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Regulation, Regulation, Regulation
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Just as location is the primary driver of value in real estate, regulation is perhaps the single most important factor shaping the utility sector. Companies in the sector face heavy regulation on multiple levels, and the changing regulatory structure has dramatically altered the competitive dynamics of the industry.

From an investment perspective, the most important regulation is done at the state level because the states decide how utilities are structured, what degree of competition will be allowed, and what rates will be charged. Today, the structures are all over the board—some states still have regulated monopolies at essentially all levels, while others have portions that operate in totally free market conditions. Each state has a different structure, and those structures are in the process of changing.

The next most important level of regulation comes at the federal level. Through the Department of Energy (DOE) and Federal Energy Regulatory Commission (FERC), the basic ground rules for state regulation are set. It is largely the FERC's rule makings that got the deregulation ball rolling following 1992.

Finally, most utilities also face operating regulations at the federal level. The Environmental Protection Agency (EPA) wields a great deal of power because it regulates the levels of emissions power plants are allowed to release to the atmosphere. This is important because coal-fired plants still represent the majority of the generating capacity in the country. Those with nuclear-powered plants also must operate under the watchful eye of the Nuclear Regulatory Commission (NRC).

The point to remember is that legislators and regulators have enormous influence in the sector. No fundamental analysis of a utility company "would be complete without understanding the basics of regulation and how that regulation affects the company's operations and its competitive positioning. It's not an easy task, making utilities much more complex to analyze than it might seem on the surface.

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