Corporate Finance and Sustainability: the Case of the Electric Utility Industry |
| |
| Authors: | Steven Kihm Peter Cappers Andrew Satchwell Elisabeth Graffy |
| |
| Affiliation: | 1. STEVEN KIHM, CFA, is Principal and Chief Economist at Seventhwave and Senior Fellow (Finance) at Michigan State University's Institute of Public Utilities. Over the past several decades he has focused on financial analysis of regulated utilities. He holds masters' degrees in Quantitative Analysis and Finance from the University of Wisconsin‐Madison, and is currently a doctoral candidate in the College of Business and Economics at the University of Wisconsin‐Whitewater.;2. PETER CAPPERS is a Research Scientist and Deputy Group Leader in the Electricity Markets and Policy Group at Berkeley Lab. For the past 17 years Mr. Cappers has conducted research into electric utility regulatory and business models, demand response, renewable energy, and energy efficiency policy issues. Mr. Cappers received a B.A. from Syracuse University in Mathematics and Economics, and a M.S. from Cornell University in Applied Economics.;3. ANDREW SATCHWELL is a Principal Scientific Engineering Associate at Berkeley Lab. His research explores transition strategies for future electric utility regulatory and business models and the impacts of financial incentives on utility shareholders and ratepayers. Mr. Satchwell received a B.A. from the University of Pittsburgh in Political Science, and a M.A. from Indiana University in West European Studies.;4. ELISABETH GRAFFY is a Professor of Practice in the School for the Future of Innovation in Society (SFIS) and Senior Sustainability Scientist in the Julie Ann Wrigley Global Institute of Sustainability, both at Arizona State University. After two decades advising and leading institutional change in government, she focuses on energy transitions, especially at the dynamic interface of technical expertise, social preferences, and policy‐making. Dr. Graffy holds an A.B. in Politics from Princeton University, M.S. in Agricultural and Applied Economics and Ph.D. in Environment and Resources with a focus on Public Policy from the University of Wisconsin‐Madison. |
| |
| Abstract: | The electric utility industry is in transition but needs to move even faster if the country is to meet its emissions goals. The industry has historically moved cautiously, but policies and regulatory approaches must avoid unintentionally reinforcing the status quo. Incentive‐oriented policies and redesigned regulations must balance environmental sustainability with economic sustainability. The authors draw on well‐established corporate finance principles to guide more effective policies. Shareholder‐focused utility executives must make investments conditioned by three elements: (1) the return on equity the utility can expect to make on each project; (2) the investors' required return on equity capital for each project; and (3) the size of the investment. The well‐established economic value added (EVA) model can assist policy analysis: V=(r‐k)I; where V is the shareholder value created, r is the return on equity, k is the return investors require if they are to invest in the stock, and I is the scale of the project. Any new incremental V translates into higher stock prices. All three elements of their model (i.e., risk, return, and scale) require attention by regulators and policymakers to create value for shareholders. The authors show how the right state policies could create powerful incentives for shareholder focused utility executives to support such transitions. |
| |
| Keywords: | |
|
|
