A Daydreamer’s Plan to Set Pepco Straight

by Marc Bastow | July 12, 2012 9:45 am

With power finally restored to a majority of storm-ravaged areas in the Washington, D.C., metropolitan area (notice I didn’t say “all” areas), and the recent heat wave mercifully behind us, it’s time to allow for a little “daydreaming” on the state of Pepco, the much-maligned utility behind so much frustration and anger in the area.

An outstanding article[1] by Joe Stephens in Sunday’s Washington Post focused on “myths” as applied to Pepco’s seemingly endless reasons why they are one of the worst-run utilities as measured by outages and customer survey’s.

With a blizzard (sorry) of facts and figures, Stephens lays out Pepco’s reasons and excuses for poor service. My favorite myth involves what fining Pepco for their inefficiency might accomplish. The short answer is nothing, since Pepco’s parent, Pepco Holdings (NYSE:POM[2]), manages to crank out $1.1 million in earnings in about a day-and-a-half’s time.

In my daydream, I’m king of the world for a day. And my first edict (before forcing the Lakers to trade Kobe to New York, anyway): That $242 million paid out in dividends to Pepco shareholders is history.

You think that might get Pepco’s attention?

Pepco’s customers have virtually no place else to turn for their power needs, so forcing it to revise the customer service model — not to mention how it approaches future requirements and practices — is critical.

With $240 million in fresh monies, Pepco can get to the real necessities: building up the infrastructure. I realize $240 million is a relative drop in the bucket (POM brought in roughly $5.9 billion in revenues last year), but I’ll bet it buys a lot of trucks and equipment. Burying all the power lines in the service area is probably unfeasible, but how about working on the feeder lines to the neighborhoods?

Speaking of trucks and equipment, you need people to drive the trucks and deploy the equipment, so why not hire more workers instead of constantly calling up neighboring Pennsylvania crews, or workers from Florida or Canada? People love it when their power is restored, but scratch their collective heads when the crew chief says, “My pleasure, eh?”

One might ask, “Ending dividends? Wouldn’t that punish Pepco’s shareholders, too?” Why yes, it would. And that’s part of the point.

Shareholders are the enablers of Pepco, accepting the company’s track record of miserable service because they still get a great yield (5.6%) on their investment. Good for you. I hope that $1.06 per share per annum gem is a good-enough salve for that 33% shearing in the stock price over the past five years.

But if I could force Pepco to hack its dividend in lieu of its shoddy utility service, shareholders would be forced to wake up and realize what kind of company they were dealing with. They’d bail, and they’d easily be able to find another utility stock — one that doesn’t just provide a dividend, but one that actually might do its job (and thus, have some stock appreciation potential).

Options abound everywhere: across the river at Dominion Resources (NYSE:D[3], 3.9% yield), down the road at Duke Energy (NYSE:DUK[4], 4.6% yield), or further afield at Southern Co. (NYSE:SO[5], 4.2% yield).

If shareholders wanted the dividend restored (whoops, another pun), they could revolt and oust the incumbent management and find another group to run the company. Next time you got that proxy statement or attended the shareholder meeting, you’d really have a gripe. And you’d probably act on it!

Look … realistically, I know that Pepco’s issues are a difficult problem to solve, and it’s impossible to get to 100% service efficiency no matter how much money you throw at the problem. But it doesn’t mean there isn’t room to improve — oh, there’s so much room to improve.

In the real world, is an outsider-mandated dividend suspension possible? Not a chance. But that can’t stop me from dreaming.

Now, what’ll it take to get Kobe into blue and orange?

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long SO.

Endnotes:
  1. outstanding article: http://www.washingtonpost.com/opinions/5-myths-about-pepco/2012/07/06/gJQAzrIASW_story.html
  2. POM: http://studio-5.financialcontent.com/investplace/quote?Symbol=POM
  3. D: http://studio-5.financialcontent.com/investplace/quote?Symbol=D
  4. DUK: http://studio-5.financialcontent.com/investplace/quote?Symbol=DUK
  5. SO: http://studio-5.financialcontent.com/investplace/quote?Symbol=SO

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