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. They believe low-cost producers with low industrial sales will do better than high-cost producers with large industrial sales within a region. Difficult to argue. Nevertheless, that's only half the story; the other half involves cost of capital and expected returns on functional assets. That's the half we address here. Looking at generation, transmission, and distribution as separate elements of corporate finance, we find that most electric utilities should quit the generating business.