DOUDIET:Stranded investment has overshadowed other financial issues in the transition to a competitive electric utility industry. For example, what will post-transitional companies look like? Will they attract growth-oriented investors?
Utilities as monopolies enjoyed unparalleled access to the capital markets because price was based on cost. That structure assured the ability to raise funds under any and all circumstances, but it created an atypical industry. Utilities embraced financial strategies (see sidebar) that one doesn't find among unregulated firms. Prices and costs are unrelated in competitive markets; customers are not locked in.
Allow me to propose a financial objective for the post-transitional era: sustainable earnings growth. That idea is getting lost with so much attention paid to transition-period issues. Sustainable earnings growth eventually will drive valuation for utilities, just as in all other businesses. So how does financial strategy translate into value?
In the future, utility managers will find less demand for the skills they've developed (raising capital, investor relations, and the like) in the regulatory era. Other skills will take on greater importance: budgeting, activity-based cost accounting, and cash management.
On the regulatory side the concept of incentive regulation offers a road to sustainable earnings growth, but only if utilities don't lose sight of market share. Incentive regulation rewards business innovation and yet blends in regulatory oversight. It moves away from rewarding a company for a growing investment base (em and toward cost control. The addition of price caps or tolerance bands further distances regulatory oversight from the traditional concept of price based on cost.