Closing the value gap

It's a predicament. For the most part, investor-owned electric utilities trade at a deep discount to the actual (that is, replacement-cost) value to their assets. That's because most utilities fail to earn real returns large enough to justify raising and investing capital. The result is a value gap, where overall market value is significantly lower than the replacement costs of the assets. This gap is wider for utilities than for virtually any other industry in our economy. In addition to providing education and awareness, senior management must determine which businesses and activities create value and which diminish it. Then, management must allocate capital and human resources appropriately, holding down investments in value-diminishing areas until they can improve their profitability, and aggressively investing in value-enhancing businesses while preserving their profitability. But value management must not stop with resource-allocation decisions. To create a lasting transition to a value management philosophy, the utility's compensation system must also change: executives will have motivation to create value when compensation stems from this goal, not from such misleading accounting measures as earnings-per-share growth or ROE. That requires clear value-creation goals, and the organization must continuously evaluate top management's performance in light of the progress made toward those goals