Business & Money
Experts debate whether KKR's leveraged buyout of UniSource Energy is right for the industry.
"From a public policy standpoint,...
Return on Equity: Interest Rates Push Down Allowances
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. .
The issue of ROE in a setting of regulated rates always has focused, at least in part, on ensuring that adequate investment capital is available at a reasonable price to support the development and maintenance of a reliable energy industry in the United States. In light of the recent, nationally publicized troubles in the power markets, and the restructuring of the wholesale power markets on a competitive model, some regulators are beginning to take a look at the issue of ROE in a different light.
Iowa: Ahead of the Ratemaking Game?
In Iowa, state public utility law allows state regulators to specify in advance the ratemaking principles, including the ROE, that will apply when the costs of a new plant are included in electric rates, if the plant is constructed by a rate-regulated utility. The intent of the statute is to attract the development of electric power generation and transmission facilities within the state. In ruling on a request by MidAmerican Energy Co. for a rate determination involving a proposed 540 MW, combined-cycle electric generator, the Iowa Utilities Board noted the ruling's important long-term consequences, since the utility could rely on it in future rate proceedings, or after reviewing the decision, decide not to proceed with construction. In addition to findings on ratemaking issues, such as the proper Allowance for Funds Used During Construction and depreciation of the asset, the board ruled that the ROE for investment in the plant would be 12.23 percent for as long as the plant remains a board-regulated utility asset. (The utility's ROE employed in its most recent rate proceeding was 12 percent.) While noting that capital costs were then relatively low, at least in comparison to historical standards, and the fixed return for