Beyond Bulls & Bears

Shedding Light on Utilities

For many of us, our experience with the utilities industry is limited to a passing admiration of electricity grids and gratefulness that our running water and power work as they should. But for portfolio manager, John Kohli, who specializes in domestic and international equity research analysis of utilities for the Franklin Equity Group, utilities run his daily life –literally and figuratively. In the excerpted conversation below, he’ll help us explore recent dynamics in the industry.

 On Utilities Regulation:

Thanks to deregulation, Kohli says some utilities have “stretched” the definition of a utility company. While this presents an interesting opportunity for the company to diversify, investors may not be buying into what they thought. When is a utility not a utility company?  When it’s a utility/international telecommunications company.

 Another wrinkle in the utilities space is that regulatory environments vary widely between jurisdictions.  As Kohli notes:

 “We like to have a high level of comfort in the regulatory environment…When you venture outside the U.S. you start to lose some of that perspective on what’s going on from a regulatory policy perspective. A classic example is with the recent Euro situation.  We have seen some countries in Europe who have gone away from their traditional regulatory constructs in order to stimulate growth in their economy. Italy just instituted what they’re referring locally to as a “Robin Hood tax” where they’re taxing the utilities higher than they have historically, and that’s led to significant volatility in some of those companies.”

 On Alternative Energy:

Shifting attitudes regarding global warming and the need for alternative fuel sources may also benefit utilities, says Kohli: 

“We have seen a shift in the way people are viewing greenhouse gas emission risks going forward and how it will impact global warming in the future. That’s created numerous opportunities from a technology perspective in terms of solar, wind, and geothermal power — anything that’s not a traditional fossil fuel method of generating energy. Countries like Germany, Italy, you name it, China are all going through the same revolution in terms of what technologies in the future will help drive their energy usage. 

…Utilities are a secondary beneficiary because of the growth of transporting those renewable energies from places like the desert or high wind areas into populated areas, thus creating good growth opportunities for these types of companies.”

In an investing environment where some of the recent change has perhaps been unwanted, this type of change may be the sort more investors welcome.

 Until next week, Beyond Bulls & Bears leaves you with a quote from Sir John Templeton: 

“’This time is different’ are among the four costliest words in the English language.”

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