By Timothy Puko A rising outlook for electricity prices is giving utility stocks a jolt.
Shares of power generators with plants in the Mid-Atlantic
region and Midwest soared on Tuesday, the first day of trading
after an announcement Friday by the regions' grid operator that
some electricity prices would double.
PJM Interconnection LLC boosted the price it pays plants to
operate in a bid to encourage power companies to generate more
electricity for the 61 million people in its territory. PJM sets
these "capacity prices" in an annual auction involving power
generators, which concluded Friday. The grid covers an area ranging
from New Jersey to North Carolina and as far west as Chicago.
At the auction, power producers such as Exelon Corp. and
FirstEnergy Corp. were among the bidders for long-term contracts to
supply electricity. PJM guarantees payouts to generators based on
how much power they can produce, even if demand doesn't
materialize.
FirstEnergy, which saw its stock rise 5.6%, was the biggest
gainer in the S&P 500 index on Tuesday. NRG Energy Inc. shares
rose 4.7% and Exelon's stock increased 3.6%. All three companies
operate plants within PJM's grid. Trading was closed Monday for the
Memorial Day holiday.
"We don't see any losers of the auction," analyst Angie
Storozynski of Macquarie Capital Inc. said.
Consumers will likely see higher utility bills as a result of
the auction, which sets prices for the period running from June
2017 to May 2018. Capacity prices account for about 10% to 15% of
electric bills, according to PJM.
The higher prices are a boon to power producers, as they lock in
part of the producers' revenue three years in advance.
Many utilities have struggled in recent years with low power
prices, increased competition and the rising cost of environmental
regulations. Some have closed plants when payments by grid
operators haven't been high enough, raising concerns that power
needs could exceed supply during periods of high demand.
The auction "is a sign that prices can't be as low as they've
been indefinitely without jeopardizing our [grid's] reliability,"
said Jonathan Arnold, a utilities and power-sector analyst at
Deutsche Bank Securities in New York.
PJM opted to buy less power from outside its home region in an
effort to boost prices enough to keep local generators from
shutting down plants.
The "capacity price" was set at $120 a day for every megawatt
made available, according to results of the annual auction released
by PJM on Friday.
That compares with about $60 per megawatt-day established for
regions that include some Washington suburbs, Pittsburgh and
Chicago at PJM's auction last year. The part of New Jersey between
New York City and Philadelphia will see a capacity price of $215,
about the same as last year's level.
To be sure, while the capacity-price increase helps, it doesn't
cure all of the power sector's problems, utility companies said
after the auction. The higher prices won't guarantee that all
FirstEnergy plants can stay profitable, said Don Moul, the
company's vice president of commodity operations.
Exelon filed a regulatory notice Tuesday that said three of its
nuclear units didn't win contracts with PJM at the auction, meaning
they likely needed a higher price to operate than PJM would
guarantee.
Bill Costello, energy analyst and portfolio manager at Westwood
Holdings Group, which manages $19.1 billion, said that he doesn't
see the news as a landmark shift in the market.
"The euphoria seems a bit silly," Mr. Costello said. "It
definitely seems like positive news, but we're talking about the
2017 and 2018 time frame."
Utilities also were helped by a decision Friday by the District
of Columbia Circuit Court of Appeals curtailing payments by grid
operators to large power users that agree to conserve energy.
Reduced payments would likely lead to increased power demand.
FirstEnergy was a plaintiff in the case.
"We just think it was a very strong outcome from this ruling,"
FirstEnergy's Mr. Moul said. "Friday was kind of an action-packed
day."
Chris Dieterich contributed to this article.
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