Public Utility Pricing, Debt Financing, and Consumer Welfare

16 Pages·2002·1.42 MB·English

by  Andrew Brimmer

CILBUP YTILITU ,GNICIRP
TBED ,GNICNANIF DNA
REMUSNOC ERAFLEW
Remarks by
ANDREWF . BRIMMER*
Member of the Board of Governors of the Federal Reserve System,
Upon Receipt of The Joseph P. Wharton Award,
Presented by The Wharton School Club of Washington,
International Club, Washington, D. C., May 22, 1974
ehT laicnanif smelborp fo cilbup seitilitu erew fo remusnoc puorg nemsekops osla denedaorb eht
ylneddus nworht otni sharp sucof reilrae this spring. noissucsid fo eht erutuf fo cilbup .seitilitu
On lirpA 23, eht detadilosnoC nosidE ynapmoC roF etiuq a wef ,shtnom emos fo us ni eht laredeF
gnivres( yletamixorppa flah eht noitalupop fo weN evreseR metsyS evah osla neeb denrecnoc htiw eht
kroY )etatS dettimo its dnedivid rof eht tsrif emit gniworg seitluciffid gnieb deretnuocne yb cilbup -litu
ni ylraen 90 .sraey On eht emas ,yad a rojam etavirp 1.seiti gnomA eseht ,seitluciffid rieht gninepeed -nanif
gnitar ycnega dradnatS( and s’rooP )noitaroproC laic smelborp era ylralucitrap .emoselbuort Unless
decuder its gnitar fo eht s’ynapmoc sdnob morf BBB yeht era elba ot emocrevo eseht gnicnanif selcatsbo
ot a-BB noitacifissalc making meht elbigileni as ni eht txen wef ,sraey sremusnoc era ylekil ot raeb
lagel stnemtsevni rof yraicudif laicnanif snoitutitsni eht laer stsoc fo hcus eruliaf ni eht mrof fo ygrene
ni weN kroY .etatS oS deniarts was detadilosnoC ,segatrohs hcum rehgih ,secirp and ereves stniartsnoc
nosidE .noC( ).dE that ti had ot laeppa ot eht etatS no eht tnemevorpmi fo remusnoc ,eraflew
rof ycnegreme assistance. nI eht gnisolc sruoh fo this neviG this ,tcepsorp I dediced ot erolpxe eht sub-
s’raey evitalsigel ,noisses a sum fo $500 noillim fo tcej again. ,yllacificepS I detnaw ot wonk eht erutan
etatS aid was dedivorp hguorht eht esahcrup fo owt and edutingam fo eht gnicnanif melborp hcihw eht
fo eht s’ynapmoC gnitareneg snoitats llits rednu -noc seitilitu lliw ecaf revo eht txen wef dna-sraey ton
noitcurts no( hcihw eht etatS must dneps rehtona ylpmis its nur-regnol .snoisnemid I osla detnaw ot
$300 noillim ot etelpmoc eht .)stcejorp wonk eht tnetxe ot hcihw eht srotaluger fo cilbup
nI eht ekaw fo .noC s’dE ,seitluciffid eht tekram ta-seitilitu eht ,laredeF ,etatS and lacol -slevel
eulav fo cilbup ytilitu skcots yllareneg denilced -erppa etaicerppa eht epocs fo eht gnicnanif seitluciffid and
.ylbaic etiuQ a wef fo eht denwo-yletavirp smrif era gnidnopser ot eht deen ot assure a rednuos -nanif
dnuof ti fi-tluciffid ton ot-elbissopmi lles mret-gnol laic .esab oT niatbo insights otni eht yaw ni hcihw
tbed ot ecnanif eht noisnapxe fo yticapac and ot eht yrotaluger ssecorp is gnikrow rednu tneserp -ric
install noitullop tnemetaba .tnempiuqe elihW -uger ,secnatsmuc I deksa eht 12 laredeF evreseR Banks
,srotal tnemtsevni ,stsylana and etavirp srotsevni had ot ekam an lamrofni yevrus fo eht noitautis ni rieht
neeb ysaenu tuoba seitilitu rof emos ,emit a rebmun .stcirtsiD ehT stluser fo that ssavnac era detroper
no .ereh ,yllaniF I detnaw a reraelc erutcip fo eht
* I am indebted to a number of persons for assistance in the secneuqesnoc rof remusnoc eraflew fo eht laitnereffid
preparation of these remarks. At the Board, Mr. James Kichline
had general oversight of the staff effort, Mrs. Helen S. Tice had gnicirp secitcarp yllareneg dewollof yb cirtcele and
responsibility for the assessment of public utility pricing practices,
and she also analyzed (with the help of Mr. John Austin) the gas .seitilitu
responses to the informal survey of utilities’ rate adjustment ex-
perience conducted by the Federal Reserve Banks. At each Bank,
at least one economist carried out this task, and I am indebted to
each of them. Mrs. Margaret H. Pickering helped with the assess-
ment of utilities’ financing problems. Mrs. Ruth Robinson calcu- 1 See my paper entitled “Economic Growth and Environmental
lated the unit costs of utility services to different categories of Protection: Cost Elements in Pollution Abatement” presented at a
customers. Several members of the staff of the Federal Power Symposium at the 47th National Mayo Alumni Meeting, Rochester,
Commission were particularly helpful through sharing data and Minnesota, October 12, 1973. See also the speech by Governor
discussion of issues with the Board’s staff. Robert C. Holland, “Public Policy Issues in the Financing of New
However, the views expressed here are my own and should not be Energy Capacity.” presented before the Financial Conference of the
attributed to others. National Coal Association, Chicago, Illinois. October 31. 1973.
3
FEDERAL RESERVE BANK OF RICHMOND
esehT issues era dezylana ni emos liated ni eht sponse of regulators to requests for rate adjust-
tser fo this .repap ehT sthgilhgih nac eb sum- ments will enable the vast majority of firms to
cope with their problems.
deziram ereh :
On the other hand. I believe that-before too
long-utilities ought to give serious attention to
efforts to correct the historic pattern of pricing
In the last decade-but especially in the last
which favors large commercial or industrial users
year-inflation has had a severe impact on public
with lower rates than are charged residential or
utilities. Their fuel costs have risen beyond the
small commercial customers. For example, in 1972,
expectations of the most pessimistic forecasters,
the residential electric consumer paid over twice
and their earnings have continued to deteriorate.
as much per kilowatt hour as the large commercial
They have had to finance a greatly increased vol-
customer. In the same year, residential gas con-
ume of capital investment (a sizable proportion of
sumers paid a rate over 2½ times as high as the
which was required for pollution abatement) dur-
industrial consumers.
ing a period in which their cash flow was de-
pressed, and cost of both debt and equity funds was While recognizing that there are some physical
rising. efficiencies in delivering energy to large users, I
believe these quantity discounts are no longer con-,
The normally long lead time required for new
sistent with our long-run need to conserve energy
construction has been lengthened further by delays
resources. I personally think it would be better
necessitated by the filing of environmental impact
to replace the existing system of pricing with a
statements. Moreover, the growth of consumer
structure that puts much more emphasis on peak
awareness has added new pressures against in-
loan rate differentials for both time of day and
creases in utility rates-despite the rising costs of
season of the year. This scheme would have little
providing service.
impact on industrial users, and there would be a
tendency to redistribute costs of electric use toward
Over the last few years, the ability of public
affluent residential users.
utilities to raise funds in the capital market has
deteriorated appreciably. A substantial number of In the meantime, we as a society must give care-
firms are not earning enough to cover their interest ful consideration to the way in which we are to
cost to the extent investors normally find appealing allocate our scarce energy resources. Moreover,
(typically a 2-to-1 earnings-cost ratio). This we should all accept the fact that this growing
means that they are effectively barred from float- scarcity will mean higher prices for energy relative
ing long-term debt. Some utilities have also ex- to most other items on which consumers can spend
perienced difficulty in rolling over commercial their income. In the long-run, it is better to permit
paper. Consequently, a growing proportion of these increases in real costs to be passed on to
utilities have found it necessary to rely temporarily final users-rather than pretend that we can-
on short-term bank credit. somehow-escape the burden. Only in this way
will consumer welfare be truly served in the years
Moreover, a significant number of these firms
ahead.
have had their bond rating lowered or suspended.
For example, the number of adverse rating actions
in the first 4% months of this year exceeds those gnignahC noitpecreP fo eht Problem fo cilbuP
occurring in all of 1972 and 1973. seitilitU nI ,rebotcO 1964, eht laredeF rewoP
The results of an informal survey of public utili- noissimmoC )CPF( desaeler its troper no eht Na-
ties undertaken by the Federal Reserve Banks
lanoit rewoP yevruS hcihw ti detaitini ni 1962. sihT
earlier this month suggest that the regulatory proc-
ess has not been accelerated-despite the severity ,yevruS eht tsrif evisneherpmoc yduts fo eht cirtcele
of the financial problems which these firms face.
rewop yrtsudni as a ,elohw detniop tuo tneiciffe -tap
Of the nearly 100 utilities contacted, over 80 per
cent have sought rate relief within the last year. snret fo tnempoleved and noitanidrooc ni cirtcele
Just under half of the requests were granted in
rewop noitareneg gnoma all stnemges fo eht yrtsudni
full ; another one-seventh were granted either in
part or on an interim basis, and two-fifths were hcihw thgim eb elbaniatta gnirud eht 1970’s. nI
still pending.
,tcepsorter ti stibihxe eht msimitpo hcihw deliaverp a
The time typically required for the resolution edaced .oga ehT troper is dellif htiw sretpahc hcus
of a request for a rate adjustment apparently has
not been shortened significantly-if at all. While as eht eno deltitne “A yrotsiH fo lairtsudnI htworG
the time lag varies widely among the States, it
and tsoC ”snoitcudeR as llew as snoitatrohxe hcus
averages from 9-12 months. If lags are not too
long, the rate adjustments are often too small. as “. . . ehT egnellahc gnicaf eht cirtcele rewop indus-
yrt is ot eunitnoc eht mret-gnol dnert fo gnilles -cele
The majority of respondents reported automatic
rate adjustments for fuel costs and purchased yticirt ot eht remusnoc at ylidaets rewol .secirp . . .”2
electricity as well. In many cases, such clauses had
applied to nonresidential customers for some years, ehT gnidulcnoc retpahc was deltit kooltuO“ rof tsoC
and the procedure was extended to all customers ”.snoitcudeR ,revewoH eht rettam fo secruos fo -if
recently. Nevertheless, while these clauses help
somewhat in cushioning the impact of escalating gnicnan rof eht detcejorp htworg ni yticapac was
fuel costs, these schemes vary considerably in the ylerab tpecxe-dessucsid ot tniop tuo that eht lanretni
speed with which a cost increase is reflected in a
rate increase. sdnuf fo denwo-rotsevni seinapmoc erew gnitnuocca
rof an gnisaercni erahs fo eht sdnuf rof latipac -xe
As I weigh the financial situation faced by
public utilities, I am personally convinced that .noisnap
they are-in fact-confronted by genuine difficul-
nI 1972, eht noissimmoC issued rehtona rewoP
ties. At the same time, however, I do not believe
these difficulties will lead to a parade of utilities yevruS troper gnirevoc eht doirep .0991-0791 ehT
to their respective State legislatures to seek emer-
gency assistance-as one large company had to do
in New York State. Instead, I am personally con-
vinced that a more sympathetic-and timely-re- 2 Volume I. page 5.
4
ECONOMIC REVIEW, JULY/AUGUST 1974
dlrow as deweiv ni this yevruS demees tnereffid gnol noitcurtsnoc sdoirep rof wen yticapac evah neeb
deedni morf that hcihw had neeb desimorp ylno a denehtgnel rehtruf yb eht syaled desuac yb eht -er
wef sraey .erofeb roF ,elpmaxe eht CPF won deriuq sgnilif fo latnemnorivne tcapmi stnemetats and
eht segnellahc fo an ylgnisaercni yllatnemnorivne
. . . estimated that the recent reversal in the his-
suoicsnoc .cilbup ,yllaniF ni noitidda ot eht lags
&&al downward trend in the real cost of electric
service will be carried into the future. . . . (Volume ydaerla gnitsixe ni eht yrotaluger ,ssecorp eht htworg
I, page I-19-1.)
fo remusnoc ssenerawa has dedda wen serusserp rof
tI osla devresbo :taht gnipeek setar morf gnisir yldipar fi at hguohtla-lla
eht remusnoc ecirp xedni )IPC( stroper sesaercni
. . . When the first National Power Survey was gnigareva 5 rep tnec rep raey ni gas and cirtcele
published in 1964 electric power companies
stsoc ni eht last owt .sraey
had little trouble raising the funds needed to
modernize and expand their plant. Today this is
far from the case. . . . (Ibid., page I-20-1.)
laicnaniF stnempoleveD ecniS 1964 ehT raey
ehT tnecer rewoP yevruS deniatnoc an eritne retpahc 1965 saw eht kaep fo ytiralupop rof ytilitu skcots ;
morf eht evitcepsrep fo 1970 no eht s’yrtsudni -nanif ecnis neht sgninrae-ecirp )E/P( soitar evah ,nellaf
gnic smelborp detapicitna rof eht doirep fo -nemert tseretni setar evah ,nesir and eht laicnanif erutcip
suod noisnapxe detcejorp rof eht gniwollof owt -ed fo eht rotces has .detaroireted nI 1968 and 1969,
.sedac nI ,lareneg its enot was yldedraug citsimitpo tseretni setar had nesir yltneiciffus ot ticile selcitra
tuoba eht s’yrtsudni ytiliba ot esiar eseht substantial ni eno fo eht gnidael snoitacilbup cilbuP( Utilities
sums ni eht latipac .stekram ylthgintroF - retfaereh detic as gnillac rof
P.U.F.)
,yletanutrofnU stneve mees ecno again ot evah erom detacitsihpos and suoicsnoc-dleiy seuqinhcet fo
nekatrevo eht .sretsacerof nihtiW eht last ,raey leuf hsac 3tnemeganam ro rof eht esu fo mret-trohs -urtsni
stsoc evah nesir dnoyeb eht snoitatcepxe fo neve eht stnem rof gnicnanif ni a doirep fo hgih tseretni
tsom citsimissep fo sretsacerof fo a wef sraey .oga 4.setar ehT ycagel fo hcus seitivitca is spahrep ot eb
tseretnI setar evah deniamer hgih and wohs elttil dnuof ni eht wol level fo ytidiuqil ni eht ytilitu rotces
tcepsorp fo .gnillaf ehT etar fo noitalfni has -relecca and ni eht eglub ni eht gnicnanif radnelac ni 1975
,deta and ytilitu sgninrae evah deunitnoc ot -roireted nehw eht raey-evif seton fo 1970 emoc .eud -ruC
.eta ehT ylralohcs as llew as eht ralupop erutaretil yltner emos srevresbo era gnitacovda ecnalab-ffo
sdnuoba htiw selcitra no eht htlaeh-lli fo eht ytilitu teehs gnicnanif ,gnisael( )yliramirp as a yaw fo
yrtsudni ni lareneg and fo ynam seinapmoc ni -rap making eht s’yrtsudni seitiruces erom evitcartta ot
.ralucit ynaM smrif evah neeb decrof ot issue kcots eht gnitsevni 5.cilbup rehtO ,srevresbo ,revewoh
ecnis sgninrae evah neeb tneiciffusni ot teem eht tniop tuo that eht noitpoda fo esael noitazilatipac as
tseretni egarevoc stnemeriuqer ni gnitsixe dnob -ni an gnitnuocca elpicnirp yb eht seitiruceS and -xE
.serutned egnahc noissimmoC )CES( lliw dissipate eht -navda
ehT secruos fo eseht smelborp era ton tluciffid ot egat yrev .yldipar
.etalosi Capital syaltuo evah neeb substantial ecnis emoS fo eht s’yrtsudni laicnanif smelborp nac eb
a-5691 doirep ni hcihw tnemtsevni was yllautriv decart ni eht lacitsitats selbat dedulcni ni this .repap
stagnant ni rehto .srotces ,eromrehtruF this -napxe esehT selbat evah neeb delbmessa morf a yteirav fo
nois had ot eb decnanif gnirud a doirep ni hcihw eht secruos hcihw od ton mees ot possess a hgih eerged
’seitilitu hsac wolf was ,desserped and eht tsoc fo fo ycnetsisnoc htiw eno .rehtona ,yletanutrofnU
htob tbed and ytiuqe latipac was .gnisir As hcae -ni emit did ton timrep us ot egagne ni yna etarobale
esaerc semoceb deddebmi otni eht s’yrtsudni tsoc stpmetta at .noitailicnocer tuB revetahw eht -reffid
,erutcurts rehtruf upward erusserp no eht tsoc fo secne ni data, yeht all llet yllaitnesse eht emas .yrots
sdnuf is †.detrexe noitalfnI has nekat its llot as .llew selbaT 1, 2, and 3 wohs eht ytilitu tnenopmoc fo
noitcurtsnoC stsoc evah ,nesir leuf stsoc evah ,nesir eht lapicnirp seidob fo etagergga data no secruos fo
and trap fo eht esir ni tseretni setar is elbatubirtta sdnuf hcihw evah neeb detaroprocni otni eht wolF
ot an noitalfni .muimerp Costs fo noitullop -etaba fo Funds stnuocca delipmoc yb eht laredeF evreseR
tnem osla retne otni htob gnitarepo and noitcurtsnoc s’draoB .ffats esehT era data gniwohs eht stiforp
.sesnepxe naelC sleuf era ni ylevitaler trohs -ylppus and hsac wolf seires delipmoc yb eht uaeruB fo -ocE
and erofereht dna-yltsoc eht noissime lortnoc -piuqe
tnem detaroprocni otni plants is osla .evisnepxe ehT
3 R. W. Jackson. “Cash-Balance Sheet Bonanza,” P.U.F., 2/l/68.
4A . G. Mitchell. “New Trends in Utility Financing,” P.U.F.,
12/18/69.
† Earnings must be larger to cover the additional fixed charges and
price-earnings (P/E) ratios and the yields required to market’ new 5P . L. Kintzell, “Leasing in the Electric Utility Industry and How
bond issues are also likely to increase. to Account for It,” P.U.F., 3/28/74.
FEDERAL RESERVE BANK OF RICHMOND 5
cimon sisylanA )AEB( ni eht tnemtrapeD fo -moC was deriuqer etiuq apart morf eht evissam latipac
ecrem ; eht CES ytiruces issue seires ; and eht CES .syaltuo nevE erom than laicnanifnon business as a
etaroproC gnikroW Capital .seires selbaT 4, 5, and ,elohw seitilitu evah detibihxe eht enilced ni sgnidloh
6 era desab ylegral no etagergga data rof -rotsevni fo mret-trohs assets evitaler ot mret-trohs seitilibail
denwo gas seitilitu delipmoc yb eht naciremA saG hcihw has deziretcarahc eht last 20 .sraey ecnO again
noitaicossA and denwo-rotsevni class A and B -cele eht melborp is erom ereves rof cirtcele than rof gas
cirt seitilitu delipmoc yb eht 6.CPF Again, eht sucof .seitilitu ,eromrehtruF hcum fo eht 1973 htworg ni
is no secruos fo ,sdnuf latipac ,syaltuo and setar fo eht tnerruc assets fo seitilitu is elbatubirtta ot sub-
.nruter stantial sesaercni ni yrotnevni koob seulav and -er
htoB sets fo data etacidni a gniworg llaftrohs fo .selbaviec knaB tiderc and mret-trohs seitiruces
lanretni sdnuf evitaler ot latipac .serutidnepxe -eroM ylbaborp( laicremmoc )repap tnuocca rof tsom fo
,revo eht melborp is hcum erom etuca rof cirtcele eht neve regral esaercni ni tnerruc .seitilibail
than rof gas seitilitu hcihw evah tahwemos rehgih ehT latipac erutcurts fo htob cirtcele seitilitu and
setar fo .nruter nI eht esac fo lanretxe ,gnicnanif gas seitilitu rehto than senilepip has detfihs morf
htob sets fo data again tniop up eht gniworg erahs nommoc ytiuqe ot tbed revo eht .doirep ,revewoH
fo seitilitu ni mret-gnol seitiruces dereffo ni eht rof gas noissimsnart ,seinapmoc eht esrever is .eurt
latipac 7.tekram nehW eno senimaxe ytidiuqil ,soitar ,yletanutrofnU ti is ton elbissop ot etarapes rieht
ti is ysae ot ees yhw this emulov fo lanretxe gnicnanif ytiruces issues morf eht .etagergga ,yllaniF tseretni
egarevoc has niaga-denilced less os rof gas -epip
senil than rof eht dna-srehto eht egareva tseretni
6 One major source of disparity between the two sets of estimates of etar deddebmi ni eht tbed erutcurts has detfird up.
retained earnings is attributable to differences in depreciation ac-
counting. The BEA bases the national income accounts on tax toN ,ylgnisirprus eht ten nruter no nommoc ytiuqe
definitions of depreciation and earnings, while utility regulator
reports incorporate straight-line techniques. In fact, any use they has nellaf tuohguorht rof cirtcele ,seitilitu nesir
make of accelerated depreciation is included under “deferred taxes.”
ylthgils rof ,senilepip and nellaf and neht devorpmi
7 The two components series sum to more than the SEC aggregates,
however. This phenomenon can be explained in the case of debt again rof rehto gas seitilitu gnirud eht doirep -4691
by the fact that the SEC series is limited to bonds while the indus-
try series include other forms of debt as well. No such convenient 1973.
answer is at hand for the equity series.
Table 1
ELECTRIC, ,SAG DNA YRATINAS :SECIVRES LANRETNI FUNDS DNA LATIPAC SYALTUO
($ Billions)
Source: Lines 1-8, and 12 from the Survey of Current Business, July issues, Tables in Section 6. Line 10, S.C.B., “Plant and Equipment.”
6
ECONOMIC REVIEW, JULY/AUGUST 1974
elbaT 2
YTIRUCES SEUSSI DNA NET EGNAHC NI OUTSTANDINGS
$( Billions)
1964 1965 1966 1967 1968 1969 1970 1971 1972
Issues
Debt
All industries 10.7 12.7 15.6 21.3 19.4 19.5 29.5 31.9 27.1 21.5
Public utilities 2.1 2.1 3.3 4.2 4.3 5.2 7.8 7.5 6.2 5.5
Equity
All industries 3.7 3.2 4.2 4.7 6.1 9.3 9.2 14.8 15.2 13.6
Public utilities .6 .6 .6 .7 .9 1.4 2.9 4.2 5.0 4.7
Net change
Debt
All industries 6.6 8.1 11.1 16.0 14.0 13.8 22.8 23.7 12.7
Public utilities 1.4 1.3 2.7 3.4 3.7 4.5 6.9 4.5 4.3
Equity
All industries 1.4 * 1.2 2.3 -. 9 4.3 6.8 13.5 13.0 10.6
Public utilities .5 .1 .5 .7 .9 1.4 2.9 4.2 4.8 4.5
:ecruoS CES Statistical Bulletin, suoirav .seussi “Public ”seitilitu srevoc ,cirtcele ,sag ,retaw dna rehto .seinapmoc
elbaT 3
END OF RAEY :YTIDIUQIL SOITAR TO TOTAL CURRENT SEITILIBAIL
nI( per )tnec
---1-9--6-4- 1965 1966 1967 1968 1969 1970 1971 1972 1973
Total current assets
Electric utilities 103.1 92.6 95.5 87.5 79.4 70.3 72.4 76.9 82.8 73.3
Gas utilities 105.0 101.6 88.8 90.4 87.4 85.8 100.8 103.4 102.7 96.5
All nonfinancial business 195.1 188.0 182.6 182.7 174.7 164.5 161.5 165.3 166.2 163.5
Cash and Governments
Electric utilities 31.9 25.8 24.3 18.6 16.3 13.4 12.3 13.0 14.3 9.6
Gas utilities 26.3 24.7 20.9 19.1 17.0 14.3 18.0 16.6 18.5 13.7
All nonfinancial business 35.9 32.0 27.5 26.4 24.4 20.3 19.0 21.2 20.8 19.6
Cash, Governments and other
current assets
Electric utilities 42.4 34.8 35.2 27.1 24.6 20.8 20.4 20.9 21.4 15.5
Gas utilities 34.5 33.7 29.7 26.3 23.1 19.8 29.6 26.8 28.3 22.7
All nonfinancial business 46.3 42.1 37.4 36.8 35.5 31.3 30.5 33.8 33.7 32.4
:ecruoS detaluclaC from atad ni CES Statistical Bulletin, “Working Capital fo U. .S ”snoitaroproC dna dehsilbupnu .liated
7
FEDERAL RESERVE BANK OF RICHMOND
elbaT 4
LATIPAC SYALTUO DNA GNICNANIF OF INVESTOR-OWNED SAG DNA ELECTRIC SEITILITU
$( )snoilliM
* etoN tnerappa seires .kaerb
:ecruoS Capital ,yaltuO AEB .seires :srehtO AGA dna FPC .atad cirtcelE erofeb 0791 from 0791 Power Survey, elbaT ,2.02 dna 2791
detamitse from nosidE cirtcelE etutitsnI .atad
elbaT 5
LATIPAC STRUCTURE OF INVESTOR-OWNED ELECTRIC DNA SAG SEITILITU
:ecruoS cirtcelE seinapmoc from FPC Statistics of Privately Owned Electric Utilities in the United .setatS 2791 detamitse from nosidE
cirtcelE etutitsnI .atad
saG :seinapmoc naciremA saG ,noitaicossA saG ,stcaF ,2791 dna reilrae .sraey
8
ECONOMIC REVIEW, JULY/AUGUST 1974
elbaT 6
SELECTED STATISTICS FOR INVESTOR-OWNED SAG DNA ELECTRIC SEITILITU
nI( per )tnec
1964 1965 1966 1967 1968 1969 1970 1971 1972
Before tax interest coverage
Interest on long-term debt
Electric 5.33 5.31 5.17 4.74 4.35 3.89 3.49 3.11 2.98e
Gas transmission 3.55 3.62 3.69 3.61 3.49 3.53 3.05 3.08 3.12
Other gas utility 5.91 5.57 5.28 5.12 5.02 5.06 4.07 3.61 3.55
Total interest
Electric 5.11 5.08 4.87 4.43 4.01 3.47 3.12 2.89 2.79e
Gas transmission 3.30 3.29 3.23 3.1 1 3.01 2.79 2.58 2.81 2.88
Other gas utility 5.26 5.00 4.67 4.46 4.20 4.02 3.42 3.28 3.27
Net return on common
Electric 12.3 12.6 12.8 12.8 12.3 12.2 11.8 11.7 11.8e
Gas transmission 12.9 12.3 13.0 14.1 13.9 14.6 12.2 13.3 13.6
Other gas utility 12.5 12.7 12.6 12.9 11.7 12.6 12.3 12.6 12.8
Average interest on
long-term debt
Electric 3.7 3.8 3.9 4.0 4.3 4.6 5.1 5.5 5.8e
Gas transmission 4.8 4.6 4.8 5.0 5.4 5.6 6.1 6.7 6.8
Other gas utility 4.9 4.5 4.3 4.4 4.4 4.5 5.4 5.8 6.1
Current ratio*
Electric .973 .862 .894 .841 .786 .692 .728 .743 .763e
Gas transmission 1.014 .792 .653 .670 .624 .613 .701 .871 .819
Other gas utility .856 .870 .849 .832 .797 .729 .801 .885 .899
:ecruoS eeS selbaT 4 dna .5
* larutaN .srebmun
tneceR ytilitU gnicnaniF Problems As detacidni mret-gnol gniworrob nehw eht xat-erp sgninrae liaf
,evoba eht ytiliba fo cilbup seitilitu ot esiar sdnuf ni ot teem this 8.tset
eht latipac tekram has detaroireted ylbaicerppa ni ehT gnitar seicnega osla ekil ot evah a owt semit
tnecer .sraey At this ,tniop ti thgim eb lufpleh ot egarevoc rof a aaB .gnitar erehT era ,snoitpecxe
ekat a resolc kool at eht tnetxe fo eht .noitaroireted .revewoh roF ,elpmaxe s’ydooM yltnecer evag an A
gnitar ot an cirtcele ytilitu htiw 1.75 semit egarevoc
Interest Coverage: At eht dne fo 1971 eht( tsetal
ecnis eht wol oitar did ton tcelfer miretni etar -ni
etad rof hcihw etelpmoc data era ,)elbaliava tseretni
sesaerc yltneserp ni tceffe and lanoitidda sesaercni
egarevoc soitar rof cirtcele seitilitu nwohs( ni elbaT
.detcepxe
)7 detacidni that ylhguor htnet-eno fo eht seinapmoc
gnirutaM As nwohs ni elbaT 8, tuoba $8.2
erew rof all lacitcarp sesoprup dedulcerp morf -gnol Debt:
noillib fo cilbup ytilitu sdnob and seton lliw erutam
mret gniworrob ni eht cilbup .tekram And erom
gnirud eht doirep .87-4791 Just revo $1 noillib is
yltnecer elbaliava noitamrofni suggests emos lareneg
eud this ,raey and $2½ noillib serutam ni 1975. revO
rehtruf noitaroireted ni eseht .soitar xat-erP -nrae
flah fo eht cilbup ytilitu tbed ot eb dednufer gnirud
ings egarevoc fo at tsael owt semit mret-gnol tseretni
segrahc sraeppa ot eb eht yllareneg detpecca rewol
timil detarelot ni eht .tekram nI ynam ,sesac ynapmoc 8O ne electric utility contacted by the St. Louis Federal Reserve Bank
reported such an experience. In 1972, the company had to resort to
egagtrom serutnedni yllacificeps tcirtser lanoitidda selling preferred stock and obtained long-term bank loans. After
receiving rate relief, the company sold bonds in early 1974.
9
FEDERAL RESERVE BANK OF RICHMOND
elbaT 7
INTEREST EGAREVOC OF YLETAVIRP OWNED
ELECTRIC YTILITU ,SEINAPMOC 117-9691
Times tseretni denrae erofeb sexat
Below 1.50- 2.00- 2.50- 3.00- 3.50- 4.00- 4.50- 5.00 or
1.50 1.99 2.49 2.99 3.49 3.99 4.49 4.99 Above Total
(Number fo )seinapmoC
1971 9 10 41 41 39 18 14 10 75 197
1970 7 6 39 39 30 25 12 16 20 194
1969 8 2 18 31 30 38 15 11 41 194
1 ehT oitar is detaluclac gnisu sgninrae erofeb emocni ,sexat dna eht credits fo tseretni charged ot noitcurtsnoc evoh neeb detaert sa
rehto .emocni ehT tseretni segrahc edulcni tseretni no long-term debt, tseretni no debt ot detaicossa ,seinapmoc dna rehto tseretni .esnepxe
:ecruoS laredeF rewoP Commission’s Statistics of Privately Owned Electric Utilities, .1791
this raey and txen raey seirrac snopuoc fo less than detad nosidE and eht 5 detaler seinapmoc dedulcni(
4.00 rep tnec nwohs( ni elbaT .)9 ehT snoitacilpmi ni elbaT 10 as gnitar“ )”dednepsus era ,dedulcxe eht
fo gnidnufer this tbed at gniliaverp setar neve( fi rebmun fo esrevda gnitar snoitca thus raf this raey
eno assumes that tnerruc serusserp ni yenom stekram sdeecxe esoht gnirucco ni all fo 1972 and 1973.
thgim )esae era etiuq .suoivbo erehT evah osla neeb tnecer secnatsni fo gnirewol fo
denwo-yllapicinum ytilitu ratings.
:sgnitaR gnidargnwoD fo ytilitu sdnob has -ca
noitamrofnI no gnidargnwod fo cilbup ytilitu -moc
detarelec ylprahs ni tnecer .skeew nevE fi -ilosnoC
laicrem repap issuers is erom .yhcteks s’ydooM
werdhtiw its gnitar rof detadilosnoC nosidE repap
and dedargnwod 3 rehto ytilitu issuers gnirud .lirpA
Table 8 ehT laicurc ,noitseuq ,revewoh is rehtehw eht -emirP
GNIRUTAM CILBUP YTILITU BONDS DNA NOTES 2 and 3-emirP detar issuers era elba ot ecalp wen ro
revo-llor gnidnatstuo .repap ,yldetropeR a rebmun
(millions of dollars)
fo eseht issuers era gnicneirepxe elbaicerppa -iffid
ytluc ni gniod .os
Changes ni Dividends: detadilosnoC nosidE fo
weN kroY is eht ylno elbaton cilbup ytilitu ot timo a
dnedivid this .raey ,revewoH at tsael thgie rehto
cirtcele seitilitu deliaf ot nrae rieht tnerruc dnedivid
ni eht tsom tnecer sgninrae .doirep tuB yeht evah
decnuonna stnemtimmoc“ ot maintain ”.sdnedivid
Recent latipaC Market gnicnaniF Adjustments:
nI eht last xis ro neves ,skeew ereht evah neeb
suoremun secnatsni fo cilbup ytilitu sreworrob -er
gnipmav rieht gnicnanif plans ot teem yldipar -gnahc
gni tekram .snoitidnoc stnemtsujdA ni plans and
yraropmet syaled ni redro ot niatbo ylriaf tpmorp
noitadommocca ni eht latipac stekram rehtar than
etinifedni stnemenoptsop mees ot eb eht erom -erf
tneuq .ecnerrucco rojaM seitilitu evah decuder eht
ezis fo rieht ;sgnireffo dehctiws morf kcots issues ot
dnob issues gniwollof( eht sharp ecirp pord ni ytilitu
skcots retfa eht .noC .dE dnedivid )noissimo ; -er
decud ytirutam fo issue morf mret-gnol ot -idemretni
mret-eta ; dehctiws morf evititepmoc ot detaitogen
:sedulcnI seussI fo ,cirtcele gas dna retaw seitilitu dna enohpelet
.seinapmoc dna-gniddib ni( at tsael eno )esac degnarra -retla
evitan mret-gnol bank .gnicnanif
:ecruoS s’ydooM Public Utility launaM .3791
10 ECONOMIC REVIEW, JULY/AUGUST 1974
Table 9
GNIRUTAM CILBUP YTILITU BONDS DNA NOTES
(millions of dollars)
Coupon on Maturing Issues - Per cent
:sedulcnI seussI fo ,cirtcele gas dna retaw seitilitu dna enohpelet .seinapmoc
:ecruoS s’ydooM Public Utility launaM .3791
elbaT 01
SEGNAHC NI CILBUP YTILITU BOND SGNITAR YB S’YDOOM SROTSEVNI 1ECIVRES
1 sedulcnI ,cirtcele ,sag retaw & gas pipeline ,seinapmoc tub ton noitacinummoc .seinapmoc
2 yraunaJ ,1 4791 hguorht yaM ,31 .4791
3 sedulcnI ylno yletavirp denwo cirtcele ytilitu ;seinapmoc sedulcxe ,sag retaw dna gas pipeline .seinapmoc
4 sedulcnI detadilosnoC nosidE fo N. .Y dna 5 detaler .seinapmoc
:ecruoS s’ydooM Bond Survey dna Bond .droceR
Table 11
NOMMOC YTIUQE SA REP CENT OF TOTAL NOITAZILATIPAC
FOR ELECTRIC YTILITU SEINAPMOC
:ecruoS laredeF rewoP Commission’s Statistics of Private Owned Electric Utilities in the United ,setatS .1791
FEDERAL RESERVE BANK OF RICHMOND 11
elbaT 11 sedivorp serugif no tnecer sdnert ni -moc
Table 12
nom ytiuqe as a egatnecrep fo latot noitazilatipac fo
REBMUN OF SEITILITU CONTACTED NI
cirtcele ytilitu .seinapmoc ,revewoH elihw kcots -if
LAREDEF EVRESER KNAB STUDY
gnicnan is evitcartta ni smret fo rieht ecnalab ,steehs
this noitpo is ton yltnerruc a elbisaef evitanretla ot
dnob gnicnanif rof ynam fo eseht seinapmoc ecnis
rieht nommoc shares era gnilles woleb koob .eulav
ytilitU Rates dna eht yrotalugeR Process As I
detacidni ,evoba I detnaw ot teg an noitaicerppa fo
eht tnetxe ot hcihw eht laicnanif smelborp fo cilbup
seitilitu nac eb decart ot eht yrotaluger“ lag” as llew
as ot .noitalfni desserpxE ,ylpmis eht yrotaluger lag
is eht emit hcihw must espale neewteb an esaercni ni
stsoc and eht noissimrep dna( )ytiliba ot puocer .ti
ecniS tsom setar era desab no past stsoc rehtar than
detcejorp ,serutidnepxe ni an yranoitalfni -norivne
tnem sgninrae dluow neve-reffus fi eht ecap fo eht
yrotaluger erudecorp erew ot eb .detarelecca
oT niatbo emos noisserpmi fo eht yaw ni hcihw eht
yrotaluger ssecorp is yltnerruc sa-gnikrow raf as
cilbup ytilitu etar stnemtsujda era I-denrecnoc
deksa eht 12 laredeF evreseR Banks ot ekam an
lamrofni enohpelet yevrus ni rieht ”.stcirtsiD ehT
snoitseuq dedulcni ni eht yriuqni :erew
a. What yrotaluger seidob ,etatS( lacol ro
)laredeF evah noitcidsiruj revo eht s’mrif etar
,snoitacilppa and is ereht gnippalrevo ?ytirohtua
b. nihtiW eht last has eht mrif detseuqer
year,
a etar ,esaercni and fi os what was its noitisopsid
gnidulcni( deeps fo .)noisiced
.c seoD eht mrif possess an citamotua etar
hguorht-ssap no segnahc ni leuf ro/dna rehto
?stsoc
ehT snoitseuq erew tnes ot eht evreseR Banks no
yaM 7, 1974, htiw a esnopser detseuqer yb yaM 14.
As elbaT 12 ,setacidni 98 seitilitu erew .detcatnoc
fO eseht ,seinapmoc 42 era cirtcele ,seitilitu -na
rehto 25 era noitanibmoc gas and cirtcele ,seitilitu
28 era gas noitubirtsid ,seinapmoc and 3 era -epip
.senil weN dnalgnE stnuocca rof erom than htfif-eno
fo eht seinapmoc deyevrus ; eht Kansas ,ytiC Atlanta,
and dnomhciR stcirtsiD rehtegot etubirtnoc an -idda
lanoit 30 rep ,tnec and eht tser is detubirtsid revo
eht gniniamer .stcirtsiD
1. Regulatory Jurisdiction. With tcepser ot -uger
yrotal ,ytirohtua on tcirtsid detroper yna smelborp
a Pipeline.
9 In passing, it should be noted that these data were collected on the
b Principally electric. basis of a scientific sample. Thus, the figures quoted should not
be viewed as necessarily representative of the U. S. utility scene.
Nevertheless, I believe that they provide some insight into the
c Pipeline and distribution company. current state of utility rates and regulations.
12
ECONOMIC REVIEW, JULY/AUGUST 1974