Utility Investment Strategies
Objectives & issues
November 1999
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Contents
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Introduction.
Background.
Investment drivers.
Strategies summary.
States of regulation.
Service unbundling.
Summary of regulation.
Conclusions.
Utilities examined.
Introduction
• Last 10 years have seen huge investment
in the Victorian & NZ (VNZ) and UK
electricity industries by US utilities.
• It has also seen some withdrawals from
these markets by a key US utility (Entergy
Corporation).
• This slide show looks at the key drivers
of global investment and examines a few
utilities’ strategies .
Background
• In VNZ terms (and perhaps even in UK
terms) some overseas utilities are huge.
• US utilities are heavily regulated on a
cost-plus
basis,
with
additional
restrictions on recovering stranded costs
and imprudent investments.
• Some larger overseas utilities have
accumulated huge cash reserves and
borrowing capabilities over the years.
Background
• Deregulation of several global markets in
the
early
1990’s
coincided
with
privatisation - Victoria, UK and NZ to a
lesser extent.
• Many large US utilities saw it as an
opportunity to invest for reasons that
appear to fall into five broad categories.
Investment drivers
• Key factors driving global investment by
US utilities are.…
• The likely capital gains if an industry is
privatised for less than true market value.
• The superior earnings at an acceptable risk
level that can be derived from less regulated
markets.
• The learning experiences from newly
deregulated markets that can be imported
back to the domestic market.
Investment drivers
• The desire to boost revenues by redefining
the long-term market as global rather than
just local or national.
• The need to diversify risk away from one
jurisdiction or economy.
Investment drivers
• Key drivers of global investment are
therefore.…
• the relative states of deregulation between
each domestic and global market.
• the earning potential derived from underlying
economic factors.
• the investment risk in each global market
relative to each domestic market (mainly
comprising political risk).
Strategies summary
• Identified strategies are therefore.…
• Capital gain (from purchase and resale).
• Increase earnings from a fixed portfolio.
• Increase revenues by redefining and
expanding markets (increasing portfolio
size).
• Learning from deregulated markets.
• Diversifying risk.
States of regulation
• Victoria restructured and privatised early
in the 1990’s over a 15 month period.
• Significant US investment - no obvious
evidence to suggest that the industry was
sold significantly below market value.
• Spectacular profits from improved
industry efficiencies.
• Recent supply failures may lead to some
sort of supply reliability surveillance.
States of regulation
• NZ restructured with partial privatisation
early in the 1990’s over a drawn-out
period.
• Minimal US investment, although huge
strategic premiums were paid.
• Spectacular profits from improved
industry efficiencies.
• Increasing regulation due to recent
supply failures and “excessive” profits.
States of regulation
• UK restructured with full privatisation in
the late 1980’s.
• Heavy US investment with huge strategic
premiums being paid.
• Spectacular profits from improved
industry efficiencies.
• Increasing regulation due to “excessive”
profits, along with “windfall” taxes.
States of regulation
• Most US states except S.Dakota are at
least considering deregulation, with many
having approved customer choice to
begin over the next year or two.
• California, Pennsylvania & Massachusetts
appear to be leading the way.
• Many utilities are vigorously fighting to
allow recovery of stranded funds.
Service unbundling
• Regulatory regimes are primarily focused
on regulating the lines businesses.
• Lines regulation may look at revenues or
profits, and include some measure of
supply reliability.
• Energy markets are unlikely to be
regulated
because
of
increasing
competition.
Summary of regulation
• NZ - lines businesses will most probably
be incentive regulated, with close
scrutiny of supply reliability.
• UK - lines businesses will continue to be
incentive
regulated,
with
OFFER
signaling that the one-off adjustment may
increase in the year beginning 1 April
2000 (this has previously been up to
15%).
Summary of regulation
• UK - water and wastewater businesses
are incentive regulated by OFWAT.
• Possibility of further windfall taxes in the
UK - water businesses hit very hard.
• Victoria - lines revenue regulated on a
“fair & reasonable” basis with an
incentive criteria.
• US - various stages of deregulation in
each state, focused on mainly on energy.
Summary of regulation
• Early in the 1990’s, the VNZ and UK
markets were less regulated than the US.
• Private profit motive certainly got in
ahead of any increasing regulation to
restrain profits.
• Increasing regulation in VNZ and UK
markets driven by public concern over
“excessive profits” and recent supply
failures.
Summary of regulation
• Corresponding decrease in regulation in
many US states will make the US a more
favorable destination for investment
capital.
Conclusions
• Differing states of deregulation are
providing huge investment opportunities.
• Maturing regulatory regimes appear to be
reducing the potential earnings streams.
• Most strategies fall into one or more of
the five previously identified.
Utilities examined
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American Electric Power
Edison Mission Energy
Electricité de France
Entergy Corporation
General Public Utilities
Pacificorp
Texas Utilities
Utilicorp
American Electric Power
• Late entry into Australia (purchased
CitiPower from Entergy) suggests an
earnings or market expansion strategy.
• Opportunities for capital gains in the
Victorian market are probably minimal.
Edison Mission Energy
• Recent investment in NZ and Australia
suggests a market expansion strategy,
combined with learning experience.
• Introduction of wholesale competition in
NZ on 1 April 1999 depressed wholesale
prices, hence it is unlikely to be an
earnings strategy.
• Huge premium paid suggests a capital
gains strategy is unlikely.
Electricité de France
• Recent purchase of London Electricity
following Entergy’s withdrawal, along
with several investments in Argentina
suggests a market expansion strategy.
• Emphasis appears to be on holding
partial stakes.
• Strategy is probably not a capital gains
one because the UK industry is now
relatively mature.
Entergy Corporation
• Original strategy of global market growth
has been altered to focus on domestic
market penetration.
• Recent sale of London Electricity,
CitiPower and Edesur.
• Strategy appears to be one of learning
about deregulation, possibly some
capital gains with business sales.
General Public Utilities
• Extensive electricity and gas investments
in Australia, South America and the UK.
• Strategy appears to be cautious market
expansion
combined
with
strong
community values.
• Diversifying risk is a key concern.
• Recent attempt to enter NZ distribution
industry suggests a market expansion
strategy.
Pacificorp
• Early and continued investment in
Australia (PowerCor) suggests a market
expansion strategy - certainly not a
capital gain strategy.
• Merger with SottishPower, who have a
similar investment strategy in the UK,
would appear to confirm similar values.
Texas Utilities
• Diversified into gas and telecomm’s in
Texas.
• Early movers in Victoria, but appear to be
in for the long haul - suggests a market
growth strategy.
• Entry and consolidation into UK at a
mature market stage suggests a market
growth strategy.
Utilicorp
• Extensive investments in Australia and
NZ, thought to be bidding for businesses
in SA, and would probably bid if Vector
was put up for sale.
• Early movers in NZ and Australia, but
strategy appears to be market expansion.
• Reducing their stake in United Networks
(NZ) to 51% suggesting cautious further
investment - could be a response to NZ
market uncertainties.
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