An excerpt from October’s Public Utilities Fortnightly, among the 23 articles, columns and letters in this issue
An excerpt from October’s Public Utilities Fortnightly, From the Editor, pages 4 and 6:
If you believe the nation’s electric grid (including its generating, transmission and distribution infrastructure) doesn’t need much tending to, doesn’t need much capital investment, then the financial strength of our utilities doesn’t matter much to you.
But consider the converse. If you believe the grid does need much tending to, does need much investment, then the financial strength of our utilities does matter a whole lot to you…
Regulators approve a certain budget of sorts, the revenue requirement, for a utility. However, that’s hardly it. The utility then has a range of financial resources to get the biggest bang for the buck, in terms of maximizing service reliability.
Why a range of financial resources rather than a fixed amount? Because the utility leverages its financial strength, provided in regulatory orders, to use the substantial funds of equity and debt investors, to multiply the resources for reliability.
The more the return for shareholders, the more funds investors are willing to let a utility use. The less the return for shareholders, the less funds investors are willing to let a utility use, versus let some other company use.
In rate cases, we wish we had a magic formula. If the allowed return on equity is set at eleven percent, for example, a utility will have enough financial strength to do everything customers would want, to maximize their service reliability. If the allowed return is set at ten percent, the utility won’t. Ten and a half percent? How much reliability does that buy customers?
Regrettably, there is no such magic formula. My apologies to rate-of-return expert witnesses, an exclusive club of which I was once a member.
Indeed, it’s a perception game. Thomas Edison Power and Light is perceived by the financial community to be financially strong. Nikola Tesla Gas and Electric is perceived by them to be weak. And George Westinghouse Energy is perceived by them to be in the middle.
So investors are eager to put their money down for Thomas Edison P&L, reluctant to do so for Nikola Tesla G&E, and wary to do so for George Westinghouse Energy. The communities and families served by Thomas Edison P&L will get the best equipment and people to keep the lights on through storms. Those served by Nikola Tesla G&E will be short-changed.
If it’s a perception game, that means utilities, regulators and intervenors are all on the same team. However much they squabble in the hearing room, they must jointly persuade the financial community that a utility is strong enough to take good care of investor funds, all the funds that can be effectively deployed to maximize service reliability.
What’s your view? The magazine for commentary, opinion and debate on utility regulation and policy since 1928, Public Utilities Fortnightly is always looking for great writers with strong views.
Steve Mitnick, Editor-in-Chief, Public Utilities Fortnightly
E-mail me: mitnick@fortnightly.com
