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Enron debacle seen driving investors back to basics

The fallout from trading giant Enron Corp's spectacular reversal is set to accelerate a trend for investors to switch away from higher risk power traders and back into the arms of more conservatively run utilities.

Even before Houston-based Enron's self-induced free-fall began just last month, institutional investors had started to sell some of their holdings in power companies that were heavily involved in free-wheeling businesses operating outside of government regulations, money managers and analysts said.

Those businesses included the trading of natural gas and electricity, as well as the generation of power for sale on the wholesale market.

But the sorry state of Enron's affairs -- including the fall of its stock price to under $1, a US Securities and Exchange Commission investigation and the reduction of its debt rating to junk status -- will act as a catalyst in speeding up this change.

"The plain vanilla companies are doing well," said Bern Fleming, manager of the $2.17 billion AXP Utilities Income Fund Fleming. "Now I'm looking for companies that pay a good dividend yield of over 4 per cent and earnings growth in the mid-single digits."

His fund sold off its 500,000 shares of Enron in the early summer, though it bought an unspecified number of the company's shares again recently after the stock tumbled.

The high dividend yield and unspectacular though more predictable earnings growth he now seeks is a far cry from many of the trader-marketers and merchant generators that have been promising growth targets of 20 per cent to 30 per cent, with nary a dividend yield in sight.

"People are wondering, can they sustain the growth targets everyone's been pointing out of 20 per cent to 30 per cent?... What is the impact of more generation coming on line? What is the impact of lower power prices?" said David Sackler, an analyst at Vestigo Associates, research arm of Fidelity Capital Markets.

When power prices were high at the end of last year and earlier this year, merchant generators such as Aquila Inc and Mirant Corp prospered because they were generally assured of reaping high prices from the power they sold.

Trading entities such as Enron and Dynegy Corp, which pulled out of a deal to rescue Enron on Wednesday, also benefited as the midddlemen in increasingly large volume markets.

With power prices volatile, particularly late last year and early in 2001, they made money from the difference in the price of power being sold and the price of power being bought.

At the same time, traditional utilities that were in the regulated business of buying power from generators and delivering that power to consumers -- whether households or commercial and industrial users -- suffered. Often they were restricted from raising prices for those customers by state government regulations while the costs of buying the power increased.

Witness the financial woes of California utilities Pacific Gas & Electric, a unit of PG&E Corp and Southern California Edison, a unit of Edison International.

Both incurred massive debts buying power for their customers at sky high prices in the wholesale electricity market and were prevented from passing on those costs to customers. Pacific Gas & Electric filed for Chapter 11 bankruptcy protection last April.

But the situation has changed substantially.

In December 2000, average power prices in the US stood at $191 per megawatt hour. In November 2001, the average price is $27 per megawatt hour.

As for volatility, "we've seen it drop to under 10 per cent from over 100 per cent, where daily prices swung all over the place to now where they meander up and a down a dollar or two," said Jeffrey Gildersleeve, an analyst at Argus Research.

Now, the shoe is on the other foot, with investors asking questions about deregulated businesses.

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