The Tesla Effect: Investing in Paradigm-Busting Utilities

Of all the technologies that I’ve covered during my years in the utilities sector, electric cars have captured my imagination the most.

That’s because this transformative technology could turn utilities from low- to hyper-growth investments, from stodgy to high-tech, from mere utility to again being central to reshaping the fabric of our civilization.

But it seems at every turn over the past 15 years, naysayers in the sector and elsewhere have tried to kill it or, at the very least, ignore it.

First, I’ll explain the hurdles that need to be overcome for the technology to flourish. Then, I’ll point out what investors should look for in utilities to see which ones have the potential to use this technology to become hyper-growth investments.

‘Can Do’ Became ‘Can’t Do’

Nearly a decade ago, I was chatting with a senior utility executive and mentioned how electric cars could one day supplant the combustion engine and capture the billions that America pays for foreign oil, making our country energy independent and radically changing the growth trajectory of the utilities sector. He practically rolled his eyes at me.

Ironically, this discussion occurred while conducting a study to see whether Dominion Resources’ (NYSE: D) infrastructure was ready to handle electric cars. We found the technology would lower carbon emissions, improve efficiency, and increase sales (a welcome benefit given declining electricity demand in the industry).

Years later, I was disheartened to learn from the CEO of a major utility that the industry had backed down on supporting a critical subsidy for electric cars because it didn’t want to take on the oil lobby. And then another utility executive once whined to me that he didn’t think regulators would allow utilities to keep profits from electric cars’ power demand, so his utility wasn’t even going to try.

Interactions like these have sometimes soured me on the current generation of utility leaders. I don’t mean to paint them all with the same broad brush, but it has been my experience that some executives are merely content to be caretakers, utterly lacking in the visionary entrepreneurialism that characterized those early CEOs who made the electric utility system into a modern marvel.

More recently, at a conference on smart-grid technology, someone asked who is going to lead the charge on developing new energy technologies since many U.S. utility CEOs just don’t seem to get that their sector is in the midst of a significant paradigm shift.

I don’t think Thomas Edison would have given a second thought to taking on Big Oil. In fact, he worked on various experimental electric cars.

And the entrepreneurs and engineers who built the electric utility system in the early 1900s were as aggressive, resourceful, and savvy as any Silicon Valley tech exec. The word “can’t” was simply not in their lexicon.

To be sure, the Edison Electric Institute, the association representing investor-owned utilities, and the Department of Energy are working together to help electric cars go mainstream. A few years ago, they signed a memorandum of understanding to spur further development of the technology.

Meanwhile, there are various utilities that have pilot programs supporting electric cars. For example, the California utilities—PG&E Corp. (NYSE: PCG), Edison International (NYSE: EIX), and Sempra Energy (NYSE: SRE)—have been making great strides in supporting the deployment of electric cars in the Golden State, where most of America’s electric car owners reside.

But my main critique of the sector’s efforts thus far is that this potentially game-changing profit opportunity is being squandered with a bureaucratic approach that seems almost certain to fail in achieving any transformational benefit.

I’ve actually seen articles in industry trade journals that claim the only impediment to widespread adoption of electric cars is regulatory-rate design! That reminds me of an old joke: “A sufficiently promising technology must be regulated or it will succeed.”

What’s really needed is a new class of utility CEO and a more entrepreneurial culture in the sector overall.

I’ve long believed tomorrow’s would-be Rockefellers could be utility executives who figure out how to capitalize on the expected hyper-growth in electric cars. That hasn’t happened yet, but I’m sure it will one day now that the industry is being forced to reckon with the existential threat posed by distributed generation.

The Tesla Effect

By 2050, the Rocky Mountain Institute, an environmental think tank, forecasts that half of America’s vehicle fleet could be electric. This could add an additional 2,900 gigawatt-hours of storage and generation capacity to the grid, which could easily support higher growth at utilities and greater earnings for investors.

In the past, some have criticized this figure as too optimistic. But with electric carmaker Tesla Inc. (NSDQ: TSLA) surpassing Ford in market value in early April, Americans are waking up to the reality that electric cars are a serious challenger to the combustion engine.

Most automakers aren’t just standing idly by—it seems every other day a new electric car is announced by a major auto manufacturer to take on Tesla.

So the question now is which utilities will be first to dominate this new technology and deliver higher returns? Because a truly entrepreneurial utility CEO wouldn’t wait until regulators, government bureaucrats, and association executives produce another report.

No, if you’re an entrepreneurial utility CEO, you seize the initiative by creating ad campaigns that promote electric cars during the Superbowl, and by working with regulators to rate-base the installation of charging stations in each and every home in your service territory to encourage adoption.

Indeed, this forward-thinking CEO should be at the vanguard of helping push new regulations and laws that encourage development.

Utilities should also engage with homebuilders to integrate charging infrastructure into new housing developments, just as the industry did in the early days of its buildout of the grid.

Like insurers do with homeowners and auto policies, utilities should give discounts and incentives for customers to bundle residential power with their car-charging.

And CEOs might even get the utility association to create a national marketing logo like in 1926, when the Reddy Kilowatt character acted as a corporate spokesman for electricity power.

In sum, these are the kinds of actions investors should look for to determine whether a utility has what it takes to generate hyper-growth from electric cars.