Discount Power Broker Keystone Energizes Investors
The Motley Fool - November 17, 1997 12:31
KESE FERC V%MFOOL P%TMF
November 17, 1997/FOOLWIRE/ -- Sidestepping the
deservedly controversial nature of OTC issues, today's Lunchtime News
column takes a look at Keystone Energy Services (OTC: KESE), up $2 1/8
to $9 1/2 this morning, as a harbinger of the changes occurring in the
U.S. electric utilities industry. Keystone is the first "public" company
to emerge as a discount power broker in the nation's nascent retail
electricity market. The company reported last Friday that it had signed
"over 30 million kwh" in contracts, which represents electricity usage
of more than $5 million per year at current prices. Keystone's stock
promptly gained 15% on the day. Electric utility stocks have
dramatically underperformed the overall market over the last two years,
largely as a result of the uncertainty surrounding deregulation of the
industry. The latest change on the legislative front to significantly
alter the competitive landscape came in April of 1996 when the Federal
Energy Regulatory Commission (FERC) ordered electric utilities
nationwide to open up their utility transmission systems and allow the
free flow of electrons to competitors.
This was the first step in the process of allowing companies in areas
where electricity is less costly to transmit their "juice" to areas
where it is more costly, which is the entire point of deregulation. The
stakes are high for an industry that is twice the size of the
long-distance telephone business. Analysts predict that the nation's
$212 billion a year electric bill will drop 20-30% over the next five to
ten years. The state furthest along in the process is California, which
has long labored under the burden of astronomical power costs (30% to
50% higher than the national average). Starting on January 1, 1998,
residential, commercial and industrial customers in California will be
able to purchase their electricity from either their current utility or
any other "licensed electricity supplier." Some have touted Keystone as
the next MCI or Sprint, making analogies with companies that benefited
handsomely when deregulation hit the long-distance arena in the mid
1980s. The more apt analogy would be with the ubiquitous long-distance
"resellers" of the period (acknowledging that both MCI and Sprint at
times resold long-distance service on AT&T lines).
Keystone's business model is simple -- it calls up potential customers
and offers them a 10% to 25% discount on their electricity service, with
no change in the provision of service or billing. When the bill is
received by the "old" utility, new legislation mandates that the
electricity portion of the bill be credited to Keystone. At present the
company is ahead of the game in terms of sales staff and marketing, as
well as the experience of its management team. The company claims that
it can penetrate 1% of the $22.5 billion California market by the end of
1998. However, in a business where the only barrier to entry is a
license, prepare for a wave of such "resellers" to inundate the market,
all competing on the basis of price. It may not happen immediately, it
may not happen in six months, but it will happen.
Unfortunately, Keystone has chosen to list on the OTC Bulletin Board
(which in essence acts as a pure quotation service) as a result of "time
to market" issues surrounding listing requirements. Companies that are
quoted on the "BB" are under no requirement to report quarterly
financial information to the SEC or investors. However, this week the
company is submitting audited financial statements in order to become a
"fully reporting" OTC issue, and Keystone has stated that it plans to
eventually list on one of the major exchanges (this week's submission is
the first step). Tracking the fortunes of Keystone will provide some
insight into a process that will be replicated in some way, shape, or
form across the entire country in coming years.
-- By Alex Schay |
