{"id":17760,"date":"2023-06-03T15:48:49","date_gmt":"2023-06-03T19:48:49","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/utility-bonds-are-cheap-but-are-utility-rates-too-high\/"},"modified":"2023-06-03T15:48:50","modified_gmt":"2023-06-03T19:48:50","slug":"utility-bonds-are-cheap-but-are-utility-rates-too-high","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=17760","title":{"rendered":"Utility Bonds Are Cheap, But Are Utility Rates Too High?"},"content":{"rendered":"
\n

Electric utilities are not especially popular with bond investors these days.<\/p>\n

Consider the spread-versus-Treasurys on the ICE BofA U.S. Electric Utility Index. The spread is the amount of additional yield the market demands for owning corporate bonds rather than supposedly default-risk-free U.S. Treasurys. On June 2, 2023, the utilities\u2019 spread was 146 basis points. (One basis point equals 1\/100 of a percentage point.)<\/p>\n

On the same date, the spread on ICE BofA\u2019s U.S. Industrial Index was 130 basis points. The difference between Utilities and Industrials, 146 \u2013 130 = 16 basis points, compares with a historical average of -3 basis points. That difference was 19 basis points greater than average, nearly qualifying as an extreme divergence, defined by one standard deviation (20 basis points).<\/p>\n

This relative spread relationship will probably change dramatically if a recession begins within the next 12 months. (Economists surveyed by Bloomberg currently put a 65% probability on that outcome.) Bond investors regard utilities as a safe haven during economic downturns.<\/p>\n

<\/fbs-ad><\/p>\n

In the most recent recession, the utility index improved all the way to -93 basis points versus the industrial index on March 20, 2020. During the three months leading up to that point, utility bonds outperformed industrials in total return terms by 4.20 percentage points. (All the preceding figures deal solely with investment grade bonds, i.e., those rated Baa3\/BBB- or higher.)<\/p>\n

A Jaundiced View <\/strong><\/h2>\n

Utility bonds go in and out of favor over time, but one constant is consumers\u2019 disgruntlement over the size of their electric bills. Politicians are keenly aware of the potential for capitalizing on that sore point. Power companies\u2019 size works against them in the public debate; as Wilt Chamberlain said, \u201cNobody roots for Goliath.\u201d<\/p>\n

The press could play a constructive role in helping people sort out misconceptions from valid complaints about electric companies. Judging by a recent editorial in Connecticut\u2019s News-Times<\/em>, though, journalists are not leaping at the opportunity. The News-Times<\/em> does an excellent job on vital local news reporting, making its May 28, 2023 editorial, \u201cState Right to Rein in Electric Utilities,\u201d all the more disappointing.<\/p>\n

The editorial begins with the declaration, \u201cConnecticut residents pay a high price for utilities.\u201d One might expect the adjective \u201chigh\u201d to be supported somehow, say by a comparison with rates paid in neighboring states. Alternatively, the editorialist could make a case that utility charges are excessive by showing that Eversource and United Illuminating, the companies highlighted in the piece, earn far higher rates of return on capital than similar utilities.<\/p>\n

Instead, the News-Times<\/em> focuses on the fact that Eversource posted \u201crecord profits,\u201d even as utility bills rose. It surely is not news to the newspaper\u2019s business reporters that companies\u2019 net income in non-inflation-adjusted dollars ends to rise over time. The fact that Eversource\u2019s earnings reached a new high in 2022 does not in itself demonstrate that the company is ripping off its customers.<\/p>\n

Turning to the reasons for Connecticut\u2019s supposedly high electric rates, the News-Times <\/em>points out that the companies \u201care privately run and looking to maximize their profits, even as they operate in something that has no resemblance to a free market.\u201d This lamentable state of affairs, says the editorialist, \u201cis a product of deregulation.\u201d OMG! Far from reducing misunderstandings on the part of its readers, the newspaper is multiplying them.<\/p>\n

It is true that utilities do not sell electric power in a free market. That, however, is because policymakers realized long ago that it would be a waste of resources for several competing companies to construct huge power plants in the same service territory. Under the regulated monopoly arrangement that resulted from that realization, states\u2019 public utility commission set rates on the basis of allowing companies to earn returns on capital commensurate with the risk in their business.<\/p>\n

Certainly, there is room for debate about the appropriateness of specific decisions by Connecticut\u2019s Public Utilities Regulatory Authority. The News-Times<\/em> editorial raises fair questions about the appropriateness of including in the companies\u2019 rate bases such costs as lobbying and public-image advertising. Nowhere, though, does the paper justify its concluding salvo that utilities have been getting \u201csomething close to a free ride.\u201d<\/p>\n

Conclusion<\/strong><\/p>\n

Utilities are currently unloved by bond investors, potentially creating an opportunity to earn superior returns. There is never a time, however, when power companies are loved by the public, press or politicians.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Electric utilities are not especially popular with bond investors these days. Consider the spread-versus-Treasurys on the ICE BofA U.S. Electric Utility Index. The spread is the amount of additional yield the market demands for owning corporate bonds rather than supposedly default-risk-free U.S. Treasurys. On June 2, 2023, the utilities\u2019 spread was 146 basis points. (One […]<\/p>\n","protected":false},"author":1,"featured_media":17761,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-17760","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-featured"],"yoast_head":"\nUtility Bonds Are Cheap, But Are Utility Rates Too High? | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Electric utilities are not especially popular with bond investors these days. 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