New Risk for Electricity Sellers and Investors
Leonard Hyman is an economist and financial analyst specializing in the energy and regulated sectors. He was formerly head of utility equity research at Merrill Lynch and senior advisor to investment banking at Salomon Smith Barney. William Tilles was a bond analyst, stock analyst and managed long/short equity portfolios for hedge funds. He is a senior industry advisor and speaker on energy and finance.
During the first energy crisis of the 1970s, electricity demand fell. Utility executives were in a state of disbelief. A drop in electricity sales, the first since the Great Depression, had to be a blip. A statistical aberration, due mainly to the patriotic fervor of Americans.
Oil producing nations in the Middle East, displeased with the turn of regional events in a 1973 military conflict, declared an oil embargo. Perhaps needless to say, gasoline and energy prices in general rose sharply, with attendant slackening in demand.
As peace after a fashion eventually returned to the Middle East and the energy emergency ended, utility executives expected a return to normalcy. They believed sales growth in electricity would resume its former robust pace.
A few of us were tempted to respond, "A sharp increase in prices, not patriotism, caused the drop in demand." It was as if the only elasticity they thought of was the variability in product demand they suddenly experienced.
Something had altered consumer behavior. Patriotism or price? Or maybe consumers only began to notice the price after severe price dislocations in oil and gasoline turned their attention to electricity.