Final answer:
DTE Energy faces financial risks due to reliance on subsidiary cash flows, which can be volatile. Companies need outside investment to ensure sufficient capital for growth, and bonds carry default risks and may be unattractive in changing markets. Monopolies and oligopolies in utilities pose challenges for cost efficiency and competition.
Step-by-step explanation:
Understanding Financial Risks for Energy Companies
DTE Energy's reliance on cash flows from subsidiaries presents a risk because it concentrates their income sources. If a subsidiary underperforms due to market conditions, regulatory changes, or operational issues, this affects the parent company's financial health. Diversification across various revenue streams is crucial in mitigating such risks. Companies cannot solely use their own profits for financial capital because reinvested earnings might not suffice for significant expansion or acquisition opportunities. They therefore seek outside investors to boost financial flexibility. As for bonds, they are somewhat risky as there's always a chance of default by the bond issuer. The fixed rate of return may also become less attractive due to rising inflation or better investment opportunities elsewhere.
Regarding natural monopolies in the utility sector, such as public utilities, the danger in splitting them into competing firms lies in potential inefficiencies. This could lead to increased costs for infrastructure duplication and potential service quality degradation, as economies of scale are lost. In the context of conglomerates like Kinder Morgan, if a merger leads to cost savings, consumers may benefit, but there's a risk it could also result in an oligopoly, which might not pass on savings and could decrease competition.