Tag Archives: Electric Utilities

Bigger Electricity, by Eric Peters

If you don’t like big centralized industries with monopolistic pricing power, you’ve got to hate electric utilities. From Eric Peters at ericpetersautos.com:

It’s interesting that the same voices which once keened in feigned outrage about the supposed chokehold applied by “Big Oil” to the prostrate American consumer are silent about its replacement:

Bigger Electricity.

Their silence about this being proof that their outrage was feigned.

It is difficult to conceive of anything more centralized and consolidated – morebig– than the grid. Of which there are just a few regional ones –  including Eastern, Western and Texas – controlled by a handful of state-permitted utilities that will have – that already have – the ability to meter the power we’re permitted to have and the power to charge us what they determine to be a “fair” price for it.

Adjustable at their whim – both in terms of price and availability.

That which can be turned on can be turned off.

Or turned down.

When demand becomes too high, the utilities can (and do) decrease supply. Or raise the cost, which achieves the same.

There is no  – as in zero – free market for electricity.

It is a wholly state-corporate “partnership,” the actual thing the keeners accused “Big Oil” of being, which it never was.

With electricity, you get what’s provided, according to the terms and conditions of the single-source provider (the utility which “serves” your area) and you pay whatever it says you will pay. If you don’t pay what they say you’ll pay, there is no option to pay less.

You can stop patronizing the extortionate Exxon station down the road – in favor of the more reasonable Speedway a couple of blocks farther down the same road.

There is competition.

There are alternatives.

You cannot seek better/cheaper electricity service.

You are plugged in – like Neo, within his Matrix.

Without alternatives.

Big Electricity is much more amenable to centralization than Big Oil, for several physical reasons – chief among them being that the mechanism of distribution is necessarily centralized.

Electricity is generated at a utility plant, then transmitted via a network of cables and substations and so on to each individual user (residential and commercial). All connected to the same source of generating capacity, over which you have no control – and no thus, no alternative.

In many areas, you haven’t even got the option to disconnect from the grid. Local codes require you to keep a meter hooked up.

Which keeps their hooks, in you.

Gasoline and diesel are refined at centralized facilities, too. But their distribution is decentralized. Tanker trucks bring the energy to wherever there is demand – at a price the market will bear.

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The Ugly Math: GM, Ford, other Legacy Automakers Throw Hundreds of Billions at EVs, Only Auto Segment that’s Growing. Tesla Made Them Do It, by Wolf Richter

The question remains: if electric utilities right now are having trouble supplying enough juice in places like Europe and China, where does the extra juice come from for millions of EVs? From Wolf Richter at wolfstreet.com:

It’s a zero-sum game that’s eating up a huge amount of cash. But Electric Utilities are loving it.

In the press release for its investor conference today, GM said that it plans to double its annual revenues by the end of the decade as it transitions to EVs. In terms of the math, 8% in price increases a year for nine years would do that without having to jump through the hoops of selling more vehicles. GM’s average transaction price in Q3 in the US jumped by 20% year-over-year. So…  I don’t see this statement as sign of an increase in volume, but an increase in prices.

GM confirmed that logic by pointing out that it expects its margins to increase as it transitions to EVs. It said that half its manufacturing capacity in North America and China will be capable of producing EVs by 2030.

Sales growth in this industry is obtained by selling higher-priced vehicles. But volume growth, in terms of the number of vehicles sold, is hard to come by in the auto industry. There are some developing economies where sales are still growing. But there has been no growth in developed economies in two decades.

In the US, sales peaked in 2000 at 17.4 million vehicles, then fell off, then plunged to 10.4 million vehicles in 2009, and then recovered to hit 17.5 million vehicles in 2016, and that was it. Sales have been falling ever since. Last year, the industry sold 14.6 million vehicles. This year, may be around 15 million vehicles.

But the one segment that is growing in leaps and bounds is EVs. And that’s what GM’s investor conference was about – creating investor excitement about this “transition to EVs,” from a Chevrolet crossover “priced around $30,000,” to the high-end Hummer EV pickup truck with 1,000 hp.

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Dear Electric Company CEO: Merry Xmas and Cut the Dividend? by Leonard Hyman and William Tilles

From Leonard Hyman and William Tilles at oilprice.com:

Pundits fill op-ed pages with letters of advice. “Dear Janet, about that last Fed meeting…” As electric company shareholders we always meant to write one of those letters. And as the Talmudic sage Rabbi Hillel once asked, “If not now, when?” So here goes.

Dear Jane/John CEO:

The party is over, again. Remember the diversification-for-growth bash? Utilities bought banks, insurance companies, real estate, oil wells and at least one tilapia fish farm, spent -hen- processing plant and gold mine. In the midst of the euphoria, legendary banker Carl Seligson asked, “How can you manage businesses that you don’t know anything about when you can’t manage businesses that you know about?” That party ended in tears. The boss ordered, “Back to basics”. That meant, “Sell more electricity”.

In the 1990s, bedazzled by dreams of rapid growth and high return (think Worldcom, Enron and Global Crossing), your new CEO invested in unregulated electric generators, encouraged by over-optimistic forward price curves and convinced that he could win a high stakes game of “chicken” — the other guy would swerve first, not build his power plant, and leave you to rake in the profits. “Not diversification”, the boss declared, “just a different way of producing and selling electricity”. Unfortunately, high risk is the flip side of high return and few firms can achieve double digit growth operating in a market growing at a single digit pace. Neither expected prices nor sales materialized. The over-leveraged generating companies tanked. More losses.

Back to basics. Bulk up regulated assets. “Grow the rate base” the boss said. The company built but customers didn’t come in the sense of buying more electricity, but they paid for the extra investment anyway. Regulation has advantages.

Then you heard about the yieldco with its simple three part formula. First, spin assets into a new, high dividend paying entity, the yieldco. Then regularly “drop” assets into it from the corporate parent to provide the illusion of growth. Finally, watch yield- hungry investors drive up valuations. Yieldcos lost their allure when fuel prices fell and the Fed declared that interest rates would rise. Try something else?

In the spirit of the times, you moved into renewables, a sensible idea, except the more renewables you built the less you needed your old facilities. Sort of like a snake eating its tail? (Did you then depreciate older plant faster to reflects it shortened life expectancy?) Customers now have access to economical alternative sources of electricity. They might not need your facilities as much as before.

Utility financial trends during the past decade certainly do not bode well — debt up 60 percent, free cash flow negative every year and sales flat. In the past utilities rarely generated enough funds internally to pay for capital investment, dividends and redemption of debt. They sold securities to fill the gap without difficulty because they could present investors a future of perpetually rising sales to customers who had to buy from them. Now customers can defect (watch the Nevada casinos). Sales have flattened. Once investors lose confidence in the company’s ability to repay debt, they will stop financing it. Time for another change in course?

To continue reading: Dear Electric Company CEO