Commission Watch

Deck: 
The industry requires new analytical tools to incorporate the realities of today's higher risk operating and investment environment into the equity allowance process.
Fortnightly Magazine - October 15 2003
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Commission Watch

The industry requires new analytical tools to incorporate the realities of today's higher risk operating and investment environment into the equity allowance process.

 

During the past 10 years, capital investment in regulated electric utility assets has slowed considerably. While a tremendous amount of capital was committed to new unregulated generation, capital investment in the regulated business has not kept pace with depreciation. With a "return to basics" mantra now common in the industry, coupled with the recognition of under-investment and heightened reliability concerns, most companies are now facing significant capital expenditure programs. According to the Energy Information Administration, the investment required to replace aging infrastructure and keep pace with growing energy demand amounts to $400 billion over the next 20 years.1 In addition to these impending capital expenditures, most utilities have experienced a significant escalation of operating costs in the recent past, resulting in decreased operating margins.

Because of these factors, many utilities are considering or have filed for rate relief. For many companies, this represents the first such filing in several years. However, due to the low interest rate environment, companies filing new cases risk living with a much lower return on equity. As Figure 1 shows, authorized returns have trended down during the last decade, and some recent awards have reached single digits.

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