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Gauging Risks: Rising Interest Rates and Industry Restructuring

Fortnightly Magazine - March 1 1995

as the reduced exposure to reasonableness reviews. It added that Edison had overlooked its past willingness to account for asymmetry when justified, as it did while authorizing incentive ratemaking for telephone utilities. The CPUC concluded that "any asymmetries brought to utilities by competition in electricity markets are not new since the last cost of capital, but have long been incorporated into share prices."

This debate about balance and fairness has also surfaced as a key to whether regulators will shield ratepayers from responsibility for the cost of stranded investment. An Edison Electric Institute study argues that shareholders should not be held responsible for the cost of plant rendered uneconomic by a competitive market because utilities have not been able to raise rates to market-clearing levels when investment decisions turn out better than expected.1 On the other hand, a study prepared for the National Association of Utility Regulatory Commissioners (NARUC) argues that the answer is not so clear.2 The authors of the NARUC report suggest a review of past decisions to determine whether the "compact" between regulators and the utilities truly calls on ratepayers to shoulder all such costs. The study suggests that pre-investment decisions by regulators or post-investment requests by utilities might serve as evidence that the risk of market failure was known and assumed by the utilities and their shareholders. The NARUC study maintains that if no risk of loss were assigned to shareholders, regulators would set ROE at the level of a highly rated bond. t


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