Like a physician with her stethoscope at the outset of a check-up, astute shareholders and directors should use the level and trend of a utility’s market-to-book ratio (MtB) as one of the first...
Banking on the Big Build
The need for many hundreds of billions of dollars in capital expenditures creates huge opportunities and challenges, especially in a more challenging credit environment.
some of the largest and most complex projects—in particular new nuclear plants—are unlikely to proceed without government support. The risk/return tradeoff for the private sector is simply not attractive enough without such support, given the large sums of money involved, potential technology risks and extended construction timetables. From a public policy point of view, government support can be justified by the contribution that nuclear and other clean generating technologies can make to reducing greenhouse gases and improving the energy security of the United States.
Government support can come most tangibly through a well-structured loan-guarantee program, which does not leave a slice of lender exposure uncovered or subordinate commercial debt to the Department of Energy’s lien. But it also can come in other ways, such as through a streamlined licensing process, and protection against the risk of delays arising from a failure to obtain regulatory approvals in a timely fashion, both of which reduce the risk of a repeat of the experience of the last cycle of nuclear plant construction. From the perspective of appropriate risk allocation, private sector investors never will be able to evaluate, price or absorb such risks as effectively as the public sector.
In conclusion, the need for many hundreds of billions of dollars in capital expenditures creates huge opportunities and challenges for both regulated and unregulated companies. Governments and regulators need to create a supportive climate for investment, in which the rules are clear and in which risks are allocated to those who are best placed to manage them. Customers will have to deal with higher bills if they are to enjoy continued safe and reliable service and lower emissions.
And companies in the sector will need to find ways to manage the risks that are within their control, allocate scarce capital efficiently, and evaluate partnerships and mergers so that they have access to capital through bad times as well as good times. Successful execution of the program will result in a high-quality utility infrastructure for customers, earnings growth for utilities, attractive returns for investors, and a cleaner environment for all citizens.