Exelon CEO John W. Rowe would head the largest utility in the industry, if a proposed merger with PSEG goes through. By creating a $40 billion market-capitalization utility, the newly formed...
Return on Equity: A Survey of recent PUC Rulings
and ratepayers should not get blanket protection from non-diversifiable risk, or market risk, which represents the variability of investment outcomes driven by the economy as a whole.
Nevertheless, the PUC did not ignore diversifiable risks entirely in its 2002 opinion. Rather, it seemed willing to accept the idea that today's utilities face higher risks than before-warranting higher compensation, all else being equal-even if that higher risk level is to some degree a product of an increase in diversifiable risk.
Thus, in its 2002 generic order, the PUC acknowledged that the utilities it regulated had claimed increases in diversifiable and non-diversifiable business and regulatory risks, but it saw little to gain in the current political climate by attempting to analyze and account separately for each category.
In short, the commission said investors and the general public now see the electric utility industry as "highly unstable"-buffeted by broad regulatory and business forces. The utilities themselves have identified a host of new risks: financing of large under-collections, municipalization, performance-based ratemaking mechanisms, cogeneration, direct access, distributed generation, substations, photovoltaic systems, diesel fuel, propane, power procurement, and legislation pending in Sacramento regarding generation, procurement, and purchase of high-cost renewable energy.
Given this climate, the PUC dispatched with any need to exclude diversifiable risk from consideration. Instead, it found a net increase in overall utility risks. That increase warranted an ROE award for calendar 2003 at the middle to upper end of the range otherwise found just and reasonable for each utility.
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