Utility Stocks Climb on Impending New Law

[HenryTo]

One reason why utility stocks are near their all-time highs:
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Utility Stocks Climb on Impending New Law

Aug 02 - USA TODAY

U.S. energy utility stocks are trading near 52-week highs on speculation that a bill awaiting President Bush's signature will unleash billions of dollars of investment and the greatest wave of industry consolidation since the 1930s.

The Energy Policy Act of 2005, which Congress approved last week, would abolish Depression-era geographic constraints that limited energy utilities to local markets and open the industry to ownership by non-utility companies.

"Capital will flow into this business -- as it needs to," says American Electric Power CEO Michael Morris. Energy analysts say $12.7 trillion in investment is needed by 2030 to build adequate power generating, transmission and distribution networks in this country.

Consolidation is likely in a climate more favorable to deals.

"I would go so far as to say that within the next five to 10 years, the current number of electric utilities -- which numbers more than 100 -- could shrink to 10," says Ken Hurwitz, a partner in Haynes and Boone's energy practice.

Billionaire Warren Buffett helped touch off the anticipated gold rush in May when his MidAmerican Energy Holdings announced plans to buy PacifiCorp for $9.4 billion in cash and debt. Another pending deal: Duke Energy's merger with Cinergy.

The Standard & Poor's utility index has traded up 32% over the last year. But the utility sector remains burdened by debt, disastrous divestitures -- such as energy trading -- and regulation, energy analysts say. That diminishes the power industry's primary appeal: monopolistic local markets.

Under the legislation, federal and state regulators will still exercise close oversight of mergers -- even obtaining some added access to utilities' books and records -- but the local rate-setting process is likely to get thornier.

Wall Street credit-rating agency Standard & Poor's said the legislative abolition of the Public Utility Holding Company Act of 1935 could encourage some speculators to purchase utilities to "lever them up and use the cash to invest in higher-risk, unrelated ventures." Unscrupulous oil and gas promoters in the 1920s contributed to frenzied market speculation.

American Public Power Association Vice President Sue Kelly, whose trade group represents 2,000 municipal utilities, warns that consolidation ultimately could limit competition. "We anticipate we're going to see a lot more cross-country merger proposals," she said. "I think it will be more difficult for (consumers and regulators) to follow."