Public Utilities, Second Edition

Public Utilities, Second Edition

Old Problems, New Challenges

David E. McNabb

A thoroughly updated introduction to the current issues and challenges facing managers and administrators in the investor and publicly owned utility industry, this engaging volume addresses management concerns in five sectors of the utility industry: electric power, natural gas, water, wastewater systems and public transit.

Chapter 9: Public utility finance

David E. McNabb

Subjects: economics and finance, public sector economics, politics and public policy, public policy


The public utilities finance function requires decision-making in at least four principal areas: (1) capital structure, which refers to the ratio of debt to equity in the financing of the organization; (2) the operating expense and investment structure, which are influenced by the regulatory environment; together, these heavily influence the utility’s allowed return on investment; (3) the acquisition and cost of capital, which are shaped by the financial strength of the utility; and (4) working capital requirements. Traditionally, service revenues were sufficient to cover operating costs on a pay-as-you-go basis, while capital improvements were financed through borrowing or grants. For publicly owned utilities, the traditional structure is changing, however. Fewer federal or state grants are available and loans are very hard to come by. This chapter discusses the need for rate increases to fund operations and capital improvements.

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