But the lower returns on equity don't necessarily result from gen selloffs or moves toward stand-alone distribution.
A survey of utility rate decisions affecting authorized rates of return on common equity (ROE), as issued by state public utility commissions (PUCs) during the period Sept. 30, 1998 to Sept. 30, 1999, indicates a small but discernible trend toward lower returns. There is no clear evidence, however, that PUCs are rethinking their assessment of utility investment risk to reflect divestitures of generation assets or a retrenchment of utility functions toward the model of a stand-alone wires or distribution company.
CONVENTIONAL WISDOM SAYS that power generation entails greater risk than the remaining distribution and transmission service components in the electric industry. Some parties have argued, however, that stripped of its generation and transmission monopolies, a distribution-only company loses strength and faces greater risk in meeting the threat of competition from distributed generation and other forms of system bypass.
Others have argued that generation divestitures can add risk in at least one sense, as utilities must then recover the cost of power purchased from third parties in assembling a resource portfolio to serve standard-offer customers who choose to remain with the utility and not to take generation service from competitive suppliers.
YET, IN ITS MOST RECENT MAJOR ROE CASE, the California PUC set ROE rates for the stand-alone distribution operations of the major utilities operating in the state, but found "no need" for either a discount or premium adjustment to ROE. The commission described the competitive threat to utility distribution as "exaggerated," explaining that: