If I had the energy, I'd invest in this sector
By BILL VIRGIN
Seattle Post Intelligencer
10 August 2006
We are not stock touts here at the Seattle P-I, nor should we be. Aside from the ethical considerations, there is the little matter of actually knowing anything about stock picking. If we did, do you think we'd still be hanging around this joint?
Yet, if you are inclined to take a flier on an investment, might we suggest not a specific stock but a specific sector: energy.
Not energy generally, an admittedly broad category. Not utilities. And not developers of exotic new sources of energy; that's better left to the venture capitalists who can afford to gamble on the latest can't-miss perpetual motion machine.
What we have in mind are the companies that make the boring but essential stuff that gets electricity, oil and gas from the well, refinery, dam and generator to your home, office and local gasoline pump.
If there's any lesson to be learned from this summer, it's that we're going to need a lot of that stuff.
That lesson was already clear enough from the heat waves that swept the East, Midwest and California this year, taxing not only the ability of utilities to generate sufficient electricity to meet heightened demand (primarily for air-conditioning load) but the ability of the transmission system to get electricity to consumers.
But just to emphasize the point:
Although the Northwest is still in surplus in electricity, the margins may soon get uncomfortably thin, what with growth and increased demand from other regions. Spokane-based Avista Corp. put out a call in July for voluntary conservation, including cutting back on air conditioning and other large appliances, noting that "normally abundant electrical supplies have been stretched because of record high temperatures across the West."
BP shut down its Prudhoe Bay oilfield on the North Slope of Alaska after serious corrosion was found in transit lines that carry crude to the Alaskan pipeline.
The U.S. Energy Department report listed several regions of the country -- including the Seattle-Portland corridor -- that will need new transmission lines soon because of electrical-grid congestion problems. The report also said Montana and Wyoming have adequate capacity now but will need more as more coal-fired and wind-power generating plants are added to the system.
The Bonneville Power Administration is talking with utilities and other groups in the region about a new approach to wholesale power contracts. After 2011, BPA will allocate the electricity it markets from Columbia-Snake river dams (and Energy Northwest's nuclear plant) to its preference customers -- municipal utilities, public utility districts and rural cooperatives. Anything beyond that, BPA will acquire and sell to utilities at the (presumably higher) price it costs to get that electricity. Or the utilities can go find more resources on their own.
A number of utilities in the region are already scrambling for more generating resources. Bellevue-based Puget Sound Energy has been adding wind projects and issued a call earlier this year for more proposals for additional generating capacity.
Alaskans continue to debate whether, and where, to build a pipeline to move natural gas from the North Slope, either across Canada to the upper Midwest of the United States, or south to a liquefied natural gas terminal.
Speaking of which, Oregonians are debating whether they want an LNG terminal on the coast or along the Columbia River.
All of which promises to be great news for utility construction companies and manufacturers of pipe, wires, turbines and all the paraphernalia that falls under the umbrella of infrastructure. More demand equals higher prices as utilities get their orders in and backlogs build.
The news, for them at least, could get even better. Not only are utilities trying to keep up with growth, but they'll also have to deal with maintaining or replacing older facilities. And if measures pass such as Washington's proposed Initiative 937, which mandates the amount of "renewable" resources utilities have to use, that will help increase the demand for -- and the price of -- wind turbines and the like.
This investment strategy won't work if, as very well may have happened, others have figured out the same angle and have bid up the prices of those companies that stand to benefit from the billions of dollars to be spent. But if they haven't, you the utility ratepayers and taxpayers might as well recoup some of what you'll be shelling out.
Or hadn't you guessed yet who is ultimately going to pay for this spending spree?
Posted by Arthur Caldicott on 11 Aug 2006