Equity Returns: ‘Allowed’ vs. Earned

Deck: 

Understanding how PUC rate case findings differ from a utility’s financial reports.

 

Fortnightly Magazine - November 2015
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The Commission Watch column has appeared in these pages since 1982. Here, as before, it offers a summary of results from major retail rate case decisions involving large investor-owned utilities, as issued by state public utility commissions (PUCs) from across the country. (Click here to view figure 1 in PDF format.)

These state regulators do not act in a vacuum. Rather, they rely on ratemaking principles set down by courts, legislators and industry experts. And these principles seek generally to achieve equity - to reach a result that is fair to utility shareholders and their retail customers. The two primary tools for this endeavor are, first, the documented cost of providing utility service (including annual expenses and a "rate base" that reflects long-term capital investment), and second, a best estimate of investor expectations - a hypothetical return on investment high enough both to keep shareholders interested and to ensure that the utility enterprise can continue to attract capital. Armed with these tools, the PUC determines an annual revenue requirement - the total annual revenue that rates must produce - and, in most cases, a rate of return (ROE) on common equity capital that is implied in the revenue award and which the utility is therefore "allowed" to earn, if all things work out as expected.

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