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How Regulatory Environments Affect Utilities

Constructive regulatory environments can foster growth.

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Andrew Bischof: We spend a lot of time differentiating utilities with constructive regulatory environments versus utilities that operate in more difficult regions. And this is important, as a company's regulatory environment is a key consideration in determining a utility's moat. So what is a constructive regulatory environment? It's an environment that allows its utility to earn an attractive and timely return, giving us greater confidence that a utility can earn a positive spread over its cost of capital. Utilities operating in regulatory environments that consistently put consumers' interests before shareholders' struggle to earn their costs of capital, highlighting the importance of regulatory stability.

Management also plays a key role in developing a utility's regulatory environment. A constructive regulatory environment is supported by management's ability to control operating costs and capital costs, as any overages are likely to come at shareholders' expense while greater efficiencies benefit both shareholders and customers and give leeway for further capital growth opportunities.

Andrew Bischof does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.