- Summary: A heat wave in the US is causing record power consumption and blackouts. Power usage exceeded previous records in California, Texas, New York, the mid-Atlantic region and the Midwest. New construction of power plants slowed in the past few years due to deregulation of utilities and the collapse of Enron. In an attempt to incentivize deregulated utilities to build more plants, Texas is raising the price cap for wholesale electricity from $1,000 per megawatt hour currently to $2,000 next March and $3,000 by March 2009, making it the highest price cap in the US. After the August 2003 blackouts, energy regulators were granted more authority to solve inter-state power line disputes. The California Independent System Operator [ISO] estimates that California "needs at least $1.8 billion of additional transmission investments".
- Comment on related stocks/ETFs: Three areas of stock impact: (1) From the article: "High energy demand this week will likely translate into big profits for some generators, especially those that use lower-cost coal or nuclear fuel to make electricity." The easiest way to play this is with the Select Sector Utilities ETF (XLU) or the Utilities HOLDRs ETF (UTH). Utilities that use coal include Duke Energy (DUK) and American Electric Power (AEP). High energy usage will also raise demand for coal, benefitting Peabody Energy Corp. (BTU), Massey Energy (MEE), Arch Coal (ACI), Consol Energy (CNX), Foundation Coal Holdings (FCL) and Alliance Resource Partners (ARLP). (2) Increased construction of power plants will benefit power plant construction companies. Jim Cramer's top pick in this area: ABB Ltd. (ABB). (3) Higher energy prices disproportionately hit lower-income families, futher increasing the pressure on discount retailers versus those that cater to wealthier customers.
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