Power's Surge

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How can power companies be short of power? Under deregulation, vertically integrated utilities like SDG&E and Con Ed (as in Edison, as in Thomas Edison, the man who electrified Manhattan) were allowed to sell their power-generation businesses and become middlemen that buy electricity on the open market from new generator operators and distribute it to their customers. "We work hard to find the best deal for our customers," says Steve Bram, Con Ed's senior vice president of central operations. "But we're at the mercy of the sellers." Those sellers, on the other hand, are at the mercy of--wow!--no one, and with capacity shortages driving up unregulated wholesale prices as much as 50 to 100 times the normal rate, they're doing quite well. "Owners of power plants can extract monopoly rents," notes Edward Smeloff, executive director of the Pace University Law School Energy Project.

The flurry of construction that was supposed to relieve the electric bottleneck has yet to arrive. Old-line utilities--which used to count on a guaranteed 5% to 7% profit--have been reluctant to invest in billion-dollar plants without understanding the vagaries of the free market, and upstart energy providers are still trying to figure out which markets are worth the hefty investments required. At the same time, the industry is plagued by an antiquated, balkanized transmission grid that wasn't built to wheel power from one region to another. "America is a superpower, but it's got the grid of a Third World nation," Energy Secretary Bill Richardson has warned. "If we don't work together and fix the problem, we'll all end up sitting in the dark."

As computers and high-tech equipment suck up more power--they now account for close to 10% of all consumption--electricity providers can barely keep up. Summer electricity demand in the U.S. has jumped 23% since 1992, while capacity has risen only 6%, so the industry's emergency-reserve capacity has slipped. With communities fighting new construction, very few major power plants have been built in the past 20 years. Yet by one Energy Department estimate, the country needs 1,000 new plants in the next two decades. As Steve Fleishman, an analyst at Merrill Lynch, notes, "The country underinvested in the energy sector in the last decade, and it's coming back to haunt us."

That doesn't mean it's haunting Wall Street. On the contrary, after a few years of dismal performance, the stocks of electric utilities--traditionally viewed as boring, safe investments more akin to bonds--have heated up this year, gaining around 5% in a choppy market. Warren Buffett and Bill Gates have made bets on the sector, investing in MidAmerican Energy and Avista, respectively. Stodgy, flat-footed utilities aren't going bankrupt, as predicted, but restructuring to tap the competitive markets. Given their background, though, it's not an easy switch. "These companies didn't consider themselves to have customers--they were called ratepayers," says Michael Egan, CFO of Peco Energy, the $5 billion Philadelphia-based giant that just merged with Unicom.