Analysis of the risk premiums on the debt of investor-owned electric utilities based on the type of fuel used to generate electric power for the years 1978-1980

Abstract

Scope and Method of Study: This study utilizes F-tests and linear regression analysis to test the hypothesis that investors, at each different Standard & Poor's rating level, require different risk premiums on the debt of investor-owned electric utilities, based on the dominant type of fuel used to generate electric power. Those 140 investor-owned electric utilities published in the Interstate Securities Electric Utilities Atlas and their company specific fuel source information were selected for this study. Standard & Poor's bond ratings and yield figures were collected on a monthly basis for each electric utility studied. The company data were categorized several different ways for testing using combinations of month, rating, and dominant fuel source.

Findings and Conclusions: An annual breakdown of company power generation by dominant fuel source revealed no clearcut trends of electric utilities moving out of nuclear fuel and into another fuel type in an attempt to reduce their fuel-related risks. When the company data were grouped first by month, then by dominant fuel type the F-test results indicated that the events occurring over time affected all fuel types in a similar manner. The results of the F-tests performed after the data were grouped by rating then by dominant fuel source indicated that the average yields and average yield ranges were not equal, but because the results were not analyzed on year-by-year basis it was difficult to attribute these differences to the shock of Three-Mile Island. The regression analysis indicated that the electric utility rates closely followed the yield rate trend set by long-term U.S. Government bonds and that the yields did not different significantly based on dominant fuel type.