Study finds utility winners during deregulation are companies that “stuck to their knitting”

Cambridge, MA, August 4, 2003 – Electric and gas utilities that stayed with traditional businesses were the winners during the first five years of U.S. utility deregulation, according to a study from Lexecon Inc., one of the world’s leading economics consulting firms.

The study comes at a time when utilities, regulators, consumers and shareholders are asking if regulatory policy changes that led to industry restructuring are yielding positive results.

James Coyne and Prescott Hartshorne, the authors of the study in Lexecon’s Cambridge, MA office, examined total shareholder return and related financial measures over five years for 64 energy and utility companies. The companies are utilities, pipelines, energy merchants and independent generators included in the Fortune 1000 index. While the group as a whole outperformed the broader market (as measured by total shareholder return), more than one-third of the companies lost value for their shareholders over the five-year period.

“From 1998 to 2002, U.S. utilities leapt into deregulation and created multiple strategies to compete. Because it takes time to determine how the strategies worked, we are just seeing results now. Winners among utility companies relied on traditional regulated utility assets,” said Coyne and Hartshorne. “They are firms that stuck to their knitting rather than plunging into merchant power generation or purchasing foreign power plants.”

The top five companies in annualized shareholder return were Exelon Corp. (NYSE: EXC), Southern Company (NYSE: SO), Entergy Corp. (NYSE: ETR), Western Gas Resources (NYSE: WGR) and PPL Corp. (NYSE: PPL).

The bottom five companies in total shareholder return for the five-year period were Aquila Inc. (QEG.V), Dynegy Inc. (NYSE: DYN), The Williams Companies, Inc. (NYSE: WMB), The AES Corp. (NYSE: AES) and El Paso Corp. (NYSE: EP).

“Companies with regulated natural gas assets out-performed the sector,” said Coyne and Hartshorne. “Companies operating in states where restructuring has been faster to implement have fared better than peers, with California being a notable exception.” Companies have cited public policy and regulatory environments as key factors in value declines, but the real reason has been the quality of corporate strategic decisions, the authors say. Leading companies focused on their core regulated utility holdings. Companies venturing into non-regulated businesses and overseas investments were heavily penalized while mergers to build scale have not yet proven effective.

The industry will continue to struggle to find a new direction. “The restructuring mandate has slowed, and companies are pruning their balance sheets while re-evaluating business options,” they added. “We anticipate highly varied financial performance based on courses the companies pursue. Strategic decisions will once again distinguish winners from losers.”

The study revealed several trends for U.S. utilities that will factor into their business plans, including:

* Regulated, rate-of-return utility businesses are back in favor and likely to remain so for some time.

* Mergers were largely not successful for acquiring shareholders over the five-year period of the study. The authors expect future mergers to be among more conservative electric-electric and electric-gas distribution companies.

* Transmission is emerging as both an opportunity and potential drain on the balance sheet given the direction of the Federal Energy Regulatory Commission policy on Standard Market Design and formation of regional transmission organizations.

* Foreign investments have proven perilous and should be approached cautiously. The authors defined three emerging business models among utilities. The first is a narrow focus on electric and gas transmission and distribution. The second concentrates on vertically integrated gas or electric operations, and the third integrates a diversified portfolio of energy operations.

A copy of the study can be obtained by contacting Danielle Mulei via email at or via phone at (617) 520-0256.

About Lexecon

Lexecon is a consulting firm whose Harvard Square, Cambridge, MA office specializes in the energy industry, and maintains an active practice with public and private clients in the fields of electricity and natural gas. The Firm’s principals and consultants are leaders from the worlds of academia, government, and business. Lexecon’s engagements span the range of economic, financial, and policy analyses, including competitive wholesale market analysis, design and structure; retail competition policies; investment analysis; wholesale supply contracting, power planning and resource procurement; energy facility siting; and due diligence. The firm has offices in Cambridge, MA and Chicago. More information can be found at

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