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November 26, 2007

Taking the Pulse of the Electric and Natural Gas Utilities Sector
    by Anne Moore Odell

KLD's newest report provides investors with insight on how US and European utilities are dealing with environmental and societal concerns. -- Fourteen of the largest US and European utilities are analyzed in-depth by KLD Research and Analytics for their first ever "Electric and Natural Gas Sector Report." The report details the social and environmental impacts of utilities and the associated risks of those impacts. It also identifies and reviews the options for responding to or avoiding negative impacts through alternative technologies and sector specific best practices.

Visit the
Prospectus Ordering CenterThe report rates utilities in relationship to each other to help investors understand the potential financial values of the electric and natural gas companies. The report provides information on ESG issues including emissions trends; safety incidents at nuclear plants; projected costs for the various generating technologies and fuels; and accounting of performance and practices by individual companies.

"The report focuses on climate change, regional air pollution, nuclear accidents, and infrastructure failure (electric grids and pipelines) as the physical manifestations of those impacts," said Andrew Brengle, Senior Research Analyst at KLD who covers Utilities and the Environment. "The report also draws links to financial risks and projected costs to utilities from existing and potential regulatory changes."

KLD's report weighs societal and environmental risks and costs from utility impacts equally with financial risks and costs. Climate change and nuclear energy risks, in KLD's view, should be considered for their practical implications for society and the environment, and not just as cost management issues for investors and the companies themselves.

Brengle told, "On the positive side, the report also recognizes opportunities available to utilities for responding to those identified risk/cost challenges. A number of the companies reviewed in the report have seized on these opportunities in alternative energy and efficiency and grid reliability improvements and distinguished themselves as leaders."

KLD singled out Scottish & Southern Energy (SSE) as the utility with the greatest potential opportunity in response to tighter greenhouse gas emissions standards. SSE is one of the largest providers of energy in the United Kingdom. One recent example of SSE's work to reduce its greenhouse emissions is the increase in the rate it pays people selling solar power back into the grid from solar panels on their houses. SSE also sells photovoltaic panels to its clients and will install solar export meters for free.

"U.S. companies have shown a capacity for aggressive pursuit of alternative energy and best practices in recent years, but likely because of a different regulatory environment and resource base, are behind their European counterparts in embracing renewable technologies and emissions reduction," explained Noel Friedman, Managing Director of Research Products for KLD.

Friedman continued, "The influence of coal is heavier in the U.S. than in Europe because it is a plentiful and relatively cheap resource. Coal as a political lobby and economic engine is still strong in the U.S. This increases the challenge for U.S. utilities to adopt less carbon-intensive alternatives."

The European companies covered in the report have also outpaced their U.S. counterparts in transparency and reporting, providing a longer and more detailed track record of information on emissions and environmental policies and strategies.

On nuclear issues, U.S. and European companies appear on equal footing. The industry in both regions has managed to avoid major problems, but also has displayed instances and patterns of laxity that do not bode well for a large scale resurgence in nuclear energy the report notes.

"The U.S. appears to have a slight edge in infrastructure improvements, having realized the need for shoring up a vulnerable electric grid in the aftermath of significant blackouts, hurricanes, and 9/11," said Freidman. "A flurry of activity in advanced grid technologies and demand side efficiency is occurring in the US."

Success in the US's infrastructure improvements, however, is tempered by increasing levels of US energy demand that outstrips European demand.

Friedman explained that nuclear power is not considered a clean energy source by KLD because nuclear energy has very difficult waste management challenges and safety risks associated with the technology. Yet, on the other hand, companies with large-scale nuclear involvement displacing coal and oil-fired generation will usually perform better on KLD Utilities Sector Report's emissions ratings.

"The report attempts to consider the risks and costs of both climate and nuclear together, where most analyses treat them separately," said Friedman. "They are interlocking issues and present a quandary where nuclear has been promoted as a primary yet high risk solution to climate change."

The Utilities Sector Report is one in a series of global ESG research products that KLD is planning to launch in the coming year. KLD is not only looking to offer more global coverage but also more of a global perspective on the issues and companies, taking regional issues into account while allowing for comparability of companies across regions.

Boston-based KLD completes independent environmental, social, and governance (ESG) research for institutional investors

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