If it drives you crazy to have to figure out which phone company costs less, just wait until the juicemen come. You’ll be asked to pick an electrical service to deliver the power that runs your home. Different companies will offer different discounts, rates and fees. And just when you’ve got it figured out, rates will change again.
For as long as you’ve been turning on lights, you’ve bought power from a local monopoly at rates OK’d by your state’s public-utility commission. Now, around half the states are working toward free-market pricing, with more states ready to jump aboard. The major utilities already face modest competition in New York City and much of Rhode Island, Pennsylvania, Massachusetts and New Jersey. Texas will deregulate in 2001 and most of California by 2002.
Then there’s San Diego, the nation’s freest kilowatt market so far. Competition was supposed to bring costs down. But a scorching summer drove up demand for limited supplies of power, shooting free-market prices into the sky. Homeowners saw their bills double from last summer’s levels. After an outcry, government imposed temporary price caps. But consumers have seen the future, and hate it. Heat waves also drove prices in New England and New York.
Not ready: In some ways, the electricity markets aren’t yet ready for retail competition. For example, power can’t easily move around the country because of the limitations of regional grids. Price competition is modest, at best. Some utilities charge that, in the wholesale markets, bidding has been rigged (the Federal Energy Regulatory Commission is investigating). “It’s like the stock market in the 1920s, before the Securities and Exchange Commission was created,” says Bruce Radford, editor of Public Utilities Fortnightly magazine in Vienna, Va. “It’s the wild West.”
But if, as seems likely, average prices rise in the years ahead, deregulation won’t be to blame. Instead, we’re facing an “electricity-capacity emergency,” says analyst Edward Tirello Jr. of the investment firm Deutsche Banc Alex. Brown. For various reasons, utilities haven’t been building many new power plants. While they fiddled, the New Economy started chewing through kilowatts like a grasshopper cloud. As consumers, we’re plugged into multiple phones, faxes, computers, electronic appliances and Sega games. As Netnicks, we add to the millions of Web sites running 24/7. As business people, we’re building vast business-information and e-commerce networks, relying on power supplies that we seem to think descend from heaven. “The shortage wasn’t foreseen and it’s worse than we think,” Tirello says. It can take years to get new power plants approved and built.
So it seems that prices were going to rise, with or without deregulation. That’s going to attract new investment, which will create more supply, says Roger Conrad, editor of the Utility Forecaster newsletter. In the meantime, someone has to pay the bills.
Double O: There are two opportunities here–one for consumers, one for investors:
Tirello expects the rising tide to lift all stocks–the power-plant developers, generating companies, power-marketing companies, drillers and sellers of natural gas (the fuel of choice for power plants) and the cleaner-burning coal companies. New technologies will arise, for energy saving and more efficient generation. Standard & Poor’s index of electrical companies has risen 20.6 percent this year, compared with just 2.3 percent for the 500 industrials. While you were hunting for high tech, utilities became the next new thing.
Wall Street’s buy lists focus mainly on generating or marketing firms–Dynegy (up 278 percent so far this year), Calpine (up 197 percent), Enron (up 96 percent) and AES Corp. (up 76 percent), plus stocks like Reliant Energy, Xcel Energy and Williams Cos. You’re not in these companies for dividends, you’re in for growth.
For dividends, you want wires companies, natural-gas distributors or traditional, integrated utilities: stocks like NiSource (wires and natural gas), Questar (gas distributor and producer), Teco (formerly Tampa Electric), Nstar (Boston Edison) or GPU (now being acquired by FirstEnergy). They’re adding value in other ways, says Lowell Miller, president of Miller/Howard Investments in Woodstock, N.Y.–through giant mergers, or spinning off unregulated units, or selling new services to their loyal customer base.
Rising prices are going to change the way we use our kilowatts. Watch for time-of-day metering–higher rates during summer weekdays, lower rates on weekends. Maybe we’ll run our washing machines at night, at a discount rate. Maybe the movie theaters will turn up the thermostat (why is it always January in a multiplex?).
Whatever happens, don’t expect deregulation to stop, says S. R. Rajan, head of utility practice at the consulting firm Stern Stewart, in New York. Freer markets are part of the solution, not part of the problem. We’ll have to learn to live with it.
