Utility Firms Research Articles

Strategic rigidity and foresight for technology adoption among electric utilities

The variation in the adoption of a technology as a major source of competitive advantage has been attributed to the wide-ranging strategic foresight and the integrative capability of a firm. These possible areas of competitive advantage can exist in the periphery of the firm's strategic vision and can get easily blurred as a result of rigidness and can permeate in the decision-making process of the firm. This article explores how electric utility firms with a renewable energy portfolio can become strategically rigid in terms of adoption of newer technologies. The reluctance or delay in the adoption of new technology can be characterized as strategic rigidness, brought upon as a result of a firm's core competence or core capability in the other, more conventional technology arrangement. This paper explores the implications of such rigidness on the performance of a firm and consequently on the energy eco-system. The paper substantiates the results by emphasizing the case of Iberdrola S.A., an incumbent firm as a wind energy developer and its adoption decision behavior. We illustrate that the very routines that create competitive advantage for firms in the electric utility industry are vulnerable as they might also develop as sources of competitive disadvantage, when firms confront environmental change and uncertainty.

Inefficiency in Japanese water utility firms: a stochastic frontier approach

I examine inefficiencies in Japanese water utility companies. Efficiency in this context is defined as a firm’s capacity to maximize output given a fixed level of inputs. The findings suggest that the average operation rate, customer density and size variables are associated with lower levels of inefficiency (or higher levels of efficiency), while water purification (a conditioning variable capturing low initial water quality), subsidies and outsourcing are associated with higher levels of inefficiency. Since inefficiency exists, there is an opportunity to improve Japanese water utilities by working on emulating “best practice” firms whenever possible and by providing a regulatory framework that can set appropriate incentive schemes to do so.

A Capability Perspective on Performance Deficiencies in Utility Firms

Infrastructure services such as electricity, water supply, sanitation and transportation are crucially important in our economies. Despite this importance, utility firms have found little attention in management research. This is surprising because the lack of adequate organizational structures, skills and specialized managerial know-how is an emergent issue and main challenge for many utilities worldwide. We propose a capability-based framework to explain performance deficiencies in utilities. The framework elaborates why capability gaps emerge and persist, and how this, in turn, affects performance. The insights from this framework go beyond the conventional explanations of the transaction cost and agency approaches, which suggest that appropriate incentives and regulatory structures increase the performance of public utilities immediately or after a short adaptation process. In contrast, capability gaps - understood as an inadequate availability of competences, expertise and experience - tend to have l...

A study on effects of the best human resource management methods on employee performance based on Guest model: A case study of Charmahal-Bakhtiari Gas distribution firm

Article history: Received October 14, 2012 Received in revised format 5 February 2012 Accepted 7 February 2013 Available online February 7 2013 Human resource management plays an essential role on the success of any business units such as utility firms. In this paper, we present a study to investigate the effects of different human resource management on employee performance. The proposed study is applied on one of gas distribution units in province of Charmahal-Bakhtiari, which is located west part of Iran. There were 161 people working for this firm where 75 employees were working in center of province and 86 employees were working in other sides of province. Cronbach alpha is calculated as 0.83, which is well above the minimum desirable limit. The study uses Pearson correlation test to investigate the effects of Hiring system, Training system, Job design, Organizational relationship and Share ownership programs on employee performance. The results of our survey indicate that job design is the most important technique for employee management followed by training system, organizational relationship and share ownership programs. © 2013 Growing Science Ltd. All rights reserved.

A capability perspective on performance deficiencies in utility firms

This paper proposes a capability-based framework to explain performance deficiencies in utility firms as a result of policy and regulatory changes. The framework complements conventional explanations such as transaction cost and agency approaches, which suggest that appropriate incentives and regulations increase the performance of public utilities after relatively short adaptation processes. In contrast, we argue that capability gaps – understood as an inadequate availability of competences, skills and experiences – tend to have long-lasting effects on firm performance. A crucial implication of the capability perspective is that regulatory interventions that create capability gaps at the firm level may affect utility performance – and the ability of infrastructure sectors to provide adequate services – more severely than expected by traditional approaches.

Valuing the carbon exposure of European utilities. The role of fuel mix, permit allocation and replacement investments

This paper assesses the carbon exposure of European electric utilities covered by the EU Emissions Trading System (EU ETS). First, we rely on an asset pricing model to empirically determine the effect of carbon price risks on firm-specific cost of capital for a sample of 20 European utility stocks during the period 2005–2010. Second, we employ a discounted cash flow framework to simulate carbon-adjusted equity values for three selected utilities and their investment strategies from 2009 to 2020. We show that company-specific carbon risks are asymmetrically distributed to a few utility firms: While for the great majority of power producers carbon price movements are not a relevant risk factor, we find that utilities with an extremely high-emitting fuel mix bear significant risk premiums for carbon which translate to higher cost of capital and a loss of equity value. In contrast, we find no evidence that low-emitting utilities benefit from reduced capital costs. We further reveal that, in addition to the firm's fuel mix, permit allocation rules and replacement investment decisions in terms of fuel technology choice are the driving forces behind the carbon exposure of the utilities. The carbon-related loss of equity value is substantially reduced by implementing an investment strategy directed towards a carbon-free generation mix. The derogations from full permit auctioning in Eastern European member states provide insurance against carbon risks of utilities.

Strategic renewal and the change of capabilities in utility firms

PurposeThe purpose of this paper is to analyze how strategic renewal affects the reconfiguration of capabilities. In the context of organizational change in a large utility firm, we examine the evolution of the capability structure, and explain the emergence and persistence of capability gaps.Design/methodology/approachThe paper uses an inductive multiple case study methodology to compare four processes of capability reconfiguration at Eskom, South Africa's electricity supplier.FindingsThe results show that strategic renewal unfolds through different processes, which vary in their impact. Some processes have an immediate effect in closing capability gaps. The impact of others is with a significant time lag. Most critical, however, are processes that widen capability gaps. As a result, firms may face severe and persistent performance deficiencies.Research limitations/implicationsPrior research has only marginally addressed the relationship between strategic renewal and capability reconfiguration, and has largely neglected emerging capability gaps.Practical implicationsStrategic renewal may cause unintended crowding out effects of specific capabilities. Managers need to consider these potential implications of strategic renewal.Social implicationsUnderstanding the challenges of how to improve the performance of utility services is crucial for economic development, welfare and social inclusion.Originality/valueThis study importantly highlights that the emergence of capability gaps is a common phenomenon rather than an exception in strategic renewal processes. The findings contribute to the strategic renewal literature and to management research in infrastructure sectors.

The Cost of Equity of Network Operators - Empirical Evidence and Regulatory Practice

In many European countries, the deregulation of energy markets leading to the introduction of unbundling and incentive regulation for utilities firms has made the task of setting an adequate cost of equity more difficult. Firstly, Legal Unbundling led to the creation of many legally independent network operators that have to be regulated separately, excluding the generation or sales activities of mother firms. Identifying adequate costs of capital is thereby complicated by the fact that only very few network operators are traded on stock exchanges. Secondly, the increased pressure through incentive regulation schemes has reinforced the importance of setting the equity return adequately. The approaches chosen by regulatory agencies have often been accompanied by heavy criticism regarding methodology and empirical data sets used. In this context the question arises, how regulators set equity returns for network operators and whether the methodologies applied are in line with state-of-the-art capital market models. This paper therefore starts by providing an overview on empirical results, reviewing major published studies of betas and equity returns regarding utilities and network operators. This research helps to identify and discuss the most important drivers of capital costs which is an indispensable groundwork for determining adequate betas. Additionally, an overview of the current practice of regulatory equity return setting is provided. These results are then compared to an empirical analysis based on a recent data set with more than 20 network operators. Based on this data set the required equity returns according to different methodologies (CAPM, Fama-French-TFM, Ross-APT) are computed. This provides evidence that regulatory practice in Europe and Australia ignores the Fama-French-TFM or the APT, even though notably the Fama-French TFM shows the potential to provide improved estimates of required equity returns. The paper concludes by providing a suggestion on how to put the FF TFM into practice accounting for the size of non-stock listed network operators.

Empirical Estimation of the Cost of Equity: An Application to Selected Brazilian Utilities Companies

We provide an extensive set of alternative models for the estimation of the real cost of equity in a sample of utilities firms in Brazil with monthly data from March 2006 to June 2011. The main results are that the traditional CAPM is rejected and, together with the Fama-French factors, give a poor fit, low beta and low predicted real return on equity. Additional factors improve the fit of the models and the estimated betas and real cost of equity increase relative to the traditional CAPM and Fama-French. Accounting for conditional heteroskedasticity shows that autocorrelation of variances is more important than news effects. The inclusion of higher order terms shows that the third order term is mostly significant and positive indicating preference for skewness in this sample period. Our estimates of betas and the implied predicted real cost of equity show that, across the best models, betas are significantly below unity in the range 0.26-0.73. The predicted real cost of equity, across the best models, for Brazil in this sector and sample period averages 11% per year and is in the range of 8.7% to 13.2% per year.

The Effect of the Japan 2011 Disaster on Nuclear and Alternative Energy Stocks Worldwide: An Event Study

AbstractThis event study investigates the impact of the Japanese nuclear disaster in Fukushima-Daiichi on the daily stock prices of French, German, Japanese, and U.S. nuclear utility and alternative energy firms. Hypotheses regarding the (cumulative) abnormal returns based on a three-factor model are analyzed through joint tests by multivariate regression models and bootstrapping. Our results show significant abnormal returns for Japanese nuclear utility firms during the one-week event window and the subsequent four-week post-event window. Furthermore, while French and German nuclear utility and alternative energy stocks exhibit significant abnormal returns during the event window, we cannot confirm abnormal returns for U.S. stocks.

The ‘duty to finance’, the cost of capital and the capital structure of regulated utilities: Lessons from the UK

This work assesses the main regulatory responses to the changes in the capital structure of the utilities firms. It examines the different means of influencing the capital structure and the various concerns related to high gearing; particularly in relation to the cost of capital and risk. The paper argues that several of those concerns are unfounded and that the effectiveness of various aspects of the regulation of capital structure and the setting of the cost of capital are highly questionable.

Operational Compliance Levers, Environmental Performance, and Firm Performance Under Cap and Trade Regulation

Cap and trade programs impose limits on industry emissions but offer individual firms the flexibility to choose among different operational levers toward compliance, including inputs, process changes, and the use of allowances to account for emissions. In this paper, we examine the relationships among (1) levers for compliance (at-source pollution prevention, end-of-pipe pollution control, and the use of allowances); (2) environmental performance; and (3) firm market performance for the context of stringent cap and trade regulation with allowance grandfathering (i.e., the allocation of allowances for free). To investigate these relationships, we use data on publicly traded utility firms operating coal-fired generating units regulated by the U.S. Acid Rain Program from three principal sources: the U.S. Energy Information Administration, the U.S. Environmental Protection Agency, and the Compustat database. Our results indicate a significant relationship between better environmental performance and lower firm market performance over at least a three-year period. From a regulatory perspective, our results show a negative association between allowance grandfathering and firm environmental performance. Overall, by explicitly considering the context of stringent regulation, we find a counter-example to the view that better environmental performance generally associates with better economic performance.

Pricing weather derivatives: An application to the electrical utility

Weather derivatives designed to manage casual changes of weather, as opposed to catastrophic risks of weather, are relatively a new class of financial instruments. There are still many theoretical and practical challenges to the effective use of these instruments. The objective of this paper is to develop a pricing approach for valuing weather derivatives and presents a case study that is practical enough to be used by the risk managers of electrical utility firms. Utilizing daily average temperature data of Guangzhou, China from <TEX>$1^{st}$</TEX> January 1978 to <TEX>$31^{st}$</TEX> December 2010, this paper adopted a univariate time series model to describe weather behavior dynamics and calculates equilibrium prices for weather futures and options for an electrical utility firm in the region. The results imply that the risk premium is an important part of derivatives prices and the market price of risk affects option values much more than forward prices. It also demonstrates that weather innovation as well as weather risk management significantly affect the utility's financial outcomes.

The Cost of Equity of Network Operators - Empirical Evidence and Regulatory Practice

In many European countries, the deregulation of energy markets leading to the introduction of unbundling and incentive regulation for utilities firms has made the task of setting an adequate cost of equity more difficult. Firstly, Legal Unbundling led to the creation of many legally independent network operators that have to be regulated separately, excluding the generation or sales activities of mother firms. Identifying adequate costs of capital is thereby complicated by the fact that only very few network operators are traded on stock exchanges. Secondly, the increased pressure through incentive regulation schemes has reinforced the importance of setting the equity return adequately. The approaches chosen by regulatory agencies have often been accompanied by heavy criticism regarding methodology and empirical data sets used. In this context the question arises, how regulators set equity returns for network operators and whether the methodologies applied are in line with state-of-the-art capital market models. This paper therefore starts by providing an overview on empirical results, reviewing major published studies of betas and equity returns regarding utilities and network operators. This research helps to identify and discuss the most important drivers of capital costs which is an indispensable groundwork for determining adequate betas. Additionally, an overview of the current practice of regulatory equity return setting is provided. These results are then compared to an empirical analysis based on a recent data set with more than 20 network operators. Based on this data set the required equity returns according to different methodologies (CAPM, Fama-French-TFM, Ross-APT) are computed. This provides evidence that regulatory practice in Europe and Australia ignores the Fama-French-TFM or the APT, even though notably the Fama-French TFM shows the potential to provide improved estimates of required equity returns. The paper concludes by providing a suggestion on how to put the FF TFM into practice accounting for the size of non-stock listed network operators.

The Effect of the Japan 2011 Disaster on Nuclear and Alternative Energy Stocks Worldwide - An Event Study

This event study investigates the impact of the Japanese nuclear disaster in Fukushima-Daiichi on the daily stock prices of French, German, Japanese, and U.S. nuclear utility and alternative energy firms. Hypotheses regarding the (cumulative) abnormal returns based on a three-factor model are analyzed through joint tests by multivariate regression models and bootstrapping. Our results show significant abnormal returns for Japanese nuclear utility firms during the one-week event window and the subsequent four-week post-event window. Furthermore, while French and German nuclear utility and alternative energy stocks exhibit significant abnormal returns during the event window, we cannot confirm abnormal returns for U.S. stocks.

Operational synergy in the US electric utility industry under an influence of deregulation policy: A linkage to financial performance and corporate value

Sueyoshi et al. (2009) have examined a synergy effect between electricity and gas services in the US electric utility industry. They have compared electricity-specialized firms with diversified utility firms in their financial performance and corporate value. A problem of their study is that it has not empirically measured the operational performance of the electric utility firms. As an extension of the preceding study, this research investigates the operational performance of 104 US electric utility firms (1990–2004) by fully utilizing DEA (Data Envelopment Analysis). This study finds the three new policy implications. First, the synergy effect has not existed in the operational performance of diversified utility firms before and after the deregulation on the US electricity markets. Thus, core business concentration is more effective for electric utility firms than corporate diversification to enhance their operational performance under the current US deregulation policy. Second, the operational performance has had an increasing trend until 1996 and a decreasing trend after 1996. Thus, the US deregulation policy has been influential on their operational performance. Third, the enhancement in operational performance of electric utility firms has improved their financial performance. The improvement in financial performance has increased their corporate value. Thus, this study finds the business causality among operational performance, financial performance and corporate value in the US electric utility industry.

Is the Regulatory Control of Utilities’ Capital Structures Always Justified?

This work analyses whether there are reasons for regulators to control the capital structures of utilities firms. That control is commonly seen as a suitable ex-ante form of prevention of financial distress. The case of UK utilities is used as case study. It is shown that various concerns related to high levels of debt are unfounded, mainly because the specificities of the regulatory regime have not been taken into account. Contrary to what underlies some concerns, the economic benefits of price-cap regulation are not necessarily undermined with the change in the capital structures of the firms. Also, incentive-based regulation is not necessarily incompatible with high levels of debt. Finally, it is shown that there is still a need for regulators to control the capital structure of regulated utilities. The capital structure affects the distribution of risk between firms and consumers and ultimately the prices paid by the latter. Therefore, the need for a more open link between risk and the regulatory outcome is needed. The challenge is to adapt without losing the incentives-based characteristics of the regime.

Can environmental investment and expenditure enhance financial performance of US electric utility firms under the clean air act amendment of 1990?

This study investigates the causality from environmental investment (as a long-term effort) and expenditure (as a short-term effort) to financial performance in the US electric utility industry. The industry is one of the large air polluters in the United States. This empirical study finds that the environmental expenditure under the US Clean Air Act has had a negative impact from 1989 to 2001. The negative impact has become much effective after the implementation of the Title IV Program (1995) of the US Clean Air Act. This study cannot find the influence of environmental investment on financial performance by a statistical test although it indicates a positive impact. In the United States, fossil-fueled power plants such as coal-fired ones still produce a large portion of electricity. The generation structure is inconsistent with the betterment in the US environmental protection and imposes a financial burden to electric utility firms.

Core business concentration vs. corporate diversification in the US electric utility industry: Synergy and deregulation effects

Many economists such as Wilson (2002) [Wilson, R., 2002. Architecture of power market, Econometrica, 70, 1299–1340] have considered that there are similarities between electricity and gas services in the US electric utility industry. Hence, they expect a synergy effect between them. However, the two businesses do not have technology similarities at the level that the gas service produces a synergy effect with electricity. To examine whether there is a synergy effect of corporate diversification in the industry, we compare electricity-specialized firms with diversified utility firms in terms of their financial performance and corporate value. The comparison indicates that core business concentration is more effective for electric utility firms than corporate diversification under the current US deregulation policy.

Beyond economics for guiding large public policy issues: Lessons from the Bell System divestiture and the California electricity crisis

During the summer (2000), wholesale electricity prices in California were approximately 500% higher than those during the same months in 1998–1999. This study finds that the price hike has occurred due to an increase in fuel prices and real demand. The change of the two market fundamentals explains 45.73% of the price increase and fluctuation during the crisis. The responsibility of energy utility firms is 21.41%. The policy implication regarding the California electricity crisis is different from well-known economic studies which have attributed the price hike to the exercise of market power. The difference points up a need for drawing on researchers from multiple disciplines who are capable of checking each other's methodologies in guiding large policy decisions. This need was suggested by Professor Cooper regarding the AT&T breakup two decades ago.