One of the most intelligent guys in the power industry is named Wayne Leonard. I was told that he started in the plant accounting department at Public Service of Indiana (not usually the starting point for CEO’s) and then PSI merged with Cincinnati Gas and Electric to form Cinergy which was then bought by Duke power. Wayne left when they were still Cinergy and went to Entergy, which is a big southern utility based out of shattered New Orleans. I remember seeing presentations by business unit when I was at Cinergy and Wayne’s stuff was over my head while the other divisions were essentially mouth-breathers. I would always recommend watching Mr. Leonard’s actions to see where the industry is heading.
In parallel, readers of this blog have seen my heckling of Exelon for pretending that their local distribution company was a separate entity from their massively profitable power generation entity, such as this post. Readers have also seen my post recommending that the State of Illinois seize the nuclear power plants from Exelon here at this post (I realize that this is odd coming from a libertarian, but there is a method to this madness) – if you are interested just go to LITGM and type “Exelon” in the search box to see more.
The underlying issue is that power companies should be viewed as two main entities 1) distribution companies that purchase power from someone else and serve cities 2) generating companies that make power and sell this power to distribution companies. The value of #2 electricity companies is ALMOST INFINITE – meaning that since no one is creating new base load plants while demand increases, you can sell power for the highest price the market will bear indefinitely. The only blips on the horizon are the fact that at some point you bleed the distribution companies so badly that they go bankrupt and the states start to look around for more desperate solutions (like seizing the assets, the assets that rate payers paid for originally). The value for #1, however, is negligible – they usually make a return on capital and this return is being hacked away by local politicians and governments because more money is going to the generating companies and they don’t want to raise rates. Usually they received about a 10% return on equity and this is going down into the single digits, around 8%. And this 8% isn’t without risk, either.
The investment issue is that many companies are a mix of #1, highly valuable plants, and #2, virtually worthless distribution companies. As integrated entities, you can’t get the value for #1 because the governing authorities make you give a lot of it back by not letting #2 go bankrupt.
What to do? Watch Mr. Leonard. He is proposing spinning off the super-valuable nuclear plants from Entergy to form a separate company (which raised the stock price about 5%). Current share holders will receive shares of this new entity (called Spin-co for now) and this will be their reward, since these shares are expected to be richly valued by the market (and this value will fall to current share holders).