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Commission Watch

The industry requires new analytical tools to incorporate the realities of today's higher risk operating and investment environment into the equity allowance process.
Fortnightly Magazine - October 15 2003
  1. Base =
    (NOPATc,t / Rate Base)
    NOPATc,t = net operating profits after tax for firm c in year t
    y0 = universal constant
    y1 = coefficient for allowed return on Rate Base
    y2 = coefficient for regulatory risk
  2. Most of these variables are significant at the 98 percent or greater level.
  3. The graphic uses the average allowed ROE granted in decisions handed down during the calendar year for expected return and uses the standard deviation of returns across the industry for the calendar year.
  4. We are looking to validate the appropriate range of target Sharpe ratio. Our research continues, but based on our work to date, a ratio between 2 and 2.5 seems appropriate.

 

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