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By Charles Fishman, CFA | 11-18-2014 03:00 PM

3 Utilities Moving Into Wide-Moat Territory

ITC Holdings, American Electric Power, and Public Service Enterprise Group are aggressively expanding into a wide-moat area of electric transmission.

Charles Fishman: At Morningstar, we award most regulated utilities a narrow moat because of their monopoly position in the territories they cover. However, that's offset against the fact that regulators typically cap their returns.

However, one area that we do award a wide moat to is electric transmission. And there are three companies that are aggressively expanding into this area, and that includes ITC Holdings (ITC), American Electric Power (AEP), and Public Service Enterprise Group (PEG).

Now, why does electric transmission have a wide moat? Four reasons: One, it's critical to providing reliable service. As witnessed by the last major blackouts in the United States, they were caused by transmission failures, including the most recent one in 2003. Number two, it allows customers in high-priced areas to access lower-priced power in an adjacent area, or even one or two states away.

Number three is that our country, right now, is moving to a lower carbon generation, which means a lot of utilities scale solar as well wind. Typically, those are in remote locations, and it takes high voltage transmission to transfer that power to where the customers are using it.

Finally, the regulatory framework for transmission is different than other areas of the electric utility world. It is regulated by FERC at the national level, the Federal Energy Regulatory Commission. They provide higher ROEs and a regulatory framework that is favorable to the states.

So, in conclusion, these three companies are expanding rapidly into a wide-moat area of electric transmission. They are fairly valued at this moment, but there might be an opportunity in the future to purchase them at a discount to our fair value estimate.

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