Last month, Entergy New Orleans revealed it was pulling funding from a vital city project to shore up the city’s flood defenses. Citing the massive cost of recovering from Hurricane Ida, the company said it could no longer fulfill its commitment to loan $30 million to the Sewerage and Water Board.
Four days later, the utility’s parent company, Entergy Corp. announced quarterly shareholder dividend payments at $1.01 per share, totaling $202 million.
The two announcements, side by side, are indicative of what several utility experts told The Lens is a broader trend for Entergy, and for utility monopolies across the country — insulating shareholders from risk and shifting the burden to customers.
“The risks and rewards of the business are supposed to be shared by the customers and stockholders. But more often, the customers are required to foot the bill,” longtime utility expert and consultant Stephen Hill told The Lens. “The consumers wind up with the short end of the risk stick.”
Like other utility companies, Entergy stock doesn’t offer investors big growth potential. To make up for it, the company dedicates a huge portion of its annual earnings — over 60 percent on average — to ensure its quarterly shareholder payments remain steady and predictable. In a statement, an Entergy spokesperson said that keeping the dividend high and protecting the stock price also benefits customers by making it cheaper for the company to raise cash for infrastructure investments.
But some consumer advocates argue Entergy has only been able to maintain those dividends by shifting the volatility of the business — like falling demand, natural disasters and fuel prices — to its consumers. And the past two years have been a test case for how successful Entergy has been.
Entergy’s finances were rocked by a global pandemic, a recession, a series of record-breaking hurricanes, winter storms and rising gas prices. But none of that is reflected in the company’s unabated dividend growth. Over the last two years, quarterly shareholder payments grew nine percent, and topped $1.5 billion total.
It’s been a different story for Entergy’s 3 million customers, who have faced bill hikes from all five of Entergy’s operating companies — Entergy Louisiana, Entergy New Orleans, Entergy Arkansas, Entergy Mississippi and Entergy Texas. Many of them will likely see additional bill increases to cover billions of dollars in storm recovery costs from the past two years.
At the same time, the company has been accused of failing to invest enough to maintain a reliable grid or prepare for the impacts of climate change, especially in the wake of Hurricane Ida last summer. Monique Harden, assistant director of the Deep South Center for Environmental Justice, said the company’s decision to use the majority of its earnings for shareholder payouts, rather than reinvesting in the company, makes those problems worse.
“Entergy shareholders are profiting from a company that is not doing what it’s supposed to do,” Harden said. “Entergy has been way off the mark for years and has just been allowed to get away with it.”
Critics note that in 2020, as revenues declined, Entergy reduced operations and maintenance spending by $150 million in an attempt to maintain profitability .
“It’s become so distorted that shareholders can only ever benefit and ratepayers can only ever pay up,” said Daniel Tait, a researcher and communications manager for the Energy and Policy Institute, and a frequent critic of Entergy. “The proposition here is pretty simple: Neither shareholders nor customers deserve to shoulder 100 percent of the burden from extraordinary events the world throws at us.”
How Entergy shed its risk
In some ways, Entergy’s actions aren’t very noteworthy. Publicly traded companies are free to choose whether to distribute their annual earnings to their shareholders, or put the money back into the company. And it isn’t remarkable for a corporation to try to insulate itself from risk or prioritize shareholder value.
But Entergy is not a typical company. It’s a government-backed monopoly, said Ari Peskoe, director of the Electricity Law Initiative at Harvard Law School.
“It’s just a classic case of the company’s owners doing well at the expense of their captive customers,” Peskoe said. “That’s the important thing here that differentiates it from other businesses. Customers are just completely captive to Entergy.”
Not only is it a monopoly, it’s a regulated utility, meaning its profits are predetermined and virtually guaranteed by government regulators. And it’s by navigating the regulatory process, rather than competing in the free market, that Entergy has been able to shed so much risk, says Logan Burke, executive director of the New Orleans-based Alliance for Affordable Energy.
“What’s astonishing here is that even with the protection of a regulator, utilities are getting away with it,” she said. “They have done everything to de-risk their portfolio and basically put all of the risk and all of the opportunity for pain on their customers.”
Entergy Corp. is made up of five regulated monopolies — Entergy Louisiana, Entergy New Orleans, Entergy Arkansas, Entergy Mississippi and Entergy Texas. Each of those is regulated by state-level public service commissions except Entergy New Orleans, which is regulated by the New Orleans City Council.
Those regulators decide in advance how much profit the companies can collect on approved infrastructure investments — between nine and 11 percent return on equity for Entergy companies. They then set the companies’ prices at a level that will enable them to collect those pre-approved profits, plus all the costs of running the business.
Until recently, Entergy Corp. also built and owned independent nuclear plants, which existed outside any monopoly and made profit by selling electricity to utilities on the open market.
But a little over a decade ago, the electric industry faced a major change. After a century of almost unfettered growth, the demand for electricity in the US stopped its precipitous climb, a result of factors including the 2008 recession, the country’s embrace of energy efficiency and small scale renewables.
“This of course made utilities desperate,” said Albert Lin, a San Francisco based utility finance expert.
The change caused a crisis for independent power plants around the country, many of which became unprofitable and shuttered.
Entergy, and several other major utilities, decided to sell off assets that operated outside a regulated market, and put all their assets into their monopoly utilities, where returns on investments are determined in advance and collected directly from customers.
“They sort of end up getting a better return than what would normally happen in a fair market, and it’s because it’s protected by [regulators],” Lin said. “It’s a de-risking tool to help preserve and protect the dividend.”
Regulated monopolies, even with their safe and predictable returns, still carry risk. The base rates for utility monopolies are set in advance, meaning Entergy and regulators have to predict what prices will result in that predetermined revenue. It’s based on assumptions — like how much electricity people will use and how expensive gas will be — that can be wrong.
When something unexpected happens, it can work in Entergy’s favor, like an unexpected increase in demand, or against it, like a hurricane. Lin said that increasingly, utilities have been protecting themselves and their shareholders from unexpected costs by adding charges to bills on top of their base electricity rates.
For example, roughly 30 percent of a typical Entergy Louisiana residential bill is made up of these types of charges, to pay for things like storm recovery and fuel costs.
Burke argued that with customers guaranteeing investment returns, and increasingly shouldering unexpected costs through added fees, shareholders don’t have enough skin in the game to justify their generous compensation.
“To invest money is inherently risky,” Burke said. “When it comes to vertically integrated, regulated monopolies, where’s the risk? Especially when it comes to storms, even when it comes to COVID, these utilities are virtually guaranteed to recover these costs. We are their insurance.”
Entergy is currently seeking additional riders in Louisiana and New Orleans to cover recent hurricane recovery costs. In Louisiana, that will likely mean a new $10 per month charge for the next 20 years to cover $3.2 billion in storm recovery costs from the last two years.
In New Orleans, officials have signaled they may not allow the company to recover those storm costs, depending on the company’s culpability. That, according to Entergy, is the main reason the company recently pulled funding for the recent Sewerage and Water Board project.
“Entergy New Orleans must first work with its regulators on storm cost recovery before deploying additional capital expenditures,” Entergy’s statement said.
Can regulators force the company to change?
Entergy’s regulators may not have direct control over the parent company’s dividends. But experts say they do have enough power to make sure the risks of the business are distributed properly.
“It’s certainly within regulators’ authority to change that risk allocation,” Peskoe said.
But Kirby, the Entergy spokesman, said that forcing the company to lower its dividend payments could lead to shareholders dumping their investments, potentially making it more expensive for the company to raise the capital it needs to invest in new, necessary infrastructure projects.
Less cash could force the company to borrow more, which carries risk if its credit is downgraded.
“When a utility can attract lower cost capital, it benefits customers,” Kirby said. “It’s important for utilities to maintain steady, predictable earnings and dividend growth as that enables them to borrow at lower interest rates and continue attracting new equity capital to make more customer-centric investments.”
Kirby said higher borrowing costs “would ultimately be shouldered by customers over time.”
“Thus, it is not accurate to conclude that shareholder dividends negatively impact customers,” he said.
But not everyone buys that line of reasoning.
“I’m very skeptical of the legitimacy of that argument,” Peskoe said.
The experts who spoke with The Lens agreed that lowering dividends could increase the cost of raising money for large infrastructure projects. But there is much less clarity over how much that would really cost customers, and whether they would outweigh the benefits to customers.
Lin believes the risk to ratepayers is overstated.
“I think utilities like to play the, ‘Well if we get downgraded it will be a disaster for us which will then become a disaster for you as a customer.’ “ Lin said. “I think they play that story and overblow it way too often.”
He said that the direct customer savings from clawing back utility profits “generally in every situation vastly overtakes the cost of lower credit ratings and a lower stock price.”
Burke argued that insulating shareholders from volatility not only hurts customer bills, it also leads to bad outcomes.
“Ratepayers pay for the price of fuel no matter what the price of fuel is, and the utility is therefore effectively agnostic to the price of fuel,” she said.
That, Burke said, could make the company more favorable to gas plants, even when renewables offer a safer bet.
“We are doubling down in Louisiana on our dependence on natural gas,” Burke said. “That is a risk that ratepayers are carrying…. When the cost of the fuel doubles and triples, that hurts.”
Similarly, utility expert and consultant Robert McCullough told The Lens in the wake of Hurricane Ida that Entergy’s ability to add storm recovery fees to bills encourages the company to wait until vulnerable infrastructure is destroyed, rather than replace or harden it in advance.
“It’s very clear if you take a look at Entergy’s actions that they believe it’s better to ask forgiveness than permission,” He said. “That’s a very good strategy. Because in the aftermath of a disaster, everyone is focused and ready to deal with it.”
But ultimately, the effects of Entergy reducing dividend payments are unpredictable. And because of that unpredictability, and the vital importance of electric service, regulators will tend to favor the utility’s argument, said Hill.
“I think regulators, when they get in the judge’s seat, and they have to make a choice, what they’re definitely afraid of is not being able to provide power to customers,” Hill said. “And the company keeps reminding them as often as they can: ‘You better not do this or this is gonna be trouble for us and we’re not going to be able to raise money.’ That’s their mantra.”
He said that even if spreading out the risk between shareholders and customers appeared likely to produce benefits, the hanging threat of a system collapse keeps regulators from pulling the trigger.
“You can call their bluff and see what happens, but regulators are really not willing to do that,” Hill said. “With regulators they tend to favor the company to avoid the worst case scenario, which they always hear is the case if they don’t give the company what it wants.”
Burke said that not all utility models require the delicate balance of investor profit and public good. She noted that some cities and states are run by publicly owned utilities, or cooperatives that are owned by its customers.
“We know that municipal and cooperative utilities, which is to say utilities that do not have a profit motive, are able to get the resources they need to provide services to their customers, and are generally more reliable,” Burke said.
In the wake of Hurricane Ida, The New Orleans City Council flirted with the idea of changing to an alternative form of electric service, like a cooperatively or publicly owned utility. But making such a massive change also comes with huge uncertainty.
“We have our model, and people will point out that despite all the flaws, it’s still probably one of the most effective models at delivering reliable electricity world wide,” Lin said. “Now the question is can you optimize and augment it so it continues to improve without breaking it. And I think that’s the challenge.”