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PPL (PPL)Stock (Electric Utilities Industry, Energy Industry, Services Industry)
 PPL Corporation is an electric utility that both generates electricity and delivers it to consumers in the northeastern and western United States and the United Kingdom.[1] Because the company both generates and transmits electricity - known as vertical integration - it earns higher returns than traditional utilities (which only transmit electricity - they buy power from third party sources) and more stable earnings than electric suppliers (which aren't regulated by the government and therefore aren't guaranteed a profit). [2] On the unregulated supply side, PPL’s power plants in the United States have a total generating capacity of 11,418MW, 61% of which comes from fossil fuels. [3] On the regulated distribution side, the company serves approximately 4 million customers in Pennsylvania and the United Kingdom. [1] PPL Generation has suffered from statutory price caps in Pennsylvania. Estimates suggest the company lost $7 billion in potential revenue from the price caps between 2005 and 2007. [2] However, the price caps are set to expire in 2010. PPL estimates retail rates will rise 36.1% and is providing its customers an option to phase in the price increase. [4] Steps towards deregulation of the electric industry at the state and federal levels in the United States have resulted in increased competition in the wholesale electric market. In 1996, Pennsylvania enacted the Customer Choice Act to restructure the state’s electric utility industry to create a competitive market for electricity generation. [5] However, on the utility side, PPL Electric maintains a regulated distribution monopoly in its service areas under authorization from the Pennsylvania Public Utility Commission.[3] Although PPL has a diversified portfolio of power sources, 61% of its power is still generated from fossil fuels, making the company vulnerable to increases in fuel costs and carbon emissions legislation. In July 2008, a US Appeals Court struck down an EPA emissions cap-and-trade rule, making $100 million in emissions allowances that PPL had purchased worthless. [6] Pennsylvania has adopted Renewable Portfolio Standards (RPS) requiring utilities to generate atleast 18% of their energy from renewable energy sources, effective in 2020. [7] Because Pennsylvania counts PPL's 17% hydroelectric power as renewable under the RPS, PPL has almost satisfied all of the state's mandated renewable energy requirements. [8]
[edit] Business Overview
 PPL Corporation is one of the oldest regional power companies in the United States, with vertically integrated operations from Montana to the U.K. [2] The company’s diversified operations results in higher returns than regulated utilities and more stable earnings than electric suppliers. On the supply side, PPL has produced an average of 20% annual shareholder returns since 2001, benefiting from the spread between fuel costs ($16 MWh) and prices ($60-$100 Mwh).[2] On the regulated side, PPL has consistently reported 8-10% returns for the past few years. [2] [edit] Business Segments
 [edit] Trends and Forces[edit] Pennsylvania to remove price caps on retail electricity in 2010Pennsylvania regulations require PPL to sell two-thirds of its power to Pennsylvania residents at capped prices.[2] Estimates suggest the mandated price caps resulted in nearly $7 billion of lost revenue between 2005 and 2007. [2] However, in 2010 the state plans to remove its price caps. [16] The company estimates rates will rise by 36.1% if future power costs match the existing trend, though the Pennsylvania Consumer Advocate expects an even higher price. [4] In order to ease the transition to market prices, PPL Electric has proposed a plan, pending approval by the Pennsylvania Public Utilities Commission, under which customers have the option of paying additional amounts on their bills beginning in mid-2008. [16] This would permit PPL to begin realizing additional revenue as early as 2009. Some state legislators have introduced legislation to extend the price caps beyond their expiration on December 31, 2009. If such legislation is enacted, PPL Electric would experience cash flow shortfalls and risk losing its high credit rating. [16] The company's business strategy relies on the removal of the price caps to recover increases in fuel costs and capital expenditures. [edit] Natural Monopoly Over Retail Electricity Promotes Stable Revenue OutlookPPL has a monopoly over retail electricity in its areas of service in Pennsylvania because of the barriers to entry to the industry due to the high cost of building infrastructure. This brings stability to the company’s operating outlook by guaranteeing a customer base. As a legally regulated utility, PPL Electric is permitted to generate a return on equity of 10.7%. [2] If returns exceed this level, the extra revenue must be passed back to ratepayers in the form of savings. On the other hand, PPL’s regulated status also makes it more difficult for the company to adjust retail prices based on swings in the cost of fuel since regulators must approve changes in electricity rates. If costs increase faster than regulators authorize retail rate increases, the company’s bottom line is negatively affected. In 2007, rising fuel costs and capital expenditures pulled returns below the allowed 10.7%. In 2008, The Pennsylvania Public Utilities Commission approved a 1.7% rate increase, the first rate increase since 1995. [2] The rate increase should boost returns through 2009. [2] In the U.K., retail electric rates are set every five years and automatically adjusted to inflation, helping PPL recover rising fuel costs. [2] [edit] Rising Cost of Coal Increases Costs for PPLPPL generates 56% of its electricity from coal power. [3] JP Morgan forecasts the price of coal will increase over 60% in 2008 due to surging demand from developing nations. [17] In particular, continued strong demand for coal in China and India, bottlenecks in ports in Australia, and the temporary closures of several large coal mines worldwide caused coal prices to increase. [18] Spot prices for domestic steam coal have increased 48% from October 2007 to February 2008. [18] In 2008, PPL projects lower earnings for its supply segment due to higher operating costs and capital expenses. [19] PPL does not completely hedge against increases in fuel prices. A 10% rise in fossil fuel prices would decrease 2008 gross margins by $20 million. [20] [edit] Global Climate ChangePPL generates 61% of its electricity from coal, natural gas, and oil[3], making the company vulnerable to carbon emissions regulation. As of 2008, twenty-six states had adopted binding Renewable Portfolio Standards, policies that require electricity providers to obtain a minimum percentage of their power from renewable energy sources. Pennsylvania has adopted an RPS requiring utilities to generate at least 18% of their energy from renewable energy sources (including hydroelectric), effective in 2020. [21] By 2010, PPL Electric will be required to supply 9% of its electricity from alternative energy sources. [14] Since PPL generated 8% of its electricity from hydroelectric power in 2007, in the short term the company only needs to marginally increase its use of alternative energy. [3] [edit] CompetitionPPL has a natural monopoly over distribution of retail electricity in its areas of operation in Pennsylvania and the U.K. since the high cost of infrastructure acts as a barrier to entry for other firms. PPL Electric does not face competition in its distribution business, and PPL’s UK subsidiary faces little or no competition in the residential power market. However, customers have the ability to employ self-generating sources of energy, such as installing their own solar panels. [22] Unlike its regulated electric distribution business, PPL’s energy supply business is not guaranteed a legal rate of return and its revenue is entirely dependent on the company’s ability to compete with other wholesale electricity providers. [23]). Competitors include regulated utilities, industrial companies, and non-utility electricity generators. The wholesale electric industry has undergone deregulation at both the federal and state levels. In 1996, Pennsylvania enacted the Customer Choice Act to restructure the state’s electric utility industry to create a competitive market for electricity generation. [5]
 PPL2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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