More harm than good. [Financing in electric utilities]
- MSB Energy Associates, Madison, WI (United States)
In discussing regulatory issues, financial analysts often encounter an unexpected foe: utility CEOs. This confrontation is somewhat unusual. After all, one might expect that financial analysts and CEOs would see the world through the same lens. Both regard the basic foundation of finance to be the development of corporate policies and strategies to maximize shareholder wealth. The CEO is supposedly the key person responsible for achieving that objective. In practice, however, utility CEOs sometimes pursue strategies that their intuition suggests are in the investors' interest, but that financial analysis reveals to be otherwise. The following are examples of frequent conflict between utility strategies and financial principles. Investors benefit from utility diversification. In recent times, the decline of utility construction budgets has generated free cash flow. Instead of flowing this excess cash to investors, some utilities have used the funds to diversify into unregulated areas. Basic corporate finance teaches that utility managers do their investors no favors by attempting to diversify for them. Investor benefits from utility growth. Since utility earnings are subject to regulatory oversight, the sales growth rate of a utility should be irrelevant to investors over the long term. The underlying financial principle here is that if a firm just earns its cost of capital, as a regulated utility should over the long term, shareholder wealth accumulates independent of aggregate company growth. The days of utility dominance of the electricity market are over. Neither the financial markets nor the current institutional forces will sustain a utility that tries to use a traditional growth-oriented corporate strategy. Utility investors will continue to suffer if utility executives fail to reconcile their intuition with financial reality.
- OSTI ID:
- 6477269
- Journal Information:
- Public Utilities Fortnightly; (United States), Vol. 131:11; ISSN 0033-3808
- Country of Publication:
- United States
- Language:
- English
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