History May Not Predict Future
Mark Beyer is chief economist of the New Jersey Board of Public Utilities. This article expresses his views and not necessarily those of the New Jersey BPU, its commissioners, or its staff.
Utility investors currently favor the earnings stability associated with regulated markets rather than the higher risk and return associated with competitive markets. However, history and economics suggest that maximizing exposure to regulated assets may not be an optimal long-term investment strategy, despite its present popularity.
The factors considered below include lower allowed returns on equity, the law of diminishing returns, declining demand for the product, price increases, and a possible death spiral.
Investor Preferences: Now and Then
Recent acquisitions of regulated assets include Southern Company's purchase of AGL Resources, Mid-America Holdings' purchase of NV Energy and NextEra Energy's pending purchase of Oncor Electric Delivery Company.
American Electric Power selling its merchant generation and PPL Corporation spinning off its merchant generation indicate an investor preference for regulated assets. And a preference for pure play securities, either regulated or merchant.
The actions of Exelon Corporation indicate how corporate strategies can change over time. In 2016, Exelon completed the purchase of Pepco Holdings, a multi-state utility holding company comprised of regulated distribution companies.