This one-day course, How A Utility Makes Money combines modules from two of Excidian’s courses, Business Finance for Electric Utility Professionals and Electric Industry Issues.
The course begins by describing how electricity is different from other commodities in
- the nature of the product, and
- capital structure.
These three issues —- 1) the fact that electricity cannot be stored, 2) that its price changes hourly and 3) that the industry is more capital intensive than any other —- combine to make the electric utility business extremely complex. Complex financially. Complex operationally. Complex politically. This background combined with an examination of the specific challenges facing your company set the stage for the remainder of the course.
Participants begin by learning basic concepts of the three major financial statements —Balance Sheet, Income Statement and Cash Flow Statement. Participants then learn a key financial ratio, Return on Equity (ROE), which is critical to understanding why financial decisions are made the way they are in the electric utility industry.
Next, participants learn the time value of money and common methods used to evaluate capital investments. Participants define and calculate Present Value (PV), Net Present Value (NPV), Internal Rate of Return (IRR), and the Benefit-to-Cost Ratio.
After studying financial statements, ROE and capital investment analysis, participants learn why electric utilities were regulated in the early history of the industry and how, today, the “Rate-of-Return Rate-Making Process governs shareholder return. Rate Base, the Return on Rate Base and Revenue Requirement are defined and used to describe how an electric utility company makes money.
Participants learn how electric utility companies use investment and financing strategies to maintain an allowable ROE. Exceeding a regulated cap may precipitate an unwanted rate review by the state’s public utility commission. Falling below a regulated cap will alienate shareholders and the capital markets making it more difficult to retain and attract equity investors.
Participants exit this course with the ability to explain corporate strategy and decision making given the rules of Rate of Return Regulation and ROE demanded by shareholders and the capital markets. Participants learn the “balancing act” in which electric utility companies are only able to operate as efficiently as their allowable rate of return.
Email us at Excidian@excidian.com or call 888-808-4794 to discuss this course in greater detail and determine if it will add value to your leadership development curriculum.