Austerity: Powering Down in Low-Wattage Times

The $218 billion power industry may have hit its nadir. The largest utility, Pacific Gas & Electric Co. (PCG ), remains in bankruptcy, as does Enron Corp., once the largest trader. Other former highfliers such as Dynegy (DYN ), AES (AES ), and Calpine (CPN ) are fighting to stay solvent, while consumer advocates and politicians call for stiff penalties against power executives.

The business has faced crises before. During the 1920s, utilities were go-go stocks, notes Jonathan W. Gottlieb, a utility attorney at Baker & McKenzie. That ended with the Depression, when Congress imposed severe restrictions on the ability of utilities to merge. A boom and bust in the 1960s and 1970s brought new reforms aimed at creating more competition, such as requiring utilities to buy power from independent power producers. Those changes helped cause today's overexpansion.

Now, more changes are coming. Federal regulators will continue to investigate charges of price gouging. Threats of fines will keep a cloud over many companies. Washington will also step up its scrutiny of electricity trading, although the business should become less volatile as control shifts from the original kilowatt cowboys to banks and Wall Street.

The march to deregulate has clearly slowed. Meanwhile, retail electric rates--which have continued to rise in spite of deregulation--will likely stay high, both to pay for high-price power purchased during the crisis and to cover the rising cost of natural gas.

Banks and bondholders that financed the more aggressive companies will restructure those debts. Utilities will retrench, selling out-of-state power projects. And as they focus back on local territories, they'll start to look more like their stodgier pre-deregulation predecessors.

By Christopher Palmeri

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