Economic uncertainties raise doubts about utility returns.
Recent shocking and unprecedented news in financial markets brings to mind several questions about utility rate cases and authorized returns. Given that utility regulators rely on financial models when seeking to determine the cost of capital for a utility, one might ask what effect stock prices and interest rates will have on the process. Will regulators feel a need to consider broader economic effects when engaging in a process that is often closely watched by the investment community?
In this time of economic uncertainty, utility investors are reminded that authorized return on equity (ROE) allowances aren’t actual earnings, but rather the rates utilities and regulators use to determine how much money consumers must pay to make it possible for the utility to earn a reasonable profit and to attract investors in the future. As such, the award is not a guarantee. To earn the ROE set by a commission, the utility must keep future expenses and sales at or near the levels as during a 12-month proxy period known as the “test year.”
In extraordinary times like these, regulators should expect some extraordinary testimony from the financial experts who appear as witnesses in rate cases.