Financial Risks for Investors in Regulated Transmission Systems

The financial risks in regulatory systems include the following.

• In many countries regulatory price controls are set for five-year periods, whereas loans required to fund investment projects are taken out for much longer time frames. If the rates of return are not sufficiently adequate, the transmission system operators (TSOs) could face difficulty in raising the required funds.
• Credit ratings of stand-alone transmission companies often fare better than companies that are subsidiaries of integrated players. Stand-alone transmission companies have a clear focus on transmission, regulated rates and have visible separation from other potentially volatile segments of the industry (eg. generation and supply). They are also immune to the credit issues which can affect integrated multinationals, who may be seen to be pursuing over-aggressive expansion in other markets.
• Europe's transmission companies have a mix of ownership - some are state owned while others are private or subsidiaries of integrated companies. Public companies may be able to access equity as well as debt markets for capital, but state owned enterprises have more limited access to capital markets that can restrict investment plans.
• Underground cable projects are more expensive up front than OHL. Grid companies will have a natural concern that regulators will be reluctant to allow full recovery of the higher incremental costs from customers. Also investment projects are not "ringed fenced" from a regulatory perspective. The projects are added to the "regulated asset base". In these cases, it is important for regulators to be persuaded of the consumer benefits of certain higher cost options, such as where underground cables assist in unblocking local protests against a new transmission project
• The economics of investment into new long distance transmission infrastructure have to be weighed against the alternative of building new generation capacity. The lengthy consents process for new lines can often mean it is more attractive to build new power plants, even if this is not the optimum solution.