Grid Operators Scraping the Bottom of the Barrel

Includes: ED, HAL, MDR, WGII
by: Steven Towns

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

Heat Wave Pushes Power Prices Above U.S. Caps

  • Summary: Spot prices for wholesale electricity surged yesterday throughout the East Coast of the U.S. as another day of sweltering heat and high demand for electricity pushed prices above price caps set by federal regulators. In New York City, Consolidated Edison Inc. paid more than 10 times the average price Thursday afternoon when prices hit as high as $1.33 per kilowatt hour. The federal price cap limits what power generating companies can charge utilities and major customers, however they are allowed to charge more if justified by higher costs but it will result in an audit by regulators. Like most utilities, ConEd relies on spot markets during high-demand times and it can pass on costs to customers. High demand this year could spark more plant construction but some experts say time needed to secure permits and equipment could prevent necessary plants from being built fast enough.
  • Comment on related stocks/ETFs: Consolidated Edison (NYSE:ED) seems poised to benefit from the surge in electricity demand and spot prices since it can pass costs on to its customers. The article does mention however, that "Grid operators said they are paying exceptionally high prices only for short bursts of time, unlike during the California energy crisis of 2000-2001." One way of approaching the current situation from an investment standpoint is to consider the equipment and construction companies and also the commodities themselves. Potential stock plays on the construction side include: Halliburton (NYSE:HAL), McDermott International (NYSE:MDR) and Washington Group International (WGII). Resources: ConEd Q2 earnings release, ConEd press releases on the Northwest Queens Outages and it setting a new record for electric usage, Halliburton Q2 earnings conference call transcript, Q2 earnings release (.pdf), McDermott investor relations (earnings will be announced August 7 before the market opens with a conference call at 12:00 p.m. EST), and Washington Group International investor relations (earnings will be announced August 7 after the market closes with a conference call on August 8 at 1:00 p.m. EST).