Fortnightly Magazine - February 15 1995

Old Age Warrants Facelift for Stranded Costs

The year-long decline in the electric utility stock market has caught most market observers off guard. Picking the winners among electrics has become more difficult. Says Ed Tirello, long-time market savant and utility equity analyst at NatWest Securities, "Competition and retail wheeling have made the selection process nearly impossible short term."

To identify tomorrow's best industry performers, electric utility analysts have focused on generation.

FEC Questions Derivative Use

The Federal Energy Regulatory Commission (FERC) will allow Aquila Power Corp., a power marketing subsidiary of UtiliCorp United Inc., to sell electricity at market-based rates, and has approved open-access transmission tariffs for UtiliCorp (Docket Nos. ER95-203-000 and ER95-216-000). Commissioner William L.

Frontlines

The other day I heard a short news item on National Public Radio that made me stop and think. The item ran something like this: "Maxwell House has announced it will cut the price of its loose ground coffee to reflect a drop in the coffee futures market several months out."

Wasn't that easy? Call it integrated resource planning in the espresso lane. Note what Maxwell House did not do. It did not solicit a demand forecast or run the PROMOD computer model.

FERC Eases PURPA/FPA Regulatory Burden

The Federal Energy Regulatory Commission (FERC) has approved a final rule streamlining regulations in the Public Utilities Regulatory Policy Act of 1978 and the Federal Power Act (parts I and II) that affect securities issued by public utilities, rate filings by public utilities, and procedural and technical rules governing qualifying facilities (QFs) (Docket No. RM92-12-000). The changes aim to reduce the regulatory burden on the QF industry.

People

Paul J. Evanson was named president of Florida Power & Light Co. to succeed Stephen E. Frank, who resigned in January. Frank led the company through a tough restructuring process. Evanson, 53, previously was v.p., finance, and CFO for both Florida Power & Light and FPL Group Inc. Evanson will be succeeded by Michael W.

Financial News

Annual Annual EPS

Close Close Percent 52-Wk 52-Wk Div Div Book P/E Last

Company Region 09/30/94 12/30/94 Change High Low Rate Yield Value Ratio 12 Mos. Electric Utilities AEP Company Inc. Midwest 31.38 32.88 4.78 37.38 27.25 2.40 7.30 22.68 11 2.94

Unicom Corp. Midwest 22.25 24.25 8.99 28.75 20.63 1.60 6.60 24.39 - -0.31

Union Electric Co.

Trends

Cost Cuts

Competition

Power-supply costs and nonproduction operation and maintenance (O&M) costs differ markedly, both between regions and between utilities within regions. In an open market, only companies with a competitive cost structure will be able to compete effectively.

High costs reflect high embedded costs; above-market, long-term coal-supply and power-purchase contracts; and relatively high nonproduction O&M expenses.

Tax Corner

In his article, "Why Taxes Don't Distort Emissions Trading" (Dec. 1, 1994, p. 37), Michael Thomas suggests that utilities should flow through the proceeds of emission allowance sales to ratepayers in the year of sale. His idea is that utilities can eliminate any net effect on current income taxes by matching the increased revenue (emissions sales proceeds) against a revenue decrease (lower rates charged to customers). Slam dunk. End of story. Unfortunately, it's not so simple.

Electricity Forecast: Slow and Steady

Average electricity prices are expected to remain virtually unchanged through 2010, rising a scant 0.4 cents per kilowatt-hour, according to the Energy Information Administration's (EIA's) "Annual Energy Outlook 1995" (DOE/EIA-0383(95)). If the forecast holds true, the average household electric bill should increase by only $3 to $4 per month. Good news for residential consumers; more pressure for utilities. The flat forecast reflects low projections for major fuel prices, which break with previous EIA forecasts. EIA administrator Jay E.

PUCs in Year 2000: Mixed Mission, Clear Challenge

You can look at the title in two ways: (a) "The sky is falling," or (b) "There's nothing new under the sun." But both views are wrong. Let me explain.

No one doubts that state public utility commissions (PUCs) must change. But we need not throw up our hands in despair or smile and pretend we've seen it all before. Yes, PUCs have seen major changes before. The 1930s expanded PUC authority from an advisory, sunshine role to serious oversight.