Return on Equity: Interest Rates Push Down Allowances

Deck: 

Results of the annual survey of energy utility rate proceedings.

Fortnightly Magazine - November 15 2002
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Results of the annual survey of energy utility rate proceedings.

With interest rates at record lows, it is not surprising to find downward pressure on allowances for return on equity (ROE) set by state public utility commissions in retail rate cases. (The table presented herein shows the results of our annual survey of authorized rates of return on common equity for state-regulated energy utilities.)

Take as an example, Nevada Power Co., which is suffering as it tries to recover from earnings shortfalls resulting from the western power market crisis. The Nevada PUC's staff expert witness on cost of capital had reported that the results of his calculations "are the lowest he has found in over 12 years' experience of return on equity estimates." After concluding its review of the company's overall revenue requirements going forward, the PUC decreased base rates by $42.9 million annually. Revealing the significance to both consumers and shareholders of the ROE issue, approximately $30 million of the decrease was attributable to the PUC's decision to lower the company's authorized rate of return from 12.5 percent to 10.1 percent. The company also suffered a second blow to its revenue picture (unrelated to the ROE findings) when the PUC, in a separate proceeding, denied recovery of $437 million of $922 million in power costs incurred during the power market crisis. .

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