Frontlines

Deck: 
Forecasters seem at odds over timing for recovery of power prices and earnings.
Fortnightly Magazine - August 2003
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Forecasters seem at odds over timing for recovery of power prices and earnings.

Like the rise in the Dow and Nasdaq this summer, optimism in the energy sector is on the increase as utility earnings improve. But as there is disagreement over the strength of the U.S. economic recovery, there is considerable discord in predictions of the utility industry recovery. Much of the unease comes from conflicting and disparate forecasts. Depending on whose report you read, the recovery in power prices is expected within 4 months, 12 months, 3 years, or 6 years (some even say 10 years). Certainly, the variation in forecasts must be attributed to the different assumptions about the effect a broad economic recovery would have on power demand and supply.

For example, in a report issued July 8 by UBS Warburg, equities analyst Lawson Steele said average U.S. peak electricity prices were expected to rise 48 percent in 2003 from the previous year, owing in part to higher prices for natural gas. Thus, Steele predicts power price hikes ranging from 21 percent in the Mid-Atlantic states to 27 percent in the Midwest, 58 percent in the Western states, and 74 percent in gas-dependent Texas. Yet others see this vision as "all wet," to borrow some jargon from investment bankers. Those critics say it's overly optimistic from a generator's view because UBS fails to take into account the current power demand and supply fundamentals. Notwithstanding that UBS based its report on forecast power costs from the nation's 50,909 generating stations.

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