To the Editor
An earnings gap? Is that like the “missile gap”—a false alarm but a sure attention getter? Gary L. Hunt and Jon Ecker assert, in their article (“Back to Basics: A Starvation Diet for Utility Earnings Growth,” June 2004) that investors expect 10 percent growth but a back-to-basics strategy will deliver only 3 percent. I agree with the latter observation but not the former. The earnings gap sounds, to me, like a leftover from the 1990s. I doubt that utility investors, in general, expect 10 percent, at least not the investors that I know.
Just about every utility that comes to town to tell its story preaches the line that the back-to-basics strategy will produce growth rates of at least 3 percent, and investors do not walk out in disgust and promptly dump the stocks. At a recent Edison Electric Institute conference in New York City, a panel of institutional investors berated utility managements for having engaged in strategies that destroyed value, not for going back to basics. I suspect that energy utilities, as a whole, have produced no earnings or dividend growth over the past decade just because they strayed from basics into fields in which they had no experience or advantage. Three percent is a lot better than nothing.