Betting on Pike, Con Ed and Other Power Distributors

 | Nov 19, 2012 | 5:56 PM EST  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

exc

,

aep

,

nrg

,

dyn

,

pom

,

ed

,

nu

,

utl

,

nee

,

pike

Two new trends are emerging in the utility industry. The first is about long-term commodity prices and the second is about energy distribution systems. The combination suggests moving into utilities that specialize in distribution systems.

I previously reported that Exelon (EXC) warned of persistently low prices in the nation's wholesale power prices. While they remain hopeful for 2015 and beyond, it is just that, hope.  

Exelon is not alone. Other generators are also concerned about low prices. As the nation turns toward energy efficiency as a resource, independent power companies, such as Calpine (CPN), NRG Energy (NRG) and Dynegy (DYN) can no longer rely on history to forecast future demand and revenue.

Exelon is counting on their competitors' failures. They are expecting dozens of old, inefficient power plants will become unprofitable, and those plants will be forced to exit the market. With supply declining, Exelon hopes prices will rise.

Working against Exelon's hope are two issues. One has to do with the retiring plants and the other is about consumer behavior. Old power plants that are retiring and exiting the market are, for the most part, marginal facilities. Marginal plants spend too much time on standby. They don't produce profitable energy unless there are spikes in demand.

Having these units exit the market may not have as much as an impact on energy supply as Exelon hopes.

Adding to Exelon's supply-demand challenge is the consumer. As new demand-response programs accelerate, a growing number of consumers will be avoiding high-priced power, opting instead to wait a few hours for lower-priced power. This is called load shifting.

Exelon and other independent power producers hope more power plants will exit the market than consumers will shift load. Their other hope is the economy will return to robust levels where consumers won't care about energy prices. All they need is one out of two to become reality.

While consumers will avoid high prices, they want reliability. Eastern utilities learned from the derecho last July that consumers would not tolerate sustained periods of no power. Pepco Holdings (POM) became a target when they left customers without power for days -- again.

Hurricane Sandy amplified the issue. Now, Long Island Power Authority (LIPA), a non-profit utility, is facing customer outrage. It's not just Pepco or LIPA; it is all utilities wanting to avoid hostile public relations. Reliability is the new priority and consumers demand a response.

The priority is on distribution systems, not transmission systems. Transmission systems are interstate backbones that move bulk power from generators to dozens of individual local distribution systems. Distribution systems take power from transmission lines, move it through communities and deliver it to individual consumers. The derecho and Hurricane Sandy hit distribution systems harder than transmission systems.

It appears consumers are willing to pay more to achieve higher levels of reliability. While their willingness is limited, substantial investment in reliability projects are all but assured. But for most utilities, capital investments are initiated only if prudent returns are assured.

For regulated utilities, state regulators provide the necessary assurance. It turns out that all the nation's utility distribution systems are regulated by state utility commissions. Even in so-called deregulated states, distribution systems are regulated. As such, when state regulators approve upgrades, utilities should be assured prudent returns on their investments.

This makes distribution-only companies such as Consolidated Edison (ED), Northeast Utilities (NU) and even Unitil (UTL) attractive. Integrated and regulated utilities like NextEra Energy (NEE), Southern (SO), Duke Energy (DUK) and Dominion Resources (D) may even lead the pack. They have the financial resources and the influence with state regulators to deploy the most appropriate technology, including state-of-the-art smart grid and microgrid technologies.

The likely winners are American Electric Power (AEP), Consolidated Edison and Sempra Energy (SRE). Prior to the storms, these companies were already leaders in microgrid technologies. Microgrids are an important key in smart grid technologies and they will help increase system reliability and utility response times.

Another likely winner is Pike Electric (PIKE). Pike is not a utility. It's a utility contractor. Pike's services include siting, permitting, engineering, design, installation, maintenance and repair of power distribution systems. Pike is the company utilities call when they need work done on their power delivery systems.

If I had to make a choice today, I would ignore Exelon and similar independent power producers and I would bet on Pike and Consolidated Edison. Pike sits on the intersection of opportunity and competence. Consolidated Edison already owns smart grid technologies; they have a demanding consumer base and motivated regulators. Even better, Consolidated Edison has almost no exposure to commodity prices. 

Columnist Conversations

HP
Multiple downside targets have been met in HP....either trail stops down or book some profits or BOTH. ...
What an ugly short session for oil and energy related stocks. Think we get some sort of bounce on Monday when...
I saw a comment on JC's piece asking about a tariff on crude oil to protect the American industry and a respon...
Lang:
i was double-delighted to see Stephanie Link bullish on LULU but also a recent piece by Ed Ponsi reflecting th...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.