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The Future of Fuel Diversity: Crisis or Euphoria?

The fragmented electric industry structure poses an obstacle to a more stable, diverse, and secure power supply.
Fortnightly Magazine - October 2004

less than the amount of debt incurred. Insolvency for A and B is a real possibility. Perhaps C and D will buy out A and B at a bargain price.

Case 2: On the other hand, suppose that the four companies are regulated utilities, each with an individual tariff based on its own cost of production, and that rate-setting in Euphoria is similar to that of most U.S. states or Federal Energy Regulatory Commission tariff regulation. Customers of C and D will continue to enjoy low energy prices (they are "free riders"). Customers of A and B will protest against tariff increases to recover the high costs of A's and B's new investments. Perhaps Euphoria's regulatory commission will open an investigation, finding A's and B's capital investments imprudent and disallowing full cost recovery. With the benefit of hindsight, market prices of gas have not justified such a high investment in fixed assets or fuel development. In this case, A and B would be forced to write down the value of their investments. Operating cash flow from the allowed tariff would not cover A's and B's debt service, and A and B may become financially distressed and perhaps insolvent (though with a lower probability of insolvency and default than in Case 1). Perhaps C and D will buy out A and B at a bargain price.

In Cases 1 and 2, lenders and shareholders of A and B would suffer while investors in C and D would earn good investment returns. It wouldn't take long for investors in Euphoria to decide to shun investments relating to major capital expenditures for new fuel supply and power assets.

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