Turning risk into results: Americas power & utilities snapshot
Utilities need to look for ways to create incremental value for all stakeholders for the risks they are being required to assume.
Providing transparency enables all stakeholders to share a common understanding of the amount of risk and impact on the return on equity determination.
Value creation opportunities may include:
- Improving how utilities articulate their risk profile to regulators and other stakeholders
Utilities often do not clearly articulate the risks within their business. As a result, stakeholders involved or influencing rate case decisions have different levels of understanding of the nature and amount of risk.
Risk becomes implicit in the decision of the amount of reward offered to the shareholders (return on equity). Utilities need to be forthcoming about the risks being managed, the proposed action to manage those risks and the possible consequences that remain despite remedial actions.
- Using riders and trackers that tie to risk drivers in rate cases
Riders and trackers can be a contentious area. Those against will argue that they shift risk to consumers and diminish the regulatory lag — in particular, that cost trackers can create a perverse incentive to not be efficient.
A similar argument could be made in favor of a risk tracker. Not having trackers tied to managing risk could create a perverse incentive to delay certain risk mitigation activities, which may not be in the longer-term interest of any of the stakeholders.
As with all trackers, a regulator will need to balance the risk premium to the reduced business risk, resulting in an adjustment to the return on equity.
- Repurposing operating expenses to capital expenses for consideration in the rate base
Operating expenses means maintenance of the present. Capital expenses represent investments in improvements in the present, which may result in longer-term savings.
To determine when to move from a “maintain” strategy to an “improve” strategy, utilities need to consider the value delivered to all stakeholders.