Factors that influence public utility performance

Abstract

The electric utility industry is considered homogeneous. Nevertheless, estimates of excess returns and risk vary widely. This study uses a two-part methodology to explain performance. It finds stockholder returns directly related to beta risk, service market diversification and the use of oil-fired generating facilities. Stockholders did not suffer from what is perceived to be unenlightened regulatory climates. Nor were they fooled by accounting ‘sleight of hand’. Beta risk was directly related to the debt ratio as well as the use of external rather than internally generated equity capital. Geographic location of the utility played a role. Investors in sunbelt utilities bore lower beta risk. Furthermore, service market diversification was found to reduce risk where regulatory climate is considered favourable. Lastly, it appears most electric utilities are diversifying their service/product markets to increase return rather than reduce risk.