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Risks in the Utilities Sector
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As we mentioned at the beginning of this chapter, what was once one of the most stable and risk-free sectors became a sector fraught with risk. Unfortunately, the main driver of the increased risk for utilities—changing regulation—is still alive and "well today.

For companies that operate in areas that have not deregulated yet, deregulation getting back on track is a looming risk. Increased competition is never a good thing for a company or its finances. In the utilities sector, the federal framework is already in place for states to deregulate should they so choose. Though California's energy crisis created by its poorly designed regulatory scheme caused deregulation to stall in many states, other states such as Pennsylvania have seen much more success in their deregulation efforts. As other states meet with success, the pressure will increase on those regulated states to finally take the deregulation plunge.

Another risk all utilities face—deregulated or not—is environmental risk. There is no getting around the fact that most power plants generate pollution of one sort or another. Should environmental regulations tighten, those oper­ating power plants could be forced to spend on expensive upgrades to reduce their emissions.

Finally, there is significant liquidity risk in the entire sector: If firms have problems rolling over their debts when they come due, they could face a liquidity crunch that would cause them to take value-destroying measures. Whether it's taking on high-interest debt, selling assets on the cheap, or participating in dilutive secondary offerings, once a company has lost the confidence of the debt markets, it is a very difficult and expensive hole to get out of.

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