News Analysis

 

 

PUCs have yet to factor in higher risk for deregulation.

Here are the results of our annual survey of authorized rates of return on common equity (ROE) for state-regulated energy utilities. This year's survey covers ROE determinations by state regulatory commissions during the period Oct. 1, 1999 through Sept. 30, 2000. The survey reports the results of traditional, cost-of-service rate orders, as well as orders involving utilities operating under performance-based rate plans. The reported ROE figures were obtained from a variety of sources, including rate analysts at state public utility commissions, rate department personnel at the major investor-owned, electric and gas utilities, and directly from orders issued by state regulators. Explanatory notes accompany most entries, and citations are provided for orders published in Public Utilities Reports, Fourth Series (PUR4th). Many of the unpublished orders are accessible through PURbase CD ROM, WESTLAW, and LEXIS.

Although the ROE determinations generally are based on the results of quantitative financial models, such as the discounted cash flow model, the ROE awards are influenced by other factors, such as prevailing interest rates. If interest rates are high, investors are thought to require a higher ROE to justify the added risk that accompanies equity investments. The converse is true when interest rates on "risk free" investments, such as 30-year treasury bonds, are low. A good example of the influence of interest rates on ROE awards was seen in California. When setting ROE for Pacific Gas & Electric Co., the California Public Utilities Commission noted that the forecast rate on 30-year treasury bonds had increased from 4.71 percent in October 1998 to 6.08 percent for April 2000. The commission then approved an increase in the utility's ROE requirement from last year's 10.60 percent to 11.22 percent.

In setting ROE for Pacific Gas & Electric, the commission was also called on to consider the perceived level of business and regulatory risk facing the utility. The commission rejected claims that risk was increasing in the electric industry, noting that one witness had testified that the risk associated with the recovery of transition costs had declined in California due to the winding down of the electric industry restructuring process. However, the commission's ROE determination was made prior to the recent, unprecedented fly-up in wholesale electric prices in California, and thus could not have factored in any associated increase in risk.

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