Utilities Lose Safe Status as Deregulation Spreads

Article excerpt

Gone are the days when an electric utility stock was a sure thing, certain to get you big dividends, some growth and a piece of a monopoly.

Now, with deregulation of utilities sweeping the country at the speed of an electric charge, many investors are in for a shock.

It's no longer safe to just buy these stocks for their big dividends, throw the certificates in a drawer and forget them. With increasing electric power deregulation, some of these companies will do well and others will turn against you. Well-managed companies in fast-growing areas could turn around and deliver growth as well as high dividends to their shareholders, while weaker utilities in slow-growing markets could cut their dividends and their earnings expectations. Adding insult to injury, many power companies subject to deregulation are charging businesses less and consumers more for the kilowatts they deliver. So investors in these highly competitive markets could find the value of their utility stocks going down even as their electric bills went up. To complicate matters, utilities are meeting deregulation in the best traditions of American business - by buying each other. "Merger activity and industry consolidation will likely be the most significant factors affecting the industry in the near term" according to utility watchers Steve Colton and Dong Zhang of American Century Investments. On the positive side, investors are looking at utility stocks for growth for the first time ever. But how do you do that? Here are a few points to consider if you already are a utility investor or expect to be. Don't panic and sell your stocks in a hurry or buy new ones. Though California, New Hampshire, Pennsylvania and Rhode Island already have moved to deregulate electric power, other states are moving more slowly. Experts believe it will take three to five years for deregulation to be felt nationwide. Take some time to think about why you own, or want to own utilities. Then you'll be in a better position to plan your utility investments. Look for companies that are making healthy profits on moderate power prices. What's moderate? Residential customers are paying an average of 8.8 cents per kilowatt hour while industrial customers are paying 5.4 cents. But those rates can go as low as 4.6 cents and 2.6 cents, or as high as 16.8 cents and 12. …


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