Equity investing in Asia has been about property and banking stocks. While Telecom listings have proceeded apace, the power industry has been deeply under-represented with governments maintaining tight control. That trend is set to reverse with big privatisations and the anticipated listing of independent power producers (IPP). Gordon Wu Ying-sheung showed what a fully operational IPP was worth, selling Consolidated Electric Power Asia at a 15 per cent premium to its net present value. New entrants are expected to aggressively grab equity funds. Asian power stocks' market capitalisation is about US$69 billion, although only 35 per cent can be bought by foreign investors. Of that, more than half is represented by Hong Kong Electric and China Light and Power. Interest in the IPP business this year has been huge. Both local power generating firms harbour regional ambitions, while Cheung Kong Infrastructure and New World Infrastructure have ridden the China-concept investing theme. The early years of building private power stations in Asia were fraught with rivalry between firms and governments suspicious they were paying two much via overly generous power purchase agreements. Increasingly, a legal and commercial framework offering IPP operators project returns ranging from the low teens to 20 per cent is agreed. While US firms scout regional opportunities local players will increasingly tap equity markets for finance. In a recent report BZW Asia points to structural changes that should fundamentally alter the power investment climate. The brokerage argues that as monopoly power gives way to individual firms bidding for the right to distribute power there is an escalation in the 'risk-reward' ratio. In the past there were either no listed power firms or a single player with highly predictable earnings facing scant competition. Now, with new entrants on the scene highly rated monopolies could be in for a shock, and new players will present opportunities. Longer term, transmission and distribution assets will be privatised as governments make the difficult decision to cede control. To date the potential return has been way less than the 15-20 per cent earned from generation as governments have maintained subsidised pricing. Asian governments are now untangling the subsidies and cross-subsidies that ring the industry - market listings inevitably require market rates of return. The hierarchy of firms will change with vertically integrated utilities engaged in generation, transmission and distribution, a very different beast to value than a pure IPP. Monolithic firms are inevitably subject to political forces, making the regulatory environment and accounting regime that drives management policy a critical issue, argues BZW Asia. For example Hong Kong's two generating companies are compensated with a fixed 14.5 per cent return on fixed assets that lays an incentive to over-build power stations. Any threats to capital expenditure, as is now the case, will be critical to the share price. By contrast, nimble IPP's are a growth stock whose value comes from an ability to win on-going contracts, justifying an expansion to net asset value. IPP earnings rise on a steep curve and then flatten with a normal utility type return. Maintaining deal flow was the sales story for Hong Kong's two major infrastructure plays and will increasingly be the pitch for regional firms raising equity capital.