Why Utility Profits Could Be the Next Target
Libya’s Largest Oilfield Hit by New Armed Group Blockade Leonard S.
Hyman is an economist and financial analyst specializing in the energy sector.
He headed utility equity research at a major brokerage house and… Electricity prices are heading up.
Utility operating costs, raw materials, and fuel (obviously), are all heading up and no sign of stopping.
Now higher capital costs courtesy of the Fed can also be expected.
All we can say is that it seems like inflation is back, baby.
The Fed recently raised its discount rate and Treasury bond yields hit 5%—their highest level in almost two decades.
A utility’s cost of capital consists of two parts: 1) the return earned on a risk-free investment (like US Treasury bonds) plus 2) an extra amount added to compensate for the additional risk assumed by equity holders, who take a subordinate role in the capital structure.
Does this imply cost of capital has to rise with these costs inevitably passed along to consumers, leading to still higher rates? Well we do know that state public utility regulators set a return based on cost of capital.
However, as we pointed out above, there are two parts to the cost of capital determination.
The risk-free interest rate, like Treasury’s, which is clearly rising, and the equity risk premium.
It is the latter figure which allows regulators to have some flexibility.
| Product | Price | Change |
|---|---|---|
| Brent Crude | $102.14/bbl | +0.34% |
| WTI Crude | $96.90/bbl | +0.21% |
| EN590 Diesel | $846/MT | +0.18% |
| Jet Fuel A-1 | $1090/MT | +0.55% |
| Mazut M100 | $450/MT | -0.15% |
| Bitumen 60/70 | $470/MT | +0.08% |
| Sulphur Gran 99.5% | $470/MT | -0.44% |
| Urea 46% Gran | $650/MT | +1.12% |
| NPK 16-16-16 | $460/MT | -0.28% |
| Nat Gas TTF | $15.42/MMBtu | +0.92% |
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