RATE UNBUNDLING: ARE WE THERE YET?
FEBRUARY 15, 1996
THE ELECTRIC INDUSTRY CONTINUES to evolve in different forms across the country. Some proposed changes are radical, others are more evolutionary, but few utilities remain unaffected. Competition in the generation sector sharpens the focus on cost-effectiveness, market share, and new lines of business. Investor-owned utilities (IOUs) are reorganizing their current business structures and regulators are struggling either to lead the charge or to keep up.
One of the biggest challenges facing regulators is to encourage the benefits of competition while protecting electric consumers from excessive rates that produce windfall profits for shareholders. For example, over the past few years, California's IOUs have asked for a higher allowed return on common equity (ROE) to compensate shareholders for the additional risk associated with competition in the electric generation sector. In 1994, following the landmark "Blue Book" restructuring proposal from the California Public Utilities Commission (CPUC), the IOUs cried even more loudly for higher returns in their annual rate proceeding on cost of capital.