Others Learning from California’s Energy Mistakes

For all the agony and anger about energy in California, compounded now by the bankruptcy filing of Pacific Gas & Electric, deregulation and the transformation of the electric power industry is moving forward nationwide--and worldwide.

Many electric companies elsewhere are thriving and being recommended by investment analysts even as the regulated utility division of PG&E; Corp. surrenders its management to a bankruptcy court and Southern California Edison, a subsidiary of Edison International, remains under heavy threat of being forced to do the same.

Companies and regulators everywhere cite California’s troubles as stemming from mistakes they will avoid.

For example, American Electric Power, a Columbus, Ohio-based leader of the utility industry, told shareholders in its annual report that California’s blunders of “insufficient power supplies, total reliance on spot pricing and capping of rates for retail consumers even as costs of wholesale power multiplied, are not likely to be replicated elsewhere.”

Indeed, many of deregulation’s dangers may be avoided now simply because California and PG&E; have put everybody on their guard.

California’s horrible example has spurred recognition that power plants need to be built.

And PG&E;’s collapse sends a message that utility companies operating partly in regulated and unregulated environments need to separate their accounts so as to better understand the different businesses they are managing.

Wall Street sees electricity as a growth industry just because power is in relative short supply in many parts of the country.

“The United States has not built enough power plants over the last 10 years to meet demand,” says analyst Brian Youngberg of Edward Jones & Co., a St. Louis-based investment company.

That spells opportunity for companies able to produce low-cost power and market it in different regions.

Promising Investment

Today’s favored utilities are those moving to acquire power plants and sell power as an unregulated commodity in different areas, even as they cope with deregulation and competition in their home territories.

The examples of two leading companies will explain a lot about the utility business today, why investors regard it as promising and how companies and state regulators elsewhere are taking steps to avoid the blunders of California.

Utilicorp United, based in Kansas City, Mo., is the modern outgrowth of a family-owned electric company dating to 1902. Under Richard Green, the founder’s great-grandson who has been chief executive since 1982, Utilicorp went eagerly into wholesale marketing and trading of electricity around the world, acquiring companies in Australia and New Zealand, even as it continued to operate regulated utilities in Missouri--where electricity remains regulated--and six other Midwestern states.

Utilicorp, helped by the growth of its Aquila Energy subsidiary that trades electricity contracts, has expanded to $29 billion in revenue in 2000 from just over $1 billion a decade ago. “I’ve got two companies,” Green says, “one is a regulated utility, growing 3% to 5% a year and paying a dividend, and the other is Aquila, which is growing 20% a year.”

So he is separating the two, issuing stock in 19.9% of Aquila now and intending to spin it off as an independent company within a year. “Investors can then have their choice of growth or stability and dividends,” Green says.

American Electric Power is a venerable pioneer of the utility industry. It originated the practice of siting power plants atop coal mines so the fuel could be transferred efficiently to the steam turbine boilers.

Now its home state of Ohio is going through a three-year process of deregulating electricity. So AEP is going aggressively into wholesale electricity generation and marketing.

Last year it acquired Dallas-based Central & Southwest Co. and now markets in Texas, Louisiana and Oklahoma as well as its traditional bases in Ohio and Michigan.

AEP, too, is going to separate its unregulated and regulated businesses.

It’s doing this, the company told shareholders, because “it will enable investors to value our businesses separately and will improve our ability to manage the realities of electric deregulation and to focus on the differing capital requirements of each business.”

Why is that significant? Because PG&E;, the holding company that owns Pacific Gas & Electric, also has thriving energy trading and out-of-state electricity operations within its corporate structure.

It built up the unregulated business in recent years by transferring proceeds from sales of California power plants and cash flow accruing from the state’s complex deregulation scheme.

But PG&E; didn’t separate the unregulated and regulated businesses for shareholders. And now PG&E;’s publicly traded stock has lost 77% of its value and the company faces a battle in bankruptcy court to keep its unregulated assets out of the hands of creditors.

Avoiding Mistakes

As companies elsewhere try to avoid PG&E;’s errors, so other states take pains not to make California’s big mistake of going into deregulation without a reserve of electric generating capacity. Ohio is making sure that it has a surplus of generating capacity.

The Northeastern states of Massachusetts, Connecticut, New Hampshire and Rhode Island, which have deregulated, also have plenty of spare capacity, reports Cambridge Energy Research Associates.

With electricity in surplus, those states and regions can encourage price competition in electricity. But when there are shortages, as began to occur last year in California, desperation buying by customers and price gouging by suppliers are all but inevitable.

A point to keep in mind in the wake of California’s disaster and PG&E;’s downfall is that the electric utility industry and the U.S. system are at the outset of a long process of transformation.

It’s not unlike the telephone business that has changed so much in the last 30 years, starting from, say, the rise of MCI in the 1970s or the breakup of AT&T; Corp. in 1984.

Yet those years also saw the rise of whole new technologies and new companies, even as giants of another age faded and failed.

California and California companies may yet find success in this new age of opportunity--and peril--for electricity.

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James Flanigan can be reached at https://jim.flanigan@latimes.com.

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Bright Lights

Despite the severe troubles of Pacific Gas & Electric and Southern California Edison, investors have been keeping some utility stocks at or near their highs lately. Analysts also favor a few companies directly involved in California, such as San Diego-based Sempra Energy and AES, which owns and is upgrading power plants in the state.

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52-week Company Stock Price* High Low EPS** Amer. Electric Power $47.34 $48.94 $29.44 $2.82 AES 43.97 72.81 35.59 1.46 Cinergy 34.05 35.25 22.06 2.56 NiSource 30.56 31.80 16.13 1.80 Sempra Energy 22.30 24.88 16.81 2.21 UniSource Energy 21.20 22.18 14.13 1.32 Utilicorp United 31.70 33.00 18.06 2.20

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* Friday close

**Earnings per share

Sources: Edward Jones & Co.; Crowell, Weedon & Co.; Bloomberg News.