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In recent years, many US utilities have begun to follow a "shift
to safety" strategy by rapidly shifting shares of capital spending
away from competitive ventures and toward safer, state-regulated
utility projects. Between 2016 and 2019, capital spending on
state-regulated utility projects increased 10.5% per year, while
utility capital spending on nonutility projects fell 6.5% per year
(see Figure 1).
The trend toward safety is likely to continue, as major
announcements in 2020 from Avangrid (PNM Resources acquisition),
DTE Energy (plans to spin-off midstream natural gas business) and
PSEG (plans to divest nonnuclear competitive generation) all
reflect an increase in strategic emphasis on regulated electric and
gas utility operations.
Figure 1: Annual increase/decrease in investor-owned
electric utility capital spending by segment, 2016- 19
Driving the shift to safety
A key factor driving the shift to safety is the rising risks and
weakness associated with competitive, nonutility investments. In
recent years, utilities that have followed a shift to safety had
the lowest overall shareholder returns, indicating that
underperformance, in many cases driven by nonutility projects,
forced a change in strategic focus.
Another factor driving the shift to safety is the relative
stability and consistency of regulated utility investment
opportunities and returns. Over the past two decades, capital
spending on regulated utility infrastructure projects has grown
steadily, averaging 3 percent per year in real terms. At the same
time, the average approved return on equity for regulated utility
gas and electric infrastructure projects has been remarkably
steady.
Outlook for the shift to safety
Utilities that follow the shift to safety strategy will likely
enhance the stability and predictability of capital spending and
the associated returns. Analyses from IHS Markit suggest that a
successful transition to a largely regulated utility will boost
shareholder returns, at least in the near-term.
The shift to safety strategy reveals a bet that existing utility
franchises can sustain earnings growth for many years. Organic
growth has been robust in recent years and utilities anticipate
spending more on their existing utility franchises over the next
several years, driven by upgrades of aging assets, system
hardening, transitioning power generation fleets to cleaner energy
resources and demand growth (in certain regions).
For now, the shift to safety looks to be a good bet for most
utilities. But there is a potential for a new set of risk factors,
like customer affordability or state regulatory changes, to disrupt
the cover of safety provided by a fully regulated strategy.
