Some transmission and distribution utilities are grappling with how to capture the equity value upside from exponential load growth, just years after divesting competitive generation portfolios to become pure-play wires businesses.

Integrated utility companies such as American Electric Power Co. Inc., Duke Energy Corp. and Southern Co. have seen their stock prices rise substantially amid electricity demand increases from datacenter customers seeking round-the-clock supplies. So have independent power producers (IPPs) such as Constellation Energy Corp. and Vistra Corp., who also reap rewards from skyrocketing power prices.

Transmission and distribution-focused utility companies including Consolidated Edison Inc. and Exelon Corp., on the other hand, have not experienced a commensurate benefit, according to industry analysts. As of the Oct. 15 market close, Constellation's shares were up 131% since the start of the year, and Southern units have gained 28% over the same period, compared to Exelon's 11% rise.

"It's not as if the wires companies are being completely left out from the rate base growth capex associated with electric load growth, but they don't quite have the same juice as if you build a big-ticket item like a new combined-cycle plant or a wind or solar plant," Neil Kalton, managing director of utility equity research at Wells Fargo Securities, said in an interview.

Shedding merchant generation

Exelon spun off Constellation, its power generation and retail energy business, in 2022, eliminating what management described at the time as "confusion among different stakeholders" as well as the cost of operating generation assets in nonregulated jurisdictions, which could not be recovered in customer bills. Separately, Exelon unloaded its contracted solar business in 2021. Exelon today distributes electricity to 10.5 million customers through six utilities serving locations that include Chicago, Philadelphia and Washington, DC.

Con Edison, meanwhile, sold its unregulated renewables business to RWE AG in 2023 for $6.8 billion to focus on its core utility businesses. New York City-headquartered Con Edison serves 3.9 million electric and more than 1.2 million natural gas customers.

"When you look at today's power outlook you could maybe argue that they got out of it at the wrong time, but at the time they made the decision it was clear it was the right one," Mizuho analyst Anthony Crowdell said in an interview. "Regulated utility investors typically don't like volatility, especially when it comes to commodity prices."

Still, selling contracted generation has not necessarily been a panacea, and can lead to a different kind of uncertainty.

"You don't control your own destiny as a wires-only utility in a deregulated state," Kalton said.

"There can be a mismatch where you have a bunch of new load coming on, the generation lags and then it causes power prices to go up significantly, and if that happens as the wires company you're the one who's billing customers," Kalton added. "You're getting a pass-through on the cost, but it creates more bill pressure on your customers, which then in turn creates some additional regulatory risk."

Duke and AEP also divested their merchant renewables segments, but retain sizeable rate-based gas and renewables generation portfolios. New Jersey-headquartered Public Service Enterprise Group Inc. sold its unregulated gas plants and solar facilities and considered unloading its nuclear plants, but ultimately kept them after federal legislation created a production tax credit starting in 2024.

Transmission does have a "really strong growth outlook," according to David Arcaro, head of North American power and utilities equity research at Morgan Stanley.

"One area that I think has gone underappreciated is how much transmission investment will be needed even with this backdrop of needing to invest in power generation," Arcaro said in an interview. "Transmission has actually been the biggest bottleneck for datacenters in powering generative AI."

PJM auction delay

Merchant generators operating in the PJM Interconnection LLC territory have secured well-priced power purchase agreements with hyperscalers and the grid operator's most recent capacity auction set record clearing prices, but they must now contend with a potential delay to the next auction, originally scheduled for December.

In a notice to stakeholders, PJM said it will ask the Federal Energy Regulatory Commission to approve a delay in the 2026/2027 Base Residual Auction for approximately six months.

FERC had directed PJM to respond by Oct. 17 to a complaint (EL24-148) about the treatment of reliability must-run (RMR) units and address a request to delay the auction, also known as the Reliability Pricing Model (RPM). Consumer and environmental advocates have flagged PJM's RMR arrangements as one of the key factors pushing auction clearing prices higher.

"Instead of sizeable upside, we see downside skew" for Constellation, PSEG, Vistra and Talen Energy Corp., analysts at Jefferies, led by power, utilities and clean energy research group head Julien Dumoulin-Smith and managing director Paul Zimbardo, wrote in an Oct. 11 report.

The recent auction's nearly $270/MW-day clearing price across most of PJM's footprint represented about $9/MWh to $11/MWh of revenue for a nuclear plant, they said, but the next auction would likely clear at approximately $163/MW-day if RMR units are included, leading to a $4/MWh to $5/MWh "lower valuation."

"This could be embedded in investor datacenter [power price] assumptions and reset market expectations lower to a degree," the Jefferies analysts said.

Analysts at BMO agreed in an Oct. 14 note that those companies now face "some additional uncertainty."

The prospect of much higher customer bills had also created a potential "longer-term opportunity" for PJM utility reregulation, but the auction delay "does undercut" that, Jefferies added.

Reregulation in PJM could have multiple impacts, with Morgan Stanley's Arcaro noting it "still doesn't get around the bottleneck of how long it takes to build new power plants." Zimbardo, of Jefferies, said reregulation could attract more investors to wires-only utilities.