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3 power plays ready to surge
The U.S. power grid is set to get a major upgrade worth billions. Here are 3 companies that are well-positioned to profit.
By Jim Jubak
After doing nothing for more than two decades, utility companies are poised to spend $50 billion to build and upgrade the system of wires and towers used to distribute electricity throughout the United States. And based on recent spending trends, that $50 billion is probably on the low side.
The spending will transform the electrical utility industry. Who knows, some of it may even lower what you pay to heat your home, drive your car and run your refrigerator and air conditioner -- eventually. But way, way before all this spending puts a penny into any consumer's pocket, it will show up in the stock prices of companies in the utility, energy, construction, engineering and manufacturing sectors.
Warren Buffett knows this. That's why he recently bought electric utility PacifiCorp from Scottish Power (SPI, news, msgs) for $5.1 billion. Electric utilities Duke Energy (DUK, news, msgs), American Electric Power (AEP, news, msgs), and Exelon (EXC, news, msgs) know it. That's why they've all bought other utilities in recent quarters. In my June 3 column, "Why Buffett is buying utilities," I gave you my list of electric utility stocks that you could buy -- both those of companies doing the acquiring and those likely to be acquired -- to get in on this trend.
In today's column, I'm going to look at three other stock winners that will gain from the billions in capital spending that will transform the U.S. utility grid in the next decade.
A faulty, patchwork system
The spending flood that I'm talking about is a reaction to a more than two decades-long spending drought. From 1975 to 1999, according to the U.S. Department of Energy, spending on the electricity-transmission system fell by an average of $83 million a year. That trend turned around in 1999, and in the next four years investment rose by 34% over the previous four-year period. Average annual investment in those four years came to $3.6 billion.
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But that uptick in annual investment is just a down payment on the electric grid's needs. Estimates of the cost of expanding and upgrading the grid start at $50 billion and rapidly head north.
Why so much? The grid of high-voltage lines that transmit power for long distances in this country is a patchwork of local systems. It suffers from a mismatch between where the customers for electricity live and work and where the electricity is generated. For example, California, which is starved for power, sits next to power plants in Arizona, hungry for customers. Currently, the grid lacks enough capacity to carry the surplus power from Arizona power plants to California homes. And the grid is full of bottlenecks where one or two regional connections between local systems restrict the amount of power that can be shifted from one area to another to meet a surge in demand. Or provide backup in an emergency.
The Department of Energy estimates that brownouts and blackouts cost the U.S. economy about $80 billion a year.
Plenty of projects in the works
The current fragmented grid is even more of a mismatch with plans for long-distance transmission of bulk electricity from huge centralized power plants. Hey, I've got my doubts that turning the Dakotas into a reservation for coal-fired power plants that ship their electricity to California and Nevada is a good idea, but that's definitely the policy trend du jour. You can see it at the state level in legislation passed to set up the South Dakota Energy Infrastructure Agency that would promote the construction of transmission lines to carry power to other states from coal-fired and wind-powered generating facilities in South Dakota. The same law includes tax breaks for new power plants.
And you can see it in at the national level in the energy bill that is slowly working its way through Congress. The Senate version of the bill, for example, contains $2.25 billion in tax credits for coal production and $278 million in tax credits over 10 years for building advanced nuclear power plants, which, given current well-founded fears of terrorist acts directed at nuclear plants, aren't likely to be sited near the large urban populations that use the power. Oh, and the bill also provides loan guarantees for the construction of nuclear and coal power plants. (You can see why the South Dakota legislature thought there might be a future in building coal-fired power plants and shipping the electricity out of state.)
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