Chymko Consulting develops financial planning models for electric, gas, and water utilities. A utility’s ability to provide safe and reliable service depends on the ability to finance current capital infrastructure, which is made possible year-after-year with long term financial planning. To plan for the future, it is necessary to model the complex relationship between utility ratemaking and utility financial accounting policies. This requires more than just an analysis of current rates or the current operating budget.
The ability to finance today’s capital infrastructure is often affected by financial decisions made in prior years, particularly financial decisions regarding how much of year-end net income is retained in reserves and how much is paid to shareholders as a dividend. If the dividend is too low, cash reserves eventually accumulate at the expense of the shareholders, and shareholders question why it is worthwhile to continue investing in the utility. If the dividend is too high, cash reserves will eventually be depleted and future infrastructure will need to be financed through new debt, provincial grants, developer contributions, or new shareholder equity. Particularly challenging for municipally owned utilities, new shareholder equity means higher taxes.
An effective, efficient, and realistic utility financial planning model must therefore quantify the expected future impact of today’s financing decisions in terms of the ability to finance future capital infrastructure.