Financial News

Fortnightly Magazine - November 1 1996
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In the race toward competition, will outside investments break their poor track record?

The current rash of utility investments outside of the core franchise businesses appears to follow a pattern: a new spree of diversification every decade. Diversification was the rage in the early 1970s before the energy crisis, and revived during the mid-1980s when huge construction programs wound down. It has now reemerged as the threat of competition curtails traditional investment opportunities. Much of the industry's future growth depends on the returns from this current round of investments, but a look at the success of past diversifications offers little encouragement.

Conventional utility financial reporting does not segregate earnings by regulated and nonregulated activities, nor segregate the utility's capital structure or its financing charges. This failure makes it impossible to analyze the financial results of diversification programs directly. However, most utilities with substantial diversification efforts have formed holding companies and report financial

information for both the holding company and the utility. The difference between the holding company's financial results and those of the utility yields a close approximation of the financial results of the diversification efforts. Measuring the results of diversification in this way appears reasonable, since the utility subsidiary was the original entity, and continues as a self-contained entity.

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