Friction between Entergy and the city of New Orleans has brought a 12 percent drop in the utility company’s stock value. Entergy is one of only two utility companies that is regulated by a city and a publicly traded utility and Entergy customers have been critical of the company in the aftermath of Hurricane Ida, despite them restoring power to their service area on time or ahead of schedule. Elected officials throughout Southeast Louisiana have questioned Entergy’s disaster recovery plan and criticized higher electric bills that are expected in the future. Newell spoke with Travis Miller of Morningstar Securities Research about the unique situation Entergy finds itself in.
“The stock price of Entergy New Orleans dropped about 12%, from $114 a share down to $100 a share. For the benefit of the listening audience, what do things like that actually mean?” Newell asked.
“It's pretty clear that the market is anticipating a fairly negative outcome here,” Miller said. “Any kind of political intervention, any kind of pushback on customer rates, all of that falls to the bottom line for Entergy. If you're a shareholder, you don't want politicians and customers taking money away from your dividend.”
“As a regulator, you're attempting to create an environment that is fair to all parties, understanding that the utility provider is a for-profit company and not a charity,” Newell said.
“There's a balance. You want to keep customer bills as low as possible and you want to keep high quality, reliable energy. The flip side is that by having an investor-owned utility, the infrastructure is much cheaper to build and a company the size of an Entergy has a lot of capital access at fairly low prices to build that infrastructure… We've seen several examples where cities or counties have tried to run studies about whether they could take over the incumbent utility… at the end of the day, they run all the studies and it just makes a lot of economic sense to have a large entity that can access capital markets and can raise cheap capital, issue debt in the markets,” Miller said.
“It seems to me that Entergy New Orleans has put themselves in a real difficult situation, because they want to maintain the regulatory authority over the city,” Newell said. “But it may be too small to really gain on all the economies of scale.”
“The Entergy New Orleans system is one of the smaller systems that we see among investor-owned utilities…when you're small, you don't have as much access to the public debt and equity markets. Entergy has that access because of its financial structure given the size of its system elsewhere… they're able to use some of that to help reduce costs in terms of financing any kind of repairs for New Orleans, though the city is in a tough spot because they are small and there is some challenge there raising a low-cost capital to repair and maintain the system,” Miller said.
“Publicly we don’t know of any kind of infrastructure or preventive maintenance plan the New Orleans city council is judging Entergy by. Does something like that typically exist?” Newell asked.
“Usually utilities do have long-term plans. 10 years is a typical long-term plan that’s filed either annually or more often with the regulatory agencies… I'm sure Entergy has an internal plan. The question is whether the plan is aligned with what regulators and politicians want them to be doing,” Miller stated.
“It would seem to me if you're going to allege that a company has failed, there would be some objective criteria to reach that conclusion, right? Just because mother nature throws a punch and there's impairment, that's not the best time to really look at whether or not they've been doing what they're supposed to do.” Newell asked.
“Every utility should have a very substantial disaster plan. This is not the first hurricane that hit Louisiana, nor is it the first natural disaster that hit the U.S. It's rare, but there have been utilities when something happened on their system and sure enough, the utility hasn't kept good records, there wasn't a disaster plan, or there wasn't an infrastructure maintenance plan. Those would be very big issues,” Miller said.
Hear the entire interview in the audio clip below.
