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2008 ROE Survey - Rates, Risks & Regulators

Economic uncertainties raise doubts about utility returns.

Fortnightly Magazine - November 2008

average stock price over an arbitrary historical time period. The reason is that the analyst is attempting to determine a utility’s cost of equity in the future, and since current stock prices provide a better indication of expected future prices than any other price …. [t]he most relevant stock price is the most recent one…. Use of any other price violates market efficiency.

In rate cases to come over the next year, the drop in stock prices will have a major effect on the debate. It remains to be seen how the experts and the commissions will explain the role of the models in the process and the hard decisions that must be made to keep utilities financially sound.


Table Endnotes:

1.  Utility operates under a rate stabilization and equalization (RSE) plan – an alternative rate-making mechanism that provides for periodic automatic adjustments to maintain ROE within a specified range. ROE figure shown is midpoint of approved range.

2.  Order renews existing RSE approved by Order issued 6/10/2002 for period of seven years ending on Dec. 31, 2014.

3.  Includes phase-down of existing cap on ratio of common equity to average capitalization to 57% by Dec. 31, 2008 and to 55% by Dec. 31, 2009.

4.  Produces overall rate of return on “fair value” rate base of 7.03%.

5.  Settlement stated ROE; ROE figure reflects downward adjustment for reduced risk associated with billing determinant adjustment tariff.

6.  Order adopting ratemaking cost of capital for major investor-owned energy utilities.

7.  By subsequent order commission adopts a multi-year cost-of-capital mechanism (CCM) for major utilities. Under CCM, utilities will file applications every third year beginning in April 2010. Changes in interest rates outside of a 100-basis point dead band would trigger off-year adjustments. See Re Southern California Edison Co., 265 PUR4th 161 (Cal.P.U.C.2008).

8.  Order determing utility earned $15.5 million in excess of allowed ROE.

9.  Allowed ROE approved March 14, 2007 rate-case decision.

10.  Department finds 10.1% ROE reasonable for current earnings review.

11.  No ROE was specified in the Settlement Agreement. However, in a subsequent filing WGL reported that an ROE of 10% was used to calculate carrying costs.

12.  $98.6 million requested in application, modified to $63 million, to reflect the Hawaii PUC’s decision to separate HECO’s DSM program costs from the rate case to a separate docket.

13.  Order granting application for a determination of advanced ratemaking principles for a proposed wind-generation project.

14.  Result from two most recent dockets involving wind-power projects.

15.  Proceeding to review level of earnings under formula rate plan.

16.  Test year utilized is actual year ending September 30, 2007 with pro formas to June 30, 2009 and Rodemacher Unit No. 3 full year operations.

17.  The components are as follows: Base Rate Increase $250.1 million; Fuel Cost Savings ($224.4) million; Refund of RPS-3 Carrying Charges ($98) million; Net Decrease ($72.3) millions.

18.  Company requested 12.25% ROE.

19.  Order granting requests by two electric utilities for