Perspective

A decade of restructuring has not affected the financial integrity of the average regulated utility.

Ideological bias, economic principles, success of previous deregulation, inordinate greed, and political expediency fueled the movement for electricity deregulation. The authorities, however, never deregulated. They chose to restructure. Congress passed the Energy Policy Act of 1992, which ushered in wholesale power markets, opened the transmission market to competitive power producers, and freed electric utilities from restrictions on investment activities outside the regulated sector.

By 1996, several states had decided to open their markets to competition. By 1998, power producers and traders had achieved stock market valuations formerly reserved for glamorous technology leaders. By the end of 2002, though, the world's greatest energy trader had collapsed, the generating sector teetered on the edge of the abyss, the public had demonstrated its apathy toward competitive retail supplies, and restructuring had stopped at the state level. By mid-2003, the generators on the edge of the abyss had fallen in, federal regulators had backed off from their standard market design, and utility managers had trekked from coast to coast extolling the virtues of their plain-vanilla, regulated utility businesses.

Rather than rehash a list of errors made, delve into the unsubstantiated assertions that substitute for public policy analysis, or debate whether deregulation will rise from its coffin like Dracula, let us instead look at the numbers to assess the benefits of restructuring and, perhaps, look into the future.

Damage Done?

Did restructuring damage the regulated utility? We know that competitive energy companies lost billions of dollars, bond ratings declined, and creditors had to restructure loans. Presumably, if investors and creditors choose to make bad business decisions involving risky ventures, electric consumers should not care. If, however, the regulated utility participates in such ventures, they should care to the extent that those investments destabilize the utility, raise cost of capital or reduce its ability to provide service. The bond rating agencies, which failed to foresee the collapse of the generating and trading sector, worry that corporations might "allocate assets," ¹ that is, move funds from the sturdy utility to a shaky affiliate, thereby weakening the utility.

Table 1 looks at two key financial ratios: coverage of interest charges, and the common equity ratio. Pretax interest coverage shows how many times over the corporation earns its interest expense. Common stockholders equity as a percent of capitalization shows the size of the equity contribution that protects the value of senior securities. In both cases, the higher the value, the more secure the company is financially. The table presents two indicators for the regulated utilities alone, and for the consolidated entities that own the utilities and the unregulated ventures. If the consolidated entities had chosen to milk the utilities for funds in a dangerous manner, the numbers would show declines in both interest coverage and the equity ratio. Instead, the table shows steady ratios over time for the regulated utilities. The consolidated enterprises, however, show more erratic interest coverage and a declining common equity ratio.

Whether utilities decided to separate the utility and unregulated sectors