Portland General Electric Company Case Study

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Data Source: Bloomberg economic calendar 16

Interest Rates

Interest rates directly affect the utility industry due to the high capital expenditures companies need to finance projects with. These projects include but are not limited to maintaining/production of infrastructure in the generation, transmission and distribution, as well as, research and development, acquisitions, purchase of license agreements, and informational technology systems. As a result, these capital-intensive requirements for companies operating in the utility industry create high levels of debt. Interest rates and the cost of debt are directly correlated to one another, thus making PGE sensitive to changes in interest rates. Therefore, when rates grow the cost to finance, these activities through debt increases respectively.

The Federal Fund rate has been at an all-time low compared to historical rates during the last 8 or so years. This low rate environment can be linked to the Great Recession we had in 2008, with the current target Federal Funds rate is 0.50%. Initially, the Federal Reserve hinted to an increase in the federal fund rate this December from 0.50%-0.75%. However, we are reluctant to believe that this increase will occur in light of the political upset in the presidential election as financial markets have become sporadically volatile. The Federal Funds rate is a base metric used to derive interest rates for the overall economy. We anticipate that the Federal Reserve will likely not raise rates for the short-term; although, we do expect in 2-5 years the rates will be roughly 1%-1.75%. The graph below shows the historical effective fund rates.

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Source: FRED 18

Population Growth in Portland

Population growth and the housing market play a significant role in shaping the economy and the GDP. Real estate contributes to the economy through money spent on residential investment and housing services. The housing market and population growth complement the utility sector in unison; expansion in the housing market creates an upsurge in need for utilities. For the third consecutive year, the Pacific Northwest, specifically Oregon, holds the title as the “Top Moving Destination”19. Oregon’s rising population has fostered growth and sustained the economy across the board. Oregon’s overall population growth is 1.5% compared to the national average which is around 0.7%. The surge in metro Portland is nearly three times faster than the national average with the collaring counties of Clackamas, Columbia, Multnomah, Washington and Yamhill experiencing a 2% population boom13. Below graph illustrates the Oregon’s population growth by the decade in comparison to the national average.

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Source: Oregon Economic Analysis 20

For PGE, this domestic immigration population growth in their service area benefits company profits. PGE’s evolving residential and commercial customer base generates 87% of the company’s retail revenue1. This population influx is due in large part to Oregon's robust thriving economy and the state's focus on eco-friendly issues. We believe for the next few years, and Oregon will continue to grow, but eventually, the state will experience a saturation slow down. The increase in population in return boosts the real estate market, which creates a demand for electricity.

Law & Government Regulations

Government regulations dominate the utility sector as strict guidelines are enforced on multiple levels - federal, state and local agencies all jointly influence the utility sector and more precisely the electricity industry. The push for renewable energy alternatives and reducing carbon emissions has fueled more laws that govern power plants. The Clean Power Plan (CPP) is currently the toughest regulation facing the electricity industry as it establishes standards for "best system of emission reduction" of carbon dioxide, the primary greenhouse gas pollutant responsible for climate change generated by the electric generating utilities. This federal program is aimed to cut electric power sector's CO2 emissions by 32% by 2030 derived from 2005 levels.28 The major regulatory agencies that oversee the electric utility industry are the FERC, EPA and NERC. Additionally, every state, has a Public Utility Commission (PUC) which controls setting electricity rates based on of service costs including purchased power, infrastructure costs, operating and maintenance, energy and consumer programs as well as taxes.1

PGE is committed to leading the change to build a smarter energy infrastructure in compliance with all relevant legal and regulatory requirements. The future of strict regulation and compliance is uncertain with the change in presidency as Trump contemplates a moratorium on environmental compliance that hinders economic return. This highly regulated industry will continue to be under the spotlight both economically and politically.

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Industry Overview

The electric utility industry provides a crucial commodity in the generation, transmission, and distribution of electrical power. Electricity is the backbone of the economy, fueling all growth and expansion opportunities. The electrical utility industry is in the mature phase of its life cycle. Utilities are inherently a low beta defensive sector that offers stability in a volatile market. The industry is comprised of highly regulated operations, as well as, revenue constraints that regulators place on firms. Thus, making companies experience low growth rates. On the other hand, companies that operate in the electrical utility industry usually provide investors with high dividend payout yield. The electrical utility industry is made up of investor-owned, publicly-owned, cooperatives, and Federal utilities, which collectively ensure an adequate and reliable source of electricity to all consumers at a reasonable cost. To fulfil the demand of 109 million residential customers, 14 million commercial customers, and another half million industrial customers the electrical industry must generate energy from its hydroelectric, fossil fuel, nuclear, solar, tidal, wind and independent electric power generators22. Profitability is determined by governing agencies and regulations along with specific fuel costs to generate the electricity. Due to the traditional monopolistic nature of the