Policymakers need to get the facts on utility health
Throughout my nearly 20-year career, I’ve focused on accounting matters related to regulated utilities. In my experience, the financial concepts related to regulated utilities are complex. One of my undergraduate finance classes involved analyzing a company of our choice, and I recall the professor warning us, “Don’t choose a regulated utility: they’re too complex to understand.”
Part of my role as a leader is to educate those who may be less familiar with such complex concepts, including correcting common misconceptions. Unfortunately, this includes some of our political leaders.
For example, political leaders often refer to the allowed profit margin of public utilities as “guaranteed.” Far from it — profit margins are set as a maximum that is allowed, not at all a guarantee. In fact, for UI, ours has proven unattainable in Connecticut’s current regulatory environment —despite our repeated warnings about our sliding financial condition, made evident as recently as last week, when our ROE slipped again to just 4.35%, down from 4.61% the previous quarter and leaving our allowed 8.63% far out of the realm of possibility.
As a certified public accountant, I can tell you with certainty this situation will have long-term ramifications for our customers and our business. When a utility company’s financial health is in decline, as UI’s is, it’s our customers who eventually pay the price with lower quality services and degraded reliability.
Contrary to what policymakers want the public to believe, these shockingly low returns are bad for everyone. The company’s return on equity is barely above the returns offered for UI’s debt. Equity investors take more risk than debt investors, which is why equity must offer a higher return than debt — just as Wall Street stocks offer higher returns than U.S. Treasury bonds.
Returns that are essentially equivalent for both debt and equity act as a major disincentive to investing with UI. After all, why would investors take a greater risk for an equivalent — or even a lower — return? And if UI cannot provide investors with a higher return to compensate for the riskier equity, why should they invest with utilities here in Connecticut versus those in New York, Massachusetts, or Rhode Island, with more stable, predictable investment opportunities?
Such disincentives will matter to customers, because all our infrastructure
UI has warned for months that our current financial condition is untenable. At the end of February, we reported that our distribution net income in 2023 was down 31% over 2022, which was down 19% over 2021.
projects are financed with a combination of debt and equity. Debt investors are not willing to take on the risk to fully finance all infrastructure projects. Without enough equity investors, we will not have the needed capital to maintain and build out our infrastructure. This will have downstream negative effects on the service customers are used to.
UI needs substation repairs and rebuilds, flood walls around our coastal infrastructure to protect it from rising sea levels, upgrades for its meters to smart technology that will provide benefits to customers, and more — and all those investments are funded in part by equity.
UI has warned for months that our current financial condition is untenable. At the end of February, we reported that our distribution net income in 2023 was down 31% over 2022, which was down 19% over 2021.
That continued downslope is especially concerning because we had a rate case in 2023. Utilities file rate cases to inform regulators they’re not bringing in sufficient money to manage rising expenses wrought by inflation and supply chain challenges. Thus, accountants would expect an improvement in earnings following an increase in revenue determined in a rate case. That didn’t happen last year because PURA refused to grant UI the increase we needed. Worse, PURA also required UI to write-off nearly $24 million in assets on a post-tax basis — a stunning value, representing about half of our distribution net income.
Despite knowing all this, policymakers use surface-level talking points to try to hide the truth.
Late last month, when Avangrid presented its strong earnings to investors, some Connecticut public officials used that as an opportunity to say Connecticut customers would benefit from Avangrid’s overall financial strength, despite UI’s announcement of its own degraded earnings. As a whole, Avangrid’s earnings are driven by strong rate cases in New York and our renewable projects. That financial strength will not — and legally cannot — subsidize UI’s increasingly deteriorating financial condition, and for policymakers to suggest otherwise is disingenuous.
Connecticut policymakers continue to say they understand the need for a financially healthy utility, even as they support policies and programs that significantly hinder our financial health. I can assure them, based on the numbers, the challenges for UI’s bottom-line are only mounting, and it won’t be long before customers feel the impacts.