Factors Influencing Utility Cost of Capital in a Period of Market Turmoil

Published on April 14, 2020

By: John Trogonoski, Assistant Vice President

After trading at record highs in February 2020, stock markets around the globe have entered a period of extreme uncertainty and volatility as investors try to understand the potential economic and financial consequences of two external shocks:  1) a global pandemic (i.e., COVID-19); and 2) the resulting impacts on the worldwide economy. As a result, we have witnessed a sudden and sharp loss in stock market valuations and investor “flight-to-quality.”

While investors typically perceive utilities as a safe haven during periods of uncertainty, there has been a high degree of correlation between utility stocks and the broader market in the current market dislocation.  The table below shows the decline in equity prices for the broad market in the U.S. and Canada, and individual sectors within the utility industry.


Peak to Trough % Decline Mean % Decline as of 4/9/2020
S&P 500 Index -35.63% -17.95%
S&P Utilities Index -38.90% -14.44%
     Electric -29.37% -18.47%
     Natural Gas Distribution -25.41% -18.29%
     Water Distribution -16.32% -11.44%
TSX Index -37.42% -21.05%
     Canadian IOUs -31.96% -19.90%


Even as government bond yields in the U.S. and Canada have fallen to near-record low levels, and central banks have reduced short-term interest rates and provided other monetary stimuli to support the global economy, the following factors suggest that risk has increased for equity investors:

Graph comparing VIX and TSX volatility

Graph showing 5-year beta calculated for utilities

These indicators suggest that investment risk has increased in the market for equities broadly, and also for utilities.  Equity and credit analysts have also expressed concern about other important issues such as rising uncollectible accounts, industrial load concentration, a potential moratorium on rate increases, and challenges to decoupling mechanisms. The ultimate impact of this period of elevated risk for utilities depends in large part to both investor reactions and the regulatory policy response to the economic downturn.  Maintaining healthy access to capital markets on favorable terms remains a broadly accepted standard of utility regulation, benefiting both customers and shareholders.  As was the case in the Great Recession of 2007-09, capital markets will once again be tested for the pricing of risk, and utilities are not escaping this scrutiny.

All views expressed by the authors are solely their current views and do not reflect the views of Concentric Energy Advisors, Inc., its affiliates, subsidiaries, or related companies.  The authors’ views are based upon information they consider reliable. However, neither Concentric Energy Advisors, Inc., nor its affiliates, subsidiaries, and related companies warrant the information’s completeness or accuracy, and it should not be relied upon as such.

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