An analysis of the strategic implications of the re-basing of power and utility industry valuations.

Michael G. Morris

The United States must turn overseas for natural gas supplies, in spite of worries about energy independence.

The United States must turn overseas for natural gas supplies, in spite of worries about energy independence.

Regional demand resource banks, based on the Federal Reserve Bank system, would make for greater use of customer demand response mechanisms while ensuring long-term resource adequacy.

The commission may find it's powerless on capital finance and credit issues. <p><b class="hook">Some say that without Alan Greenspan attending the Federal Energy Regulatory Commission's</b> (FERC's) Jan. 16 and Feb. 5 technical conferences on capital availability for energy infrastructure and energy market credit issues, the commission will have few options other than market enforcement and the design of fair and competitive markets</p> <p>In announcing the conferences in Washington, FERC declared its interest in clarifying the state of capital available to energy markets and infrastructure. But what, if anything, can the commission do to support the embattled energy merchant and energy trading space during its current credit crunch?</p> <p>Certainly, FERC's concern is understandable. What's the point in designing an energy market that has no participants? Furthermore, the commission is all too aware that illiquid wholesale markets don't end in "just and reasonable" prices.</p> <p>The issue is timely, with wholesale energy markets in a rather bleak state (see <i>"Energy Markets: Down but Not Out,"</i> on p. 18).</p> <p>Yet, given that FERC has no congressional authority to shore up confidence in markets by providing liquidity to avert a collapse in the sector, as the Federal Reserve did during the 1997 stock market crash, what can the commission do?</p> <p>The agency can provide performance-based ratemaking to attract infrastructure projects and their financiers in the area of transmission. In terms of energy markets, the commission can also develop a standard market that inspires investor and industry confidence. As everyone knows, properly designed markets would attract more market players and financiers, and thus provide liquidity.</p> <p>But FERC may have to face that it cannot bail out the industry from its current credit problems. Credit ratings analysts already predict a grim year for utilities.</p> <p>Fitch Ratings believes that a debt crisis will dominate the U.S. power sector in 2003 and could last well into 2004. "Companies that specialize in the sale of wholesale energy are coping by stretching out debt maturities, retaining the assets they can manage, shedding the rest, and hoping they will stay afloat long enough for energy demand and prices to strengthen," according to a Fitch report.</p> <p>Of course, FERC's inquiry opens up the controversial issue of whether the government should bail out the industry. Given events in the airline industry recently, the prevailing wisdom in Washington is that markets for airline transportation and power will have to sort themselves out.</p> <p>&nbsp;</p> <p class="center"><b>Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.</b></p>

The pros and cons of dividend pay-out reductions and stock repurchase programs in uncertain economic times.