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August 18, 2003
INVESTMENT IMPLICATIONS OF THE AUGUST 14, 2003 ELECTRICITY BLACKOUT
The Northeast/Midwest and Canadian regional breakdown of the electric transmission grid, while a shock to millions of affected people should not have been totally unexpected. Problems in the U.S. energy infrastructure, “in the works” for years were typically not addressed until a crisis developed. Federal Reserve Chairman Alan Greenspan recently voiced concern about the negative impact on the U.S. economy from tightening natural gas supplies and associated rising prices; while reliance on foreign oil and problems with the electric power transmission grid have been worrisome issues for years. Until a crisis develops, little if anything, is ever accomplished. Since it began in 1995, Elco Management has focused on those sectors positioned to benefit from the need to strengthen the energy infrastructure across the entire energy chain. While mild winters masked the natural gas supply problem until last season, similarly the need to improve reliability of the electric grid has been suppressed by many constituencies including environmentalists, consumer groups representing the “NIMBY” (not in my backyard) interests and opponents of increased federal control of power to name just a few.
Two years ago, the Bush Administration submitted an energy bill that recommended strengthening the power grid and reducing the U.S. dependence on foreign oil. It still has not been passed by Congress, but we believe the electric transmission breakdown will place pressure on the politicians to react positively on an energy bill. The reality is that energy issues are highly politicized and, therefore, difficult to change from the status quo. However, in our opinion, we are now, for the first time, experiencing “the perfect storms”, to effect change, namely; a tight natural gas market, with rising prices and no visible near term solutions, $30 per barrel oil, and, now, a breakdown of the electric power network. Energy issues are in the news. Electricity and fuel for heat are not luxuries but rather necessities, and they impact our daily lives and our well being.
We believe investment in upgrading the electric power system will require incentives in the form of higher allowed returns for regulated electric utilities and private capital to spur increased investment and compromises by the Federal Government and the states as to authority on these issues, especially site development. Solutions are complicated, but fixable in our judgment. Importantly, energy sectors account for only around 6% of the S&P 500 index, down from as high as 20% in the past. We continue to seek out companies that are positioned to benefit across the energy chain in the belief that this is the most opportune period for energy investing. The August 14, 2003, blackout was an important “wake up call” and a reminder that demands a positive response from politicians, regulators and the various interest groups with their own agendas.
Dan Tulis, CFA.
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