Stock story: Consolidated Edison

A generation-long growth opportunity awaits a 199-year-old electric utility. (Reading time: 2 mins)

Stock story: Consolidated Edison

April 2022

On 16 September 1878, The New York Sun reported that Thomas Edison had discovered a powerful means of producing electric light that promised “to make the use of gas for illumination a thing of the past”. The news sparked a sell-off on Wall Street, home to the New York Stock Exchange: the stock of the New York Gas Light Company slumped more than 20% on the day as investors processed the implications of a technology claimed to be capable of providing light at less than 10% of the cost of the carburetted hydrogen gas then in use. Confronted with the risk of its product being rendered obsolete by Edison’s invention, the New York Gas Light Company executed a merger with the five rival gas companies operating in New York City in 1884 to enhance its scale and put a stop to the competition between gas companies. In 1901, the merged entity, the Consolidated Gas Company of New York, used its financial resources to acquire a controlling interest in Edison’s Electric Illuminating Company. The acquisition, a defensive manoeuvre, would prove transformational: the electrification of New York City and Westchester County delivered a generation of investment and growth that, in 1936, prompted the company to change its name to Consolidated Edison Company of New York.

Nearly 90 years on, another paradigm shift in the way energy is generated and consumed in New York is poised to present Consolidated Edison with a fresh growth opportunity that could be sustained for a generation. With a legislated target to achieve 100% carbon-free electricity by 2040 and economy-wide net-zero carbon emissions by 2050, New York has some of the most ambitious climate targets in the world. To equip its network to deliver this clean energy, support the electrification of the state’s heavily emitting transportation and building heat sectors and increase the resilience of its network to the impacts of climate change, Consolidated Edison estimates that it will need to invest about US$68 billion at its key regulated utility subsidiary over the next decade, around two-and-a-half times the level of investment it deployed over the past 10 years. If approved by the regulator, this investment would drive massive growth in Consolidated Edison’s ‘rate base’, a key measure of the company’s earnings potential, to which the regulator applies the authorised rate of return when setting customer rates.

Securing approval for and delivering this level of investment will not be without challenges. Consolidated Edison projects that the implementation of its US$68 billion long-range plan will see its revenue requirement, a key component of the total customer bill, increase at a rate of about 8% per annum over 10 years. Sustained bill increases of this magnitude risk raising the ire of the company’s customers and its regulators at the New York State Public Service Commission, where a subset of the commissioners that set electricity tariffs have historically advocated for rate increases to be limited to a level broadly in line with inflation. Consolidated Edison has sought to alleviate these concerns, pointing out that the 8% rate of growth in its revenue requirement overstates the impact on household budgets, with electricity charges likely to displace customer spending on gas heating for their homes and gasoline for their vehicles.

If it can navigate these challenges and deliver on its plans, Consolidated Edison, a company that traces its beginnings to 1823, will play a crucial role in addressing the greatest issue of the 21st century and reward investors in the process.

Sources: Company filings.

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