Electricity Price Ruling Shifts Focus to Fundamentals, cont.

Editor's note: This is the second part of Chris Edmonds' coverage of Monday's FERC action. Here's the first part.

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Short-Circuiting Price Caps

Monday's FERC action symbolizes what is becoming a hallmark of the Bush administration: adopting a compromise that eliminates the urgency of more radical action by the Democrats.

Clearly, this FERC action is a response to political pressures. "We have felt political pressure for nearly two years," said Chairman Hebert after the formal FERC meeting.

However, the recent change of control in the Senate was certain to give cost-based electricity price caps a second chance, something Bush doesn't want to face. So, FERC adopted temporary, watered-down price controls, eliminating the need for immediate congressional action. "Any FERC extension of its floating price caps would probably diminish calls for more restrictive price-cap legislation from Congress," noted Paul Patterson, Credit Suisse First Boston utility analyst, Friday.

So far, the plan appears to be working. While Sen. Jeff Bingaman (D., N.M.) said Monday that he was "skeptical" of the FERC plan, he appeared to admit that congressional action was now less compelling. Bingaman, chairman of the Senate Energy and Natural Resources Committee, is holding hearings on the California situation Tuesday.

More Certainty: Profit Opportunities?

While many power generators' stocks traded flat Monday ahead of the meeting, the FERC order and the certainty it provides may re-energize the group, which has been anemic of late. Many of the stocks have lost more than 10% in the past month. "Most of the details were leaked last week, and they are baked into the stocks," says Dietert.

Neil Stein, the independent-power-producer analyst at Credit Suisse First Boston, concurs. "The uncertainties surrounding re-regulation and political backlash are already embedded in the stock prices," he wrote in a weekly dispatch to clients Monday. "While the pure-play [independent power producer] share prices have fallen 6.6% on average, our 2001 and 2002 [earnings per share] estimates have increased nearly 25% and 24%. Consequently, over the period, the average [price-to-earnings] multiple has declined by about 25%."

Dietert's favorite picks in the group are Dynegy (DYN Quote), El Paso (EPG Quote) and Williams (WMB Quote). "Dynegy has the best management team in the sector and the best capital discipline in the business," he says. His firm has not provided banking for any of the companies mentioned.

Stein rates both AES (AES Quote) and Calpine (CPN Quote) as strong buys. And, on Monday, he reiterated his buy rating on NRG (NRG Quote), calling it the "best relative value in the IPP group." His firm has provided banking services for the companies mentioned.