Return on Equity: How Regulators Doled Out The Dollars

Deck: 

Results of the annual Survey of Energy Utility Rate Proceedings.

Fortnightly Magazine - December 2001
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Results of the annual Survey of Energy Utility Rate Proceedings.

The results of our annual survey of authorized rates of return on common equity for state-regulated energy utilities show a continued reliance on traditional cost-of-service ratemaking in many states. At the same time the results also show that rate case filings do not dominate the field of economic regulation the way they might have in times of higher rates of inflation and prior to the advent of price cap regulation and market restructuring programs.

Nevertheless, the issue of the appropriate level of "profit" to include in the rates of a regulated electric and natural gas companies continues to figure prominently for those engaged in the task of retail ratemaking.

A reading of this year's rate orders indicates that the Discounted Cash Flow analysis (DCF Method) continues as a staple for estimating the cost of equity capital sought by energy utilities. Issues such as current trends in overall cost of capital available to large industries, as well as business and regulatory risks facing utilities, are also discussed at some length in numerous cases. The debate also continues over the effect that the divestiture of generation assets by electric utilities under state-run industry restructuring plans might have on utility risk and investor expectations. Similarly regulators are also considering the change in risk for natural gas utilities when moving to a competitive market model for pricing of gas supply.

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