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Wall St. ignores California
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May 31, 2001: 6:42 a.m. ET
Most utility stocks and funds don't feel heat from power shortage
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - California's energy crisis may trigger a lawsuit, soaring electric prices and widespread blackouts in the state this summer, but it hasn't been causing major power outages on Wall Street, according to fund managers and analysts.
While California's utilities fight for their lives, many other utility companies are trading near their 52-week highs and have a promising long-term outlook, analysts said.
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Most utility funds aren't feeling heat from California crisis. | |
The impact on mutual funds has also been muted, since most utility funds focus on telecoms, analysts said. The few funds that do focus on utilities saw some stocks drop about 5 percent during two volatile weeks in January because of the California situation. But then they bounced back in April.
"There hasn't been a reaction," said Mark Luftig, a manager of Strong American Utilities Fund. "There has been a slowing down in the pace of deregulation among states that are considering it ... but for the most part we expect deregulation to continue."
Calif. Gov. Gray Davis turned up the heat on the situation earlier this week when he vowed to sue the Federal Energy Regulatory Commission after President Bush refused to initiate temporary price caps to ease the state's power crunch.
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 FUNDS THAT FOCUS ON UTILITY STOCKS
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Franklin Utilities
Merrill Lynch Utilities & Telecomm
Gabelli Utilities
Vanguard Utilities Income
Galaxy II Utility Index
Principal Utilities Income
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California's Pacific Gas & Electric is mired in bankruptcy proceedings and struggling to keep power flowing to customers. Meanwhile, Davis recently reached an agreement to buy Southern California Edison's transmission lines to help keep the company afloat. Southern California's parent company is Edison International (EIX: Research, Estimates) .
"It's a classic supply and demand problem," said Conrad Herrmann, manager of the Franklin California Growth Fund. "It's a soap opera. It's like a Lewis Carroll novel only better. The ultimate solution is we need to build new power plants."
The Franklin fund's second-largest holding is Calpine Corp. (CPN: Research, Estimates) , which is based in California, Herrmann said. The fund invests in companies that are based in California or do most of their business in the state. He expects Calpine will grow about 30 percent a year over the next several years.
Herrmann said he sold the fund's stake in Edison International earlier this year when it started to implode. The fund, with $2.2 billion in assets, is down 16 percent year to date as of Tuesday, but Herrmann attributed the performance to technology holdings. Franklin is one of the largest manager of utility stocks in the United States.
"The more dramatic impact will be on smaller corporations (in California) and 'mom and pop shops,' " Herrmann said. "There are 800,000 incorporated businesses. It will have a great deal of impact on small-time operators."
Strong American Utilities Fund, with about $300 million in assets, has about 45 percent of its portfolio in utility stocks, including Dominion Resources (D: Research, Estimates) , Duke Energy Corp.(DUK: Research, Estimates) , and TXU Corp. (TXU: Research, Estimates), Luftig said.
The Strong fund is up 0.41 percent year to date as of Tuesday, according to fund-tracker Morningstar. Luftig said the portion of the portfolio in utility stocks is up about 1.3 percent in the same time.
A twisted tale of deregulation
Part of the problem for California is the way the state deregulated its utilities, according to Morningstar analyst Justin Craib-Cox.
Under California's 1996 electricity deregulation law, utilities bought power on the open market but rates for consumers increases were capped. When wholesale rates rose last year, the state's large investor-owned utilities reported billions in losses.
"California is one of the first states to be deregulated and they did it differently, and that's why they're in trouble now," Craib-Cox said.
People who want to invest in the sector can choose different strategies: invest in the electric suppliers; invest in companies that act as power brokers such as Enron Corp. (ENE: Research, Estimates); or invest in consulting companies that help utilities cut costs.
Electricity producers to consider include Duke Energy, Enron, Calpine, Mirant Corp. (MIR: Research, Estimates) and Dynegy Inc. (DYN: Research, Estimates) , Craib-Cox said.
Other electricity producers with a lot of capacity that could sell on the open market include Dominion Resources and Exelon Corp. (EXC: up $0.04 to $66.74, Research, Estimates) , according to Craib-Cox.
Are price caps good or bad?
One possible wild card for the electrical utilities is the call for price controls by Gov. Davis and others in California.
"Something like price caps would probably not be great for companies in the generation business," Craib-Cox said. "Price caps are not a good long-term solution. They are a short-term compromise...It's a political more than an economic or financial solution."
Luftig and Herrmann were split on the issue of price controls, with Luftig saying it could be a good short-term alternative and Hermann agreeing with Craib-Cox.
"I firmly believe you have to let the free market system work its way through," Herrmann said.
Craib-Cox said the impact of the California crisis is indirect at best. In general, demand for electrical power has been so great that the outlook for the stocks is promising. Any volatility has been because of uncertainty among investors, rather than any questions lying ahead.
"What were seeing is there's going to be a lot of demand for utilities," Craib-Cox said. 
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