(November 2004) Fixing an appropriate rate of return on equity (ROE) for electric utility investors marks a fundamental component of the typical cost-of-service rate case conducted across the nation by state public utility commissions (PUCs). The following survey demonstrates the results of such cases, as observed over the past year.

Ratemaking Special Report

Regulatory Uncertainty:

In a joint survey conducted by Navigant Consulting and , utility executives identify the biggest challenge to their business.

No matter what position you subscribe to when characterizing the degree of competition in today's energy industry, it is clear that regulation continues to serve as a major influence on the business strategies and operations of the gas and electric distribution utilities in North America.

STATE REGULATORS:

Can natural gas supply keep up with demand for power?

Interviews

Things are looking up for the energy industry, but tough issues remain. Regulators-forced to grapple with the mismatch between volatile natural-gas prices and years of building gas-fired power plants-have learned a thing or two. They now insist on new rate schemes and risk-management methods while promoting the use of liquefied natural gas.

For The 21st Century

Interviews by

So it begins again. After several financially tumultuous years, executives at many of the nation's top utilities can once again look to the horizon and ask the growth question worthy of a Caesar: "What worlds to conquer?"

Utility executives are emboldened by bulging free cash flows, improved credit quality, lower operations and maintenance costs, favorable regulatory treatment, growing service territories, and increasing demand for power.

While NAESB and NERC struggle over the issue, North America steadily drifts toward unreliability.

Time is running out. It's been more than two years since the North American Electric Reliability Council (NERC) Joint Inadvertent Interchange Taskforce (JIITF), on which I served, issued its white paper[1] proposing how to price the unscheduled power (inadvertent interchange)¹ flowing between NERC-certified balancing authorities (BAs).

Commission Watch

Incentive regulation is not a cure-all for the continuing controversy over return on equity.

Regulated utilities are all too familiar with the contentious disputes that surround how the allowed return on equity (ROE) is set in a traditional cost-of-service setting. These disputes, which are reappearing as numerous utility rate-stabilization plans signed as part of deregulation come to an end, are likely to hinge, as always, on the riskiness of utility operating environments.

What construction cost might prompt orders for new nuclear power plants in Texas?

Electricity generation deregulation has opened U.S. wholesale electricity markets to unregulated power producers. In this uncertain environment, how should a generating company evaluate the risk of investing in new capacity?¹

Commission Watch

California anticipates changes in energy policy under its new governor.

The recall of California Gov. Gray Davis in November 2003 almost immediately led to speculation concerning possible changes in California's energy policy. Since his election, Gov. Arnold Schwarzenegger has assembled an Energy Working Group, co-chaired by Professor James L.

Revisiting performance-based rates with endogenous market designs.

More than 20 years ago in the pages of this publication, economist William Baumol outlined a method by which the regulation of public utility monopolies could be streamlined while simultaneously providing incentives for efficiency and productivity growth.¹ Baumol proposed a productivity incentive clause that adjusts rates automatically according to the formula,

Perspective

Two Cato analysts suggest a return to the past-vertical integration, but now with no state regulators.

The defeat of the energy bill in the Senate last year has thrown electricity restructuring back on its heels. There clearly is no consensus among politicians or academics regarding how this industry ought to be organized or how it might best be regulated. Finding our way out of this morass requires a reconsideration of how we got to this dismal point in our regulatory journey.