London-based analyst Marc Watton of BNP Paribas is warning investors to avoid Spanish electric utilities' paper, because he fears the sector could suffer the same fate as happened in California. "In Spain there have already been blackouts and there are no plans to build any generation capacity," says Watton, adding that last month prices on the wholesale market peaked and supply failed to meet demand as suppliers scrambled to meet their obligations. In addition, Spain's electricity interconnectors with its neighbors Portgual and France are inadequate and already fully utilized with existing contracts, he says. Accordingly, Watton recommends avoiding all from Endesa, Ibedrola, Union Fenosa and Hidroelectrica del Cantabrico. To add to the problems, Spain is highly dependant on hydro-electric power, which could suffer in the event of a dry winter.
Patrick Hughes, a utilities analyst at Credit Suisse First Boston in London, is also steering away from Spanish utilities, but for other reasons. He reckons the California situation was a one-off scenario caused completely by the state's poor regulatory environment. He believes that since Spanish utilities will be shifting investments away from Argentina, cash should be available for new power projects at home. Hughes is not recommending Spanish utilities for another reason. He says they trade too expensively and the huge amount of issuance due from the sector this year should cause a re-pricing of the utilities market. "Investors are looking for yield, not safety," he says.