August 11, 2003—Electric and gas utilities that stayed with traditional businesses were the winners during the first five years of US utility deregulation, according to a study from Lexecon Inc., one of the world’s leading economics consulting firms. The study comes at a time when utilities, regulators, consumers and shareholders are asking if regulatory policy changes that led to industry restructuring are yielding positive results.
The study examined total shareholder return and related financial measures over five years for sixty-four energy and utility companies. More than one-third of the companies lost value for their shareholders over the five-year period.
The top five companies in annualized shareholder return were Exelon Corp., Southern Company, Entergy Corp., Western Gas Resources, and PPL Corp. The bottom five were Aquila Inc., Dynegy Inc., The Williams Companies, Inc., The AES Corp., and El Paso Corp.
According to the study, companies with regulated natural gas assets out-performed the sector. Also, companies operating in states where restructuring has been faster to implement have fared better than peers, with California being a notable exception. Leading companies focused on their core regulated utility holdings. Companies venturing into non-regulated businesses and overseas investments were heavily penalized while mergers to build scale have not yet proven effective.
The study revealed several trends for US utilities:
- Regulated, rate-of-return utility businesses are back in favor and likely to remain so for some time.
- Mergers were largely not successful for acquiring shareholders over the five-year period of the study. The authors expect future mergers to be among more conservative electric-electric and electric-gas distribution companies.
- Transmission is emerging as both an opportunity and potential drain on the balance sheet given the direction of the Federal Energy Regulatory Commission policy on Standard Market Design and formation of regional transmission organizations.
- Foreign investments have proven perilous and should be approached cautiously.
A copy of the study can be obtained by contacting Danielle Mulei via e-mail at 617/520-0256.
