It has long been received wisdom that utility stocks offered a safe haven during market storms, thanks to their regulated rate model and above-average dividend yields. But major structural changes are afoot that could challenge the industry’s status as a defensive bulwark against market turmoil.
Photo — Please put this mug shot of Chris Hopkins of Barnett & Co. in our system to use every other Wednesday when it will run with his column.Once upon a time, the electric utility industry was simple. Operating as locally regulated monopolies, these companies raised capital to invest in generating plants and transmission lines to furnish electricity to commercial and residential customers. Public utility commissions regulated the rates these generators could charge, but also allowed for incremental increases to allow companies to recoup their capital costs and provide an acceptable return to shareholders. Much like the airline industry in the 1970s, electric utility operators were essentially guaranteed a reasonable but limited profit.
Life began to change in the late 1980s and through the 1990s, as technological advances eroded the geographical limitations that granted monopoly status due to physical proximity. Competition began to emerge. Many regulated utilities launched unregulated subsidiaries that produced power to sell into the grid to the highest bidder.
Those early efforts varied from modestly successful to disastrous, ending frequently in bankruptcy and exemplified by the Enron fiasco. Still, the genie was out of the bottle, and competitive forces were destined to shape the environment for power producers henceforth.
Today new competitive threats to regulated utilities abound. Governmental agencies like the U.S. Environmental Protection Agency as well as state regulators are imposing costly imperatives on the industry to shift away from coal to reduce greenhouse gases and mercury levels. Meanwhile, the collapse in natural gas prices has accelerated the migration from coal as the primary source of electricity. Decommissioning older coal plants and constructing gas turbine facilities requires additional capital that must be recovered from ratepayers, or extracted from the hides of shareholders.