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Return On Equity: Regulators Trust, but Verify

Some recent utility rate proceedings cast doubt on new ROE models and “risk adders.”

Fortnightly Magazine - November 2006

could not determine if the investment bankers used the same approach when determining cost of debt, what mix of debt maturities they used, or if they included short-term debt. Further, it is unclear whether the Morgan Stanley analysis was for Commonwealth Edison and PECO, a Pennsylvania-based affiliate, separately, or for the proposed combined entity. It also is not known if the investment bankers used the same capital structure or made the same assumptions regarding the treatment of transitional funding instruments, the ICC added. Re Commonwealth Edison Co., No. 05-0597, 250 PUR 4th 161, July 26, 2006 (Ill.C.C.).


Table Endnotes:

* Settlement agreement. No ROE figure stated.

1. ROE figure shown includes a 30 basis-point upward adjustment to account for LDC’s higher risk when compared to financial study proxy group.

2. Adopted ROE set below the normally accepted mid-point range to reflect finding that LCD had been deficient in accounting and record keeping practices, and had exhibited a pattern of inadequate customer service.

3. Order adopting rate-making cost of capital for major investor-owned energy utilities.

4. Approved overall rate of return 5 basis points higher than last authorized rate. Produces only nominal change in revenue requirement.

5. Although allowed ROE is 20 basis points higher than prior year’s award, rate reduction results from lower approved figures for cost of debt and preferred stock.

6. Revenue sharing agreement settlement. Existing rates remain in place. Retail base-rate revenues between specified threshold amounts will be shared 2/3 to ratepayers and 1/3 to shareholders. No ROE specified in revenue-sharing settlement

7. Figure shown is current ROE for recovery clause calculations and other non-base-rate purposes.

8. Stipulated overall rate of return of 8.1%. No ROE given.

9. Delivery service only.

10. Final figure per order on rehearing issued 05/28/06. Initial order included an increase of $45.6 million.

11. Settlement agreement. No ROE figure provided. Overall rate of return listed as 8.879%.

12. Settlement agreement includes ROE as shown.

13. Figure shown includes adjustment for initiation of fuel adjustment charge rate.

14. Approved settlement provides that $28.106 million in environmental surcharge costs will be removed from adjustment clause filing and incorporated into base rates.

15. Order on periodic earnings review under existing rate stabilization plan. Threshold for earnings sharing lowered from current ROE of 12.25% to 11.25%.

16. Commission finds stranded cost recovery complete. Figure shown allows full recovery of production fixed costs on a going-forward basis.

17. Figure shown is Phase 1 grant. Phase 2 grant totaling an additional $114.9 million revenue requirement effective 1/1/07.

18. Commission rejects proposed risk-premium adder as unwarranted given LDC’s improved credit rating and recent regulatory actions limiting risk such as preapproval of energy supply plans and ROE premiums for large construction projects.

19. Delivery service rates.

20. Revenue award includes credit of $1.4 million in allegedly unreasonable gas commodity costs recovered from ratepayers in 2005-2006 heating season.

21. Per settlement proposal. Commission finds revenue figure reflects amount the LDC requires to operate and maintain its gas distribution system.

22. Figure as listed in approved settlement agreement.

23. In July 14, 2005,