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Utilities Under Siege

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Utilities stocks were traditionally considered one of the best places for investors to put their money. Dividends were dependable and investors knew that these "boring" companies would always come through with consistent earnings. But now, many of these utilities are experiencing a double-whammy of financial and political pain.

Many utilities have suffered double-digit decreases in revenue simply because customers are losing their homes to foreclosure and small businesses are shutting down in historically record numbers. To make matters worse, these battered utilities have become hotbeds of controversy and political dog-fighting as politicians attempt to prevent these regulated utilities from raising rates.

For example, FPL Group, a regulated Florida-based electric utility, is embroiled in a soap opera-style battle with Florida Governor Charlie Crist. In order to protect their credit rating and embark on $16 billion in infrastructure upgrades and new projects, FPL requested what they consider to be an essential $1.3 billion rate increase.

Gov. Crist, trying to position himself as protecting Floridian's pocketbooks, responded to this request in an insidious, aggressive manner. Instead of reappointing two former regulators whose terms were expiring, he appointed two new commissioners to the Public Service Commission (PSC). Benjamin Stevens, the former chief financial officer for the Escambia County Sheriff's Office, happens also to be the 50 percent owner of Rick's Cabana Lounge, a nightclub in Pensacola that features strippers and dominatrix entertainment. Stevens is also listed as the owner of Ben Bartows Bar LLC, which shares the same exact address as the sex club.

David Klement, the other new member of the regulatory board now salaried at $520,000 over the next four years, is a former editorial page editor for the Bradenton Herald.

Even surrounding the original remaining four board members, there is controversy. Perhaps the most egregious commissioner in this whole debacle is Nancy Argenziano. She and Gov. Crist are of like mind when it comes to FPL. It was recently revealed that she sent thousands of text messages over the past two months which are based on or reveal proprietary and confidential information about cases before the regulatory board. The Associated Industries of Florida has called for an investigation, saying that the "discovery of thousands of private [text] messages suggest Commissioner [Argenziano] violated oath, law and PSC standards on numerous occasions."

Overall, the outcries regarding Gov. Crist's interference in rate regulators' decision-making has caused outcries from the blogs of Florida to Wall Street. "Political intervention in the utility regulatory process is detrimental to credit quality, sometimes resulting in adverse rate case outcomes. In some cases, this has led to multi-notch credit rating downgrades of utilities in states where this has occurred," writes Moody's analyst Michael Haggerty in a recent report.

The "heightened rate case risk" has also led to a number of somber analyst reports and credit downgrades from utility analysts. Atlantic Securities lowered their target price on FPL shares to $47 citing a "disappointing outcome" to the rate case and citing that even FPL describes the regulatory environment as "vitriolic."

Earlier this week, just as President Obama was flipping the "on" switch at FPL's DeSoto solar plant in central Florida, Gov. Crist won his fight to delay the vote on the rate case until January 11 of 2010 - the time when both new appointees will have already been officially sworn in.

On October 27, Citi's utility analyst, Brian Chin, wrote that he expects FPL's shares to "underperform" and that "the extension of the timeline keeps the door open for further politics to be injected in the case and the outcome of the rate case now becomes subject to the judgment of two new and untested commissioners who were appointed by a state governor entering a political race."

FPL isn't the only utility struggling with their regulators, either. Progress Energy, another Florida utility regulated by the same board, has asked for a $500 million rate increase. This will be decided at the same time as the FPL decision in January.

Pinnacle West, an Arizona-based utility, is another example of a company that has struggled with their rate regulators. Pinnacle West currently has a proposed settlement with their regulators which requires a rate freeze until mid-2012. This creates some relief on the part of Wall Street analysts such as JP Morgan's Stefka Gerova, who now believes Pinnacle West may be able to avoid "contentious regulatory proceedings for the next two and a half years." However, there is serious concern that modifications to the proposal - a possibility given the current climate - will harm Pinnacle West's financial status and health.

All of these situations has weighed heavily on the stock price of these utilities. FPL has seen their shares fall from a 2009 high of $60.61 on July 24th to a low of $50.75 on Thursday, November 12th.

Energy regulators in this country should be guardians of the public trust and competent enough to ensure our long-term energy needs are met. In many of these recent cases, it appears neither is true. In the end, the story always ends the same. When strip club owners get to set rates for utilities, it's a safe bet that businesses can't flourish and customers won't be served effectively. And, worst of all, the taxpayers will foot the bill.