For the second year running, Texas is short of electric capacity for projected peak demand periods, according to The U.S. Energy Information Administration (EIP). While that's clearly bad for Texans trying to beat the heat, it means there's pent up demand for companies like Calpine Corporation (NYSE:CPN), American Electric Power Company Inc (NYSE:AEP), and CenterPoint Energy, Inc. (NYSE:CNP) to fill.
Electricity demand is highly variable because weather helps dictate customer usage. There are really two issues for utilities, the ability to reliably meet base demand and the ability to handle the inevitable spikes in demand from extreme weather conditions.
Texas isn't as prepared as it should be for the peaks. That's a big problem in a state that is both very hot and growing. The state's sun belt geography is a fairly obvious issue. However, it was also the first to rebound during the recession. Not surprisingly, the state has some of the fastest growing cities in the country.
Having a booming economy is a good thing, but it means more electric use. That's a problem in Texas, where regulatory relationships have historically been less favorable than in other regions. For example, Texas has “the only regional transmission organization (RTO) that does not have a mechanism for paying for reserve supply,” according to EIP. Usually these costs are covered through retail electricity rates.
So, there's little incentive for utilities to build out the needed peak capacity. That said, things may be changing for the better. For example, CenterPoint Energy, Inc. (NYSE:CNP), which derived about 40% of its top line from Texas operations in 2012, was allowed a return on equity in line with the national average in 2011. It was also allowed to file for annual reviews. If this improving environment continues, utilities should start to build again.
American Electric Power Company Inc (NYSE:AEP), or American Electric Power Company Inc (NYSE:AEP), is one of the largest domestic power companies. It has operations in 11 states and serves over 5 million customers. The company's Western division encompasses operations in four states, and Texas is heavily represented. The operation there is focused on transmission assets.
Mario Gabelli recently noted that the company's American Electric Power Company Inc (NYSE:AEP) Transco division, which handles transmission, is likely to spend $2.5 billion on new projects. The country's aging infrastructure has also led to favorable regulatory treatment of such spending. Gabelli is modeling this division to contribute $0.31 a share to earnings by 2015, up from $0.06 in 2011. Since Texas is a growing market with increasing demand, it will be a driving force behind the division.The company's dividend was trimmed in 2004, but has grown regularly, though not annually, since. The company's top and bottom lines bounce around a little bit because of commodity costs, however it is well positioned for the future and offers an around 4.4% yield.