The California Public Utilities Commission (CPUC) has approved increases in the rate of return on equity (ROE) for the state's largest energy utilities, citing increasing interest rates and perceptions of risks in the electric industry. The CPUC approved increases of 70 to 120 basis points above the 1994 baseline ROE figure of 11 percent.
It explained that since utilities' ROEs were reduced as interest rates dropped, they should increase with the general cost of capital. (It noted, however, that the utilities had not offered to lower rates the previous year when interest rates were trending downward.) In addition, the CPUC ruled that investors require a ROE premium of 0 to 20 basis points for new market risks because its restructuring proceeding had moved investor perceptions of risk associated with a changing market structure closer in time. Nevertheless, the CPUC added that a reluctance to confront competitive realities would be more risky than the actions contemplated under the restructuring proposal.
CPUC president Daniel Fessler concurred, but expressed "reluctance" to order a result that would translate into higher electric and gas rates at a time "when the commission has engaged that industry in what we have described as our ... single-minded ... objective (em to lower the cost of electric service to California's residential and business consumers." He added that his concurrence does not mean that he is prepared to see the new ROE figures "automatically rolled-over" into statistical starting points for future performance-based ratemaking plans. Fessler said that California's current rate reform exercise will accomplish little if the CPUC authorizes a point of departure "larded with excess exactions" on the state's energy consumers. Re Sierra Pacific Power Co. et al., Decision 94-11-076, Application 94-05-009 et al., Nov. 22, 1994).
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