(November 2006)Our annual return on equity (ROE) survey broadly shows a continuing decline in the level of debate over issues specific to restructuring of the electric market. It also...
Annual ROE Survey: Capitalizing On Grid Concerns
Regulators use rate cases to craft incentives for capital spending.
component of the cost-of-service rate case conducted across the nation by state energy utility regulators. The following survey (see chart) demonstrates the results of those proceedings over the past year. As usual, current interest rate trends and a discussion of business risk dominate the debate; market restructuring efforts either wind down or mature; and discussion of the effect of such programs on ROE in traditional rate proceedings seems to be on the wane. In addition to the idea the ROE rate component is an appropriate tool to signal investment preferences as discussed above, regulators at the state level also are beginning to focus on the effect their own more traditional regulatory methods and procedures might have on a utility’s risk profile.
One example of this is seen in an electric rate case decided by the Idaho PUC. 3 In that case, the PUC authorized Idaho Power Co. to implement a three-year, fixed-cost decoupling pilot program. The mechanism adjusts rates upward or downward to recover the company’s fixed cost of service independent from the volume of the utility’s energy sales. With such a plan, a utility collects a stable revenue stream whether or not its customers respond to conservation incentives in a positive way. (For example, if sales go down due to efficiency improvements or conservations, rates will go up within a 3 percent cap under the approved plan.)
After setting a revenue requirement and a new ROE for the coming rate period, the commission put the utility on notice that it would address in a future rate case whether it should reduce the company’s authorized ROE to reflect reduced risk of cost recovery under the new adjustment mechanism.
1. Re Duquesne Light Co., FERC Docket Nos. EL06-109-000 et al., Feb. 6, 2007.
2. Re Nevada Power Co., 253 PUR4th 252 (Nev. P.S.C. 2006).
3. Re Idaho Power Co., 256 PUR4th 322 (Idaho PUC 2007).
* Settlement agreement. No ROE figure stated.
1. Figure reflects finding by commission that utility collects 40 percent of retail revenues through adjustment clause, making it less risky than other comparable utility companies.
2. Revenue settlement reflects cost of equity as shown.
3. Revenue shown is after LNG mitigation.
4. Revenue settlement includes earnings-sharing mechanism, which provides for allocation to ratepayers of 100 percent of all earnings above figure shown.
5. Settlement stated ROE. Previous case was settled with no stated ROE.
6. Order on periodic earnings review under existing rate-stabilization plan. Figure shown is threshold for earnings sharing.
7. The last case involving this utility where the cost of equity is noted resulted in a final order issued May 1991. Four rate cases filed since that date were determined by settlement agreements that did not specify any element of the cost of capital.
8. The last case involving this utility where the cost of equity was noted resulted in a final order issued December 1984. Six rate investigations filed since that date were determined by settlements, which did not specify any element of the cost of capital.
9. An additional $1 million