For better or worse, deregulation is now a factor in the electric utility industry. As a general proposition, deregulation makes for increased competition, which in turn will trim costs for consumers. Deregulation of the electric industry means that utilities face the prospect of freezing or reducing rates to retain market share. Stranded investments and the burdens of above-market supply contracts and construction and development contracts (especially nuclear-related contracts) will place additional pressure on these utilities and further reduce their revenue. Ultimately, these problems could hinder a utility's ability to service its debt, invest for the future, and provide a reasonable rate of return to investors.
Certain companies will be able to adapt to the changes and challenges of deregulation more quickly and adeptly than others. Weaker participants may restructure and emerge as powerful industry players, while others will fail and disappear. Some may succeed through simple expense reduction programs; others may require significant operational and/or balance-sheet restructuring (such as asset, debt, and equity writedowns).
Utility companies that are being smothered by their existing debt-service and dividend obligations are less likely to be able to meet the challenges of deregulation. Short-term solutions to liquidity problems, such as eliminating stock dividends or selling assets, may not solve the problem if revenues remain flat or fall. On the other hand, potential long-term solutions, such as attracting new equity or selling a division or business section, may not be feasible.