Electric utilities prosper now, face uncertain future
August appears to be both the best and the worst of times for the nation's electric utility companies. As the summer sun beats down and air conditioners suck up kilowatt-hours of power, this month typically marks the year's greatest opportunity for the nation's electric companies to sell power at peak prices.
But the flip side is regulatory uncertainties, increasing competition among utilities, problems with nuclear plants, and flattening electric rates that have managed to dim the industry's fairly bright financial prospects.
Most utilities are reaping the rewards of having plenty of electrical capacity on hand to supply customers at a time when the growth in demand for power has eased. Construction of new power plants has slowed to a trickle and is not expected to increase again until the end of the decade. Thus, cash normally spent on new generating stations has gushed back into the pockets of utility shareholders.
Most utilities are doing well. Some, however, are generating so much cash they have begun diversifying out of familiar territory. Florida Power & Light, for example, has formed a company to look into acquiring a major-league baseball team.
``Earnings are coming up,'' says Mark D. Luftig, a utilities analyst with Salomon Brothers. ``A lot of companies have excess cash because they're not having to build. Nobody's short of power.''
But while utilities enjoy their current advantage, concern is rising as state regulatory commissions across the United States refuse to raise rates as far or as fast as utilities want. Inflation (which may begin rising) hasn't risen much in the past few years, causing regulators to deny or cut back rate requests. Mr. Luftig says the last quarter was the first time in about 20 years where, on average, there was a nationwide decrease in electric utility rates.
``Due to reduced inflation and a sharp decline in interest rates over the past few years, commissions across the country have lowered allowed rates of return on common equity,'' writes Arthur H. Medalie, an analyst with Value Line Investment Survey.
With supply exceeding demand, electric utilities are also feeling the pinch as they begin to compete for big industrial customers. General Motors, for example, is trying to force high-cost utilities to allow their lines to be used to deliver cheaper power from lower-cost producers.
``Those that have surplus capacity are going to be looking at bypass, at raiding into the service areas of other utilities,'' Arlon Tussing, a Seattle energy consultant, told Forbes magazine. ``If large industrial companies are out there shopping around for the cheapest power, they are going to find utilities that want to sell it to them.''
Some utilities that had grown accustomed to their monopoly status were shaken recently when the Federal Energy Regulatory Commission approved the Western Systems Power Pool. The power pool is an experiment that will let 22 utilities battle to sell and transmit power in a free market.
While utilities in most parts of the country learn to deal with a buyer's market, the East Coast seems to be the one place where utilities are scrambling to supply customers with power.
A recent hot, humid Friday in the six-state New England region saw power demand edge near the limits of what the New England Power Pool (a cooperative of several utilities) could supply. The NEEP was forced to lower voltages 5 percent to meet demand. Lowering voltages can damage certain appliances.
Critics contend there should have been no problem meeting the 17.3 megawatts of demand when the power pool was already expecting 17.7 megawatts for that day.
Although there was no danger of a blackout or brownout, the shortfall caused Massachusetts Gov. Michael Dukakis to order an investigation to find out why seven generating stations that were supposed to be working that day were not, because of ``unplanned maintenance.''
The problem revolves around the region's increasing dependence on nuclear power. Maintenance on these plants can take months. The region's recent close call happened because hot weather occurred when one nuclear plant that was expected to be fully operating was only pulling part of its load. The problem was exacerbated because other, conventional plants were being repaired.
In response to the regional problem, the Connecticut Department of Public Utilities held public hearings to learn why the state's utilities had been hard pressed that day. James Meehan, the state's consumer counsel, said he thinks the utilities were involved in ``a guessing game'' that didn't work out.
Connecticut utilities retired several oil- and gas-fired generating stations earlier this year because the companies didn't want to overcommit, Mr. Meehan says. ``They did what was prudent in their own interest.''
The problem, he says, is that ``everybody knew'' New Hampshire's Seabrook nuclear power plant would be very unlikely to be operating until 1988, when the oil and gas plants were retired. Meehan also says a recent audit of plant downtime in the state showed the ``reliability of plants is not what it should be.''