Politics Won’t Generate Power for the State or Pay for It
Power outages in California this summer are a virtual certainty. There are shortages of generating capacity throughout the Western states, and in some key parts of California transmission lines are not up to carrying the load on an extraordinarily hot day.
California is not alone in having electricity problems. Federal legislation is pending to shore up the electrical system during the next several years in many parts of the country. And yet, just at this time, investment by prominent individuals and Wall Street institutions is coming into the electrical industry.
It’s a perplexing time: Opportunity and peril share the stage as a $300-billion basic business undergoes profound transformation.
California and the Western states are already experiencing serious difficulties. Voltage reductions--called brownouts--occurred in the San Francisco-San Jose area in mid-June when temperatures soared. More ominous, Edison International had to pay sky-high prices to buy electricity on days of ordinary weather in late June because traditional suppliers in Arizona and Washington had no power to spare.
To be sure, most high prices are for supplies to meet peak demand, and everyday prices for power remain reasonable. Still, peak demands can have sharp consequences. In San Diego and south Orange County, high prices this year have been passed on to consumers, hiking typical electric bills from $55 a month to $81.
So far, the state’s response has been to choose probable power interruptions rather than high prices.
With the backing of Gov. Gray Davis’ office, the California Independent System Operator, which manages the flow of electricity on 75% of the state’s high-voltage transmission lines, has voted to cap the price it will pay for electricity when last-minute demand outstrips available supply.
As Edison had to pay $750 per megawatt-hour for several days in late June, the $500 ceiling Cal-ISO has instituted won’t suffice to attract power in tight periods.
The policy aims to protect rate-paying constituents, but it could ultimately prove costly to industry, particularly to high-technology companies that need constant and reliable electricity.
As with anything political, however, there is an out. In fact, Cal-ISO can use discretion and pay whatever is necessary to attract power from out of state in emergencies. And ways are being discussed to bring relief to electricity users in San Diego and south Orange County.
What has happened to the electrical system to cause such shortages and price volatility? An accumulation of developments: fast economic growth, a shift to new technology and a whole decade of lagging investment in electrical transmission lines and power plants.
Electricity use is now growing 2% to 3% a year, straining supplies. Computer and Internet-related uses now account for 14% of U.S. power consumption, compared with only 4% a decade ago.
Few foresaw such growth, although the regulated electric utilities knew in the last decade that deregulation was coming. That only made them hesitate to invest in equipment. The result is that there were no new capital investments in transmission lines and no new power plants completed in the last decade.
The federal government is concerned. Energy Secretary Bill Richardson has made speeches around the country about the need for policy changes, including selective pricing to encourage conservation.
Legislation will be taken up this week by the House Commerce Committee to encourage investment in transmission by private companies or public-private partnerships. Other proposals will be put forward to restructure the nation’s electrical industry.
Industry and federal officials agree that the country faces several years of nail biting about power supplies.
But over the same period, shortages of power will be remedied by new power plants now being built. Five new plants are licensed for construction in California, and 14 more are on the drawing board, experts say.
In this time of uncertainty across the country, independent power-producing companies have emerged as alternatives to traditional utilities. Prominent among such companies are AES Corp. of Arlington, Va., which is a supplier to California through New Energy Ventures, a Los Angeles firm it acquired last year.
Dynegy Inc., based in Houston, is building a power plant in Arizona. And Calpine Inc. of San Jose has power plants under construction in all parts of the U.S., including two in California.
Driving these companies is the belief that expanding Internet use will mean growing demand for electricity. And Wall Street evidently agrees. The stock market favors these independent power producers--plus companies such as Duke Energy and Reliant Energy, which have independent power companies as subsidiaries--with share prices much higher than those of the traditional electric utilities.
In fact, high-tech industries, which demand ultra-reliable power--only 30 seconds of power interruptions per year compared with a current standard that allows eight hours--will spur demand for new kinds of electric companies. A new report by Banc of America Securities predicts the growth of an electrical industry based on generators for each business or even each home.
Such products already exist. Honeywell International, thanks to its merger last year with AlliedSignal Inc., makes small turbines. Capstone Turbine of Woodland Hills, which makes micro-turbines, has just had a highly successful initial public offering.
Still, generators in backyards will remain a sidelight for years to come. Meanwhile, there is investor interest in how traditional utility companies will be transformed.
Mergers are probable, says Edward Muller, the retired president of Edison Mission Energy and an investor in the electric industry.
Electricity is a fragmented business. Enron Corp., the Houston-based energy company that supplies power to California, is the largest U.S. seller of electricity and yet has only 1% of the national market.
Also, investors see possibilities in utilities’ spinning off subsidiaries as independent firms. Constellation Energy, a Baltimore holding company, owns Baltimore Gas & Electric and also has a 30% stake in Orion Power Holdings, an independent electricity generator. Goldman, Sachs & Co., with 50%, is the main investor in Orion, which may sell stock publicly later this year, reports analyst Kit Konolige of Morgan Stanley Dean Witter.
California utilities are no slouches in this beauty contest. Edison International has the national and international power producer Edison Mission Energy within it as well as Edison Capital, a financier of power plants. Once Edison amortizes past costs for nuclear plants and old power contracts, it will be free to spin off subsidiaries or operate differently.
Sempra Energy, the San Diego holding company that owns San Diego Gas & Electric, has already amortized its past costs and is branching out to build a power plant in Bakersfield and to collaborate in gas and power ventures in Mexico.
The municipal utilities, chief among them Los Angeles’ Department of Water and Power, also have value going forward. DWP, in fact, has ample power supplies under contract at present and is using proceeds of electricity sales to reduce its debt.
All of these companies will be transformed in the next five years--which is what is making the electricity industry an exciting business for investors.
Still, for the next few years, most of the excitement for ordinary folks will come from worrying whether the air conditioner can keep running on a hot summer day.
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Power Shift
With power shortages looming in California for the next two years at least, the stock market favors so-called independent power providers over the state’s three traditional investor-owned utilities. Figures show price-to-earnings ratios based on the latest reported or “trailing” 12 months of earnings per share.
Energy Suppliers
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Company Trailing EPS Fri. close P/E ratio Calpine $0.91 $66.44 73.0 Dynegy 1.25 78.88 63.1 Enron 1.25 67.63 54.1 NRG* 0.39 18.25 46.7 AES 1.16 48.00 41.4 Duke Energy 3.83 60.00 15.7 Reliant Energy 2.23 30.25 13.6
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California Utilities
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Company Trailing EPS Fri. close P/E ratio Edison International $1.95 $20.31 10.4 Pacific Gas & Electric 2.54 26.06 10.3 Sempra Energy 1.78 17.94 10.1
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* Subsidiary of Northern States Power
Sources: Company reports; Bloomberg
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James Flanigan can be reached at jim.flanigan@latimes.com.
