Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Perspective

Fortnightly Magazine - September 15 1998

Roadblocks to Profit

Can the new buyers boost revenues or cut costs? The change in ownership might influence a number of cost factors, such as operation and maintenance, fuel, depreciation, taxes, accounting rules and financing. However, an acquisition price higher than book value might itself increase some costs.

O&M. It may be possible to decrease operation and maintenance expenses, but many utilities have already made such reductions to become more competitive. Skimping on maintenance costs implies accepting risk for availability and reliability, as demonstrated by the unfortunate experiences of some nuclear plant owners in attempting to minimize O&M costs.

I know of one small municipal electric utility in the Midwest, operating without interconnections. It suffered a summer storm that drained a reservoir used to supply the city's water and cool its generating station. Customers found themselves without water or electricity for about a week. An electric outage of only a few hours a year later prompted customers to demand that the electric operation be sold, which was done.

Another consideration when decreasing maintenance expenses is that mortgage bond indentures often require periodic certification that the underlying assets are being maintained at a level sufficient to generate the income needed to retire the debt.

FUEL. Potential savings in fuel costs lie in two areas: heat rate improvements and lower unit prices. However, heat rate improvements are no more available to a new owner than to the prior owner. And utilities are large fuel users, so a new owner may not be able to purchase fuel any cheaper. In fact, some plant sale contracts have committed the utility to continue to supply the fuel.

Of course, new owners purchasing high volumes of fuel may enjoy market power, but they will have to watch out for regulators. A buyer might benefit by playing spot and long-term markets against each other, but will it outperform the previous owner? The same might be said of any potential opportunities for fuel conversion. Why wasn't it done before?

TAXES. Since property taxes tend to run higher for utilities than for other businesses, they should fall under deregulation. Taxing authorities can be expected to oppose efforts to roll back property taxes, however, so a new owner might find little to gain.

Income taxes will follow income, but will be influenced by financing costs. Regulated firms are generally well regarded by investors, and so can borrow at low cost. However, investors tend to look down on entities with nuclear stations, and the magnitude of stranded costs being discussed suggests that investors may have under-estimated the amount of risk imposed by regulation. While a new owner might be interested in financing with a higher portion of debt, the financial market may view the level of risk as requiring less debt and early maturity.

DEPRECIATION. So far only two of the many plant sales have involved nuclear units. In fact, many nuclear plant owners have already taken steps to reduce their costs by accelerating the rate at which they record depreciation or amortize related regulatory assets of these efforts to accelerate cost recovery,