Are Existing Capital Structures Adequate?
NERA economists have used c-far to analyze the utilities industry and produced some provocative results that show the benefits of using the new tool. They compared utilities in the early 1990s to the current state of the industry and found that deregulation and sharply increased competition have brought a considerably higher risk of cash flow shocks. At the same time, they found that utilities have not adjusted their capital structures to fully compensate for the increased risks. “It seems likely that utilities don’t have the information they need to develop strategies to overcome their increased cash flow risk exposure,” Dr. Stein said. “The NERA c-far model can help them proactively address questions about their capital structure with greater certainty, and can help them more accurately assess the probability of a big shock and low interest coverage which could lead to default.” Looking at about 100 U.S. electrical companies, NERA found that the cash flow risks came close to doubling
