On dividend policy and market valuations of Australia’s listed electricity utilities: Regulated vs. merchant

Abstract

Restructuring of Australia’s electricity supply industry during the 1990s led to two clear lines of business emerging, (i). regulated utilities (i.e. poles & wires), and (ii). merchant utilities (i.e. competitive generation and retail). There are dozens of utility businesses in Australia but only four were listed on the Australian Stock Exchange — two regulated and two merchant. Over the past decade the Australian Energy Regulator entered a ‘tightening phase’ vis-à-vis Opex and Capex allowances, with regulated utilities arguing regulated rates of return were sub-optimal. In this article, earnings, dividends and market valuations of Australia’s ASX-listed regulated and merchant utilities are analysed over the period 2007–2021. The practical evidence is Australia’s regulated utilities avoided the large swings in earnings that characterised merchant utilities, exhibiting outcomes consistent with the lifecycle theory of dividend policy (i.e. falling cost of capital). Soaring valuations culminated in the simultaneous takeover events of Australia’s two ASX-listed regulated utilities. This makes criticisms of regulatory policy on rates of return hard to reconcile, at least from an historic perspective. However, the industry now faces a very different trajectory and set of market conditions — rising rates, higher inflation and an unwinding of lifecycle theory effects given substantial network investments required to meet climate change objectives. This may in turn require returns policy recalibration. Unfortunately for policymakers, all regulated utilities have now been delisted, ending our ability to observe ‘real’ capital market responses to regulatory change.