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Perspective

A decade of restructuring has not affected the financial integrity of the average regulated utility.
Fortnightly Magazine - November 15 2003

a decline in interest rates that should have boosted utility share prices.

Table 3 presents total returns (dividends plus capital gains) for the 10-year period between 1993 and 2002. Electric utilities under-performed the stock market, gas stocks, and even bonds. The dividend accounted for almost the entire return, meaning that shareholders, in the end, received no value for all the money retained for unregulated ventures. (The utility tended to pay out most of its earnings to the parent.)

Mind the Gap

In the past, utility stocks have tended to follow the movement of interest rates. 6 During the 10-year period under study, interest rates dropped more than 20 percent, while utility returns earned and dividends paid remained level. Those circumstances should have produced a total return of roughly 7 percent per year (5 percent dividend plus 2 percent capital gains) based on past experience. To put it another way, the unsuccessful deviance from the utility model probably cost utility investors 1.5 percent per year, or roughly $35 billion over the decade, based on the valuation of utility shares at the beginning of the period.

To reiterate, though, the poor total returns probably derive from the outcomes of investment decisions made outside the utility sector. Restructuring did not force utility management to make those investments. Rather, it enabled them to do so.

Customer Benefits

Consumers should benefit from the introduction of competition to a market. The market participants will have to work harder to provide services efficiently, and the threat of losing the customer to a competitor will force them to lower prices in a way that reflects the savings from the efficiencies.

Not all markets function as the textbook would predict. In some, a small number of competitors may collude to maintain prices at a high level despite efficiencies that have lowered costs, for instance. In markets structured by government agencies, the rules may provide market players with opportunities to jack up prices above competitive levels. The fact that customers have little opportunity to respond to price signals may contribute to the opportunity to charge high prices.

Table 4 shows the average price of electricity to all consumers, and to residential customers, as well as the fossil fuel cost per kilowatt-hour of generation.

In the decade covered, the real price of electricity fell 1.3 percent per year. Pass-through of fuel cost savings, however, could have accounted for 0.2 percent per year of the total, and normal productivity gains could have accounted for much of the balance without even considering the impact of restructuring on electric bills. Restructuring began for consumers after 1996, however. In the years 1997 to 2002, the real price of electricity fell 0.8 percent per year, none of which should be attributable to fuel cost savings. These calculations produce savings estimates so marginal that one has to question whether the country as a whole has seen any benefits from restructuring. 7

Assuming that restructuring accounts for the cumulative drop in price (excluding fuel savings) from the time that restructuring began in earnest, consumers gained approximately $35 billion from the