THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Saturday, September 10, 1994 TAG: 9409100189
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: Long : 141 lines
Throughout the 1980s, telephone companies, airlines and railroads were jolted by the shock waves of deregulation.
Now it appears the nation's electric utility industry is about to get zapped. Power companies that have enjoyed monopoly status for most of this century soon may face competition from neighboring utilities and unregulated electricity producers.
The likelihood that big users of electricity, like Newport News Shipbuilding and the Ford truck-assembly plant in Norfolk, will be able to shop around for power has provoked concerns among utility managers, state regulators, investors, consumer activists and environmentalists.
``We've got 60 years of regulation to unwind, and the transition will be tough,'' predicted Thomas Hamlin, a utility analyst with the securities firm Wheat First Butcher Singer in Richmond.
For utilities to prosper in the new environment, they will need to rethink the way the do business, Hamlin said. ``Some still view themselves as service agencies whose business is guaranteed.''
Meanwhile, state regulators are having to re-examine the ways they balance the financial needs of utilities with their obligation to protect ratepayers, especially households and other users too small to shop for electricity.
When a large industrial customer departs, a utility still has fixed costs for serving that customer, said Richard Williams, director of the division of economics and finance in Virginia's State Corporation Commission.
If those costs are shifted to remaining customers and their rates climb, a utility could sink into ``a death spiral'' as more and more customers find it cost-effective to leave the utility, Williams said.
In their drive to cut costs, giant industrial companies have sought the right to bypass their local utilities and buy from providers of less expensive electricity. The topic has gotten the attention of regulators in at least a half-dozen states, including California and Michigan.
Earlier this year, California regulators devised a timetable that will allow industrial facilities in that state to shop for power beginning in 1996.
According to the California timetable, households in that state will be allowed to do choose their electricity provider beginning in 2002.
But the process of buying electricity from a distant source and paying the local utility to deliver it - known in the industry as ``retail wheeling'' - threatens a long-standing pact between utilities and their regulators. In exchange for accepting a specified rate of return on investment, electric utilities have agreed to serve all customers in their territory at approved rates.
If retail wheeling takes hold, the competitive pressures could spur a significant restructuring of the electric utility industry.
Some utilities may decide to split their power generating activities from their distribution operations, said analysts and utility managers.
And weaker utilities may be forced to find merger partners. ``A lot of small companies are cash-strapped and have high (dividend) payouts. What are they going to do?'' said Kasprzak of Davenport & Co.
Several utilities, including Richmond-based Virginia Power, already have gotten a taste of the competitive environment that is evolving. Electric co-operatives and municipal electric systems, which are regulated by a federal agency, already are free to shop for power, and more of them do.
A co-operative that buys its electricity from Virginia Power told the utility earlier this month that it has received 41 offers for power so far this year from brokers, independent power producers and other utilities, said Glenn E. Ross, planning manager at Virginia Power.
Like other utilities, Virginia Power has responded to the specter of competition by cutting costs more aggressively and devising more flexible arrangements for its large industrial customers.
Last week, Virginia Power predicted that it will save $200 million over the next six years from a 12 percent reduction in its work force this year. The cutback, it said, is part of a much broader attempt to prepare for changes in the industry.
In addition, Virginia Power is seeking permission from state regulators to build and operate unregulated power plants for its large industrial customers. The program, which received a favorable recommendation from an SCC hearing examiner in June, is an attempt by the utility to forestall some of large customers from building their own generating plants or replacing aging ones.
Moves like these have impressed some securities analysts, who say Virginia Power is better prepared to cope with a more competitive environment than many other utilities.
Virginia Power's rates for industrial customers, the analysts noted, are below the average for industrial rates in the southeastern and the middle-Atlantic regions. And Virginia Power relies on industrial customers for only 16 percent of its sales, which reduces the company's vulnerability to financial problems if some major customers depart.
But investors and securities analysts already have registered their concerns about the prospect for utilities' earnings and dividends.
Between September 1993 and July 1994, the Dow Jones utility average plunged by a third.
Part of that decline can be attributed to rising interest rates, which hurt utilities' finances. But part is due to the realization that steadily increasing dividends are no longer a given for utility stocks.
To conserve cash and prepare for greater competition, the parent of Florida Power & Light slashed its dividend in May by 32 percent, a move that startled securities analysts. The utility serves a growing market and is considered healthier than many others in the industry.
``FPL's action was an enormous shock, not just to investors but to the managements of other utilities,'' said Jack Kasprzak, an analyst with the securities firm Davenport & Company of Virginia. ``That event precipitated reviews by analysts all over the country'' of the costs, earnings and dividend prospects at other utilities.
In recent months, the share prices of many utilities have recovered slightly. Analysts, however, remain circumspect about the industry's prospects.
``Even with the well situated utilities, I think you'll see a slowdown in their dividend growth,'' Kasprzak said.
Environmentalists, too, are watching the debate over retail wheeling closely. Widespread acceptance, they fear, would threaten the energy-conservation programs that many utilities have adopted.
While it makes sense for large industrial users to shop for cheaper electricity, conservation measures provide greater returns for these companies and for society, said Jeffrey M. Gleason, an attorney with the Southern Environmental Law Center in Charlottesville.
The pressure for retail wheeling in other states has made the topic too important for regulators in Virginia to ignore. But the SCC is unlikely to press for its acceptance in Virginia, said Williams of the commission's division of economics and finance.
That's partly because several technical issues have yet to be worked out.
To move large amounts of power through Virginia probably will require construction of additional transmission lines, Williams said. And the approval process for new lines, he noted, ``is a tough, long ordeal. Nobody wants a transmission line near them.''
More worrisome, Williams said, is the possible erosion of cooperation among utilities. The ability of neighboring utilities to make some of their power available to those with emergency needs has enhanced the reliability of utilities in Virginia and other states, he said.
But what happens if retail wheeling is widely adopted? ``All of a sudden those neighboring utilities are competitors.''
Rather than being an end in itself, competition ``should be the means to providing effective and reliable electrical service,'' Williams said. ``And what we have now is a very effective and reliable system.''
Still, ``this industry is in such a state of flux that it's hard to predict what's going to happen.'' ILLUSTRATION: Color graphic by Ken Wright
Following the path of power
KEYWORDS: DEREGULATION ELECTRICITY ELECTRIC POWER INDUSTRY by CNB