Fortnightly Magazine - January 15 1995

Ratings Reveal Risk

In an interesting article (Oct. 15, 1994), Professor Brooks Marshall suggests that bond ratings are a poor predictor of equity risk, based on a regression of utility risk measures on measures of utility bond ratings. For utility variables, he used 1) stock beta and 2) risk premiums based on analysts' expected forecasts. For bond rating measures, he used 1) average yields for various classes of bonds and 2) a numerical ranking.

Citing an excessive commitment to increasingly expensive purchased-power contracts, the Vermont Public Service Board (PSB) has reduced allowed rate of return on equity by 75 basis points. In setting rates for Central Vermont Public Service Corp., the PSB explained that ratepayers should not bear all of the costs associated with 1) excessive power commitments; 2) a failure to fully explore return sales opportunities; and 3) inefficient energy-efficiency programs.

The U.S. Court of Appeals for the District of Columbia Circuit has vacated the Clean Air Act (CAA) compliance rules for reducing NOx emissions from coal-burning electric facilities (Alabama Power Co. v. EPA, No. 94-1170, 94-1329, Nov. 29, 1994). The ruling suspends any obligation to comply with the NOx standards pending further rulemaking by the Environmental Protection Agency (EPA).