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eventually will make the federal ban in the new law irrelevant.

Much last-minute lobbying went into the final product, so it may be weeks before all the deals and com- promises that were struck in the final days are discovered. "There are undoubtedly some time bombs and land mines in there," said one energy maven.

- - Kennedy P. Maize

'Good Guys,' 'Bad Guys'

S&P Views Utilities" Competitive Squeeze with Alarm

I I N nly the strong survive," U could have been the topic

of Standard & Poor's analyst Steve Zimmerman, as he ad- dressed "buy-side" utility ana- lysts at an S&P-sponsored brief- ing in the McGraw-Hill affiliate's midtown headquarters recently.

Zimmerman pulled few punches, as he sketched in the bleak landscape that faces many electric utilities and their investors in the waning years of the 20th cen- tury: growing competition, corpo- rate restructuring, environmental risk and regulatory change.

"The big risk in this decade will be competition," said Zimmer- man, pointing to the then-pend- ing energy bill and the wide swath it cuts in the status quo, through provisions relaxing the Public Utility Holding Company Act and new federal authority to

order transmission access at the wholesale level.

"It used to be bad news when a utility didn't get the bulk of its rate request approved. Now it's good news from a competitive standpoint," Zimmerman said, pointing to the case of high-rate Centerior Energy, which would lose key loads if it got all the rate increases it sought.

Zimmerman says some of the roughest competition may come from municipalities. Munis, he says, are living off the lower cost short-term bulk market and have their traditional tax and financing

advantages. He sees the munis teaming up with major vendors like Westinghouse, GE and Asea Brown Boveri to develop new re- sources (perhaps even through new munis) where competition is weak.

"Growing competition will im- pact almost all utilities and exert downward pressure on prices and thus revenues, earnings, and cash flow. Competition will slowly erode the captive markets and monopoly positions that elec- trics have enjoyed," Zimmerman said, noting, "[a] captive market

was probably the industry's credit strength."

"Investors should consider avoiding utilities that are high cost producers, especially those that have both nuclear challenges and environmental requirements which are an indication of future cost pressures," he said.

N ot every means of lowering cost is kosher, according to

the S&P analyst. "Increasing debt leverage as a means to lower capi- tal cost is frowned upon," he says. "Competition in other industries has tended to bring rapid innova- tions in business practices and concentration in market share among fewer companies. I can't think of any reason why the same outcome will not apply to the elec- tric utility industry."

The bottom line? "Competition will impact most of the industry, making it harder over time to maintain credit ratings," said Zimmerman, who singled o u t

some familiar out-of-favor elec- trics for his "bad guy" list.

Some of the "good guys," said Zimmerman, are Dayton Power & Light, PacifiCorp, Idaho Power, Washington Water Power, and most American Electric Power af- filiates, as well as Wisconsin Power & Light, Central Illinois Light, Louisville Gas & Electric and Kentucky Utilities.

Even for well run nuclear utili- ties, Zimmerman sees risk in "in- creasingly strict NRC rules and regulations, eventual decom- missioning challenges and the generation of radioactive waste which no one seems to want."

8 The Electricity Journal

T H E N E W S I N F 0 C U S

For investors in utilities facing nu- clear risk, he warned tartly, "first out is usually best out."

In the wider arena, Zimmerman observed, utility environmental costs are usually recoverable, but "some utilities may be forced to absorb some of these costs due to competitive conditions. Those utilities which are already compet- itively well positioned can obvi- ously weather the storm the best."

Z rimmerman suggested that • strong management is the

key in looking for a successful util- ity investment, contrasting the ap- proaches of two neighboring utili- ties whose managements are not known for their mutual affection: Detroit Edison and Consumers Power.

"Detroit Edison," said Zimmer- man, "has a well thought out plan to meet competition, including ef- forts to establish a strong balance sheet, conservative accounting practices, and harmonious regula- tory relations."

By contrast, he said, "Consum- ers Power's troubles stem from their efforts to ride roughshod over their regulators. In the end, the regulators always win."

What harbingers should invest- ors look for? Though officers and directors rarely own a large share of utility stock, Zimmerman sug- gested: "Keep an eye on pur- chases and sales of insider stock. If the insiders are bailing out, it is usually not a good sign for bond- holders."

Robert 0. Marritz

No DSM Thaw Yet

Can the Greens Make Conservation Safe for Industrials?

I s a thaw coming in the chilly re- lationship between advocates of

utility-financed demand-side management and large industrial consumers? A two-day confer- ence in Washington in October, sponsored by ELCON, the trade as- sociation for many large industri- als, suggests some unexpected warmth.

The very title of the meeting m "Greening of Electricity: The New Generation" - - suggests that ELCON is reaching out to its long- time adversaries. Among the speakers were several advocates of integrated resource planning and DSM, including Nevada con- sultant Cynthia Mitchell, Pennsyl- vania Consumer Advocate Irwin (Sonny) Popowski, and Ralph Cavanagh of the Natural Re- sources Defense Council.

Cavanagh has been in a long- running debate with ELCON's John Anderson and John Hughes

over the impact of DSM, as well as on the virtue of retail wheeling. Those who have followed the cross-country forensic over the years acknowledge that Cav- anagh and ELCON have dearly defined the issues and clarified the positions, worthy tasks all.

At the ELCON meeting, Cav- anagh said he has been "trying to dose the gap" with ELCON, be- cause he believes industrial customers stand to win great ben- efits from DSM, once they over- come their skepticism and utilities administer their DSM programs properly. Cavanagh said that is happening in the Pacific North- west and California, where indus- trial interests have signed off on utility plans to further ramp up al- ready aggressive DSM programs.

C avanagh noted that while Anderson predicted Califor-

nia and Northwest industrials would revolt over the new DSM programs, in fact there has been a successful campaign to win indus- trial support for the new pro- grams. The aluminum industry, the California Large Energy Users Association and the California Manufacturers Association have all pledged their support, he said. Those organizations, Cavanagh pointedly observed, include ELCON members.

Cavanagh acknowledged that DSM does drive up rates, long a complaint of the rate-sensitive in- dustrials, but said it also drives down total bills. "Does a non- DSM utility have a rate advantage over a DSM utility?" he asked.

November 1992 9