Shares down but analysts say FERC order not all bad

By the OGJ Online Staff

HOUSTON, June 19 -- Shares of California generators closed mostly lower Tuesday after federal regulators issued an order that imposes price controls on spot electricity transactions throughout the West.

Reliant Energy Inc.'s, Houston, shares closed down 45¢ to $33.35; Dynegy Inc., Houston, closed down 33¢ at $44.05; Mirant Corp., Atlanta, Ga., was down 32¢ at $34.35; Calpine Corp., San Jose, Calif., was down 96¢ at $41.25; and AES Corp., Arlington, Va., was down 51¢ at $42. Enron Corp., Houston, closed up $1.48 at $46.18.

However, Morningstar Inc. analyst Justin Craib-Cox said the controls instituted by the Federal Energy Regulatory Commission are milder than advocated by California Gov. Gray Davis and should allow California generators " to earn solid profit margins from their investments in power plants on the West Coast."

He said the stock prices of many wholesale power generators have slid in conjunction with the California utility mess, and Morningstar believes expectations that they would continue to earn abnormally high profits from California has already been wrung out of the companies' stock prices.

"Thus, we think many of these companies -- namely AES and Calpine -- are actually priced cheaply, given their future prospects," he said.

Merrill Lynch & Co. analyst Steve Fleishman said companies such as Calpine and NRG Energy Inc., which have locked up long-term contracts with the state, are well-positioned to benefit from the FERC plan. Less than 20% of power transactions in California take place in the spot market.

Enron CEO Jeffrey K. Skilling said after reviewing the FERC order, "We remain very confident that we will meet the market's consensus recurring earnings estimates of 42¢ and $1.79/share, respectively, for both the second quarter and full year 2001."

"We're hopeful this action allows FERC to now concentrate on the vitally important task of opening the nation's electricity grid so that power can move from where it's plentiful to where it's needed," Skilling said.

Under mounting political pressure, FERC imposed price controls throughout 11 western states. The agency will use a "proxy" price determined during reserve deficiencies and recalculated monthly against which wholesale prices will be judged acceptable or unacceptable. The order remains in effect until September 2002.

Joe Bob Perkins, president of Reliant Energy Wholesale Group, said the FERC order will serve to destabilize the market and exacerbate California's power shortages. He warned the recent decline in prices in the West are the result of cooler weather, not price controls.

While wholesale electricity prices may fall in the short term, Monday's actions threaten to lead to greater market instability in California and increase the number of rolling blackouts, Perkins said.

Lawmakers appeared likely to postpone action on federal legislation that would impose hard caps on electricity prices after FERC acted Monday. Sen. Dianne Feinstein (D-Calif) called the FERC order a "giant step forward. They may not call it cost-based rates, but it is very similar to what Sen. Gordon Smith [R-Ore.] and I asked for in our bill."

Shares of California generators closed mostly lower Tuesday after federal regulators issued an order that imposes price controls on spot electricity transactions throughout the West.