Energy prices pose threat to regulatory utility support: Merrill

Washington (Platts)--24Oct2005

Sustained high energy prices could threaten the "constructive" political
and regulatory environment the US utility sector has developed since the
California energy crisis, Merrill Lynch research analyst Steve Fleishman said
in a note to clients Monday.

     Fleishman said utility stocks had declined 11% since the beginning of
October and the sector would benefit over time if energy prices fall from
levels reached after Hurricanes Katrina and Rita. 

     "The positive fundamental drivers for utilities these days, such as
higher ratebase growth and deregulation opportunities, have key regulation
decisions at their core," Fleishman said. He added, however, that rising costs
to consumers, particularly on the post-storm price spikes, "are causing this
regulatory support to fray on the edges."

     Fleishman cited a series of recent actions, including attempts by the
Illinois governor and attorney general to block Commonwealth Edison and Ameren
from moving to market-based retail rates, "special deals" Texas utilities
reached with regulators to delay and limit changes in retail "price-to-beat"
rates, and last week's Michigan Public Service Commission order asking Detroit
Edison to explain why its administrative costs are so much higher than
Consumer Energy's.

     While Fleishman said regulatory issues are still "more on the edges" and
he believes the "regulatory environment is still sound," that picture could
easily be upset by sharply higher gas prices this winter. "Our biggest
concern...is that further gas price spikes this winter could place inordinate
stress on the regulatory situations of many utilities," he said.

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