Regulated utilities have a long track record of generating stable, bond-like returns with low volatility, even during economic downturns. Many regulated utilities have historically been insulated from the financial effects of reduced energy demand through mechanisms such as the lag effect built into the rate base, revenue decoupling, and the ability to spread fixed-cost losses from one customer group onto remaining customer groups. However, COVID-19 appears to be impacting the utilities sector as much if not more than other sectors, as indicated by the comparison of short-term share price performance between the 2008 recession and this year’s market crisis. So why is it different this time?
In this white paper, Marakon and CRA colleagues Quan Li, Neal Kissel, and Jim McMahon analyze the intense pressure on affordability, uncertainty in utility rate base growth, the heightened scrutiny on investments, and pressure on regulated ROEs in the current environment. Most of these issues were at play to some degree before the current economic downturn. The COVID-19 crisis has brought them to the fore at an accelerated pace. Consequently, there are deep strategic implications that all utility CEOs need to consider to better weather the storm in the current crisis, be better prepared for the next crisis, and increase the odds of creating long-term business resilience.
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