It's no surprise that traditional utilities are now fashionable with Wall Street. With merchant generation and energy trading gone bust, bankers, analysts, and fund managers at the 37th Edison...
Banking on Predictability
minds of debt investors as they think about new investments.
There also was a perception among the market participants-both the people building infrastructure and those financing it-that there would be some nature of self-regulation to capital flowing into infrastructure investments. Industry players repeatedly said that the capital markets would never allow an infrastructure bubble in merchant gas-fired generation. Clearly, that was not the case. There was a lack of self-discipline in merchant investments. There was a further assumption that bankruptcy in the utility sector was a far-off concept, one that could not actually be realized.
The comparison of non-recourse versus recourse debt is clear. What we learned post-crisis is that non-recourse really means that debt owners can now be equity owners upon a bankruptcy type situation. Under these circumstances, people invested non-recourse debt and possibly thought there might be some future infusions of capital, although none were required or mandated. They now know that all parties are going to act in their economic best interests when tested under duress. Under these circumstances, these debt investors are now, in the case of merchant power plants in particular, asset owners. That's a new transition within the sector, creating a new owner base within the power sector. Clearly, those investors are not meant to be long-term owners of infrastructure capital, at least not by that method of acquisition.
This is really more of a financial mechanism that poses risk. One of the lessons learned is that there is really no good substitute for financial liquidity in the event that additional cash is required to be injected into systems.
How Investors See the Power Industry
It's important to understand the complexity of what an investor may see in something like a load pocket, especially a wholesale load pocket. Considerations include:
- A wide degree of generation participants in that market, both the fuel type and the nature of their assets and how they meet load-serving needs;
- Peaking generation, whether it's market-based or just built by an incumbent, and whether that incumbent might have the advantage of tax-exempt debt;
- Distributed generation, and combined heat and power, renewables, which are somewhat social programs, but valid; and
- On the transmission side, there are intra-grid and intergrid situations, meaning the connection of grids to make regionality greater, or the concept of super regions.
From a financing market standpoint, all of these assets are in play right now. Whether there are existing assets suitable for the M&A market (which would involve somebody needing to finance that M&A transaction) or they are new-build assets requiring new construction within the pocket, or they are going to be contributed to some greater whole (possibly in the case of transmission)-all of those have financial implications to the current asset owners and to the new asset owners. They affect how the capital structures of the various participants in that pool are constructed and how the capital will then behave. Some parties are clear entrepreneurs and profit-incented. Some parties are not necessarily profit-incented, but reliability-incented and subsidized with cheaper capital. There are four basic financial regimes that provide