Branko Terzic is a former commissioner at FERC and the Wisconsin PSC, and former CEO of Yankee Energy System, Inc.
FERC’s treatment of rate of return for pipelines and electric transmission lines has been in the news recently. This reminded me of the plight of the very high-visibility and controversial rate-of-return and cost-of-capital witness.
This poor expert has the dubious distinction of presenting testimony on a subject in which everyone, in my decades of experience in public utility rate cases, has an opinion.
I am not kidding as I mean everyone.
The amount of time in a rate case devoted to rate of return direct, redirect, cross-examination and rebuttal witnesses is way greater than many other, even larger, components of the revenue requirement.
Go ahead. Ask anyone what level of profit, return-on-equity, should be allowed a monopoly utility on a percent per-year basis.
Unlike responses to the same question on annual depreciation rate, no one will be off by an order of magnitude.
Some years ago, a newly elected state commissioner was on-the-record as saying to a rate-of-return witness:
“I don’t see how you can recommend that big a number, as I only get three percent on my savings account!”
Yes, you’ll get an answer from the average citizen of somewhere between the local bank’s passbook saving rate, current mortgage rates or, rarely, the rate charged by credit card companies. No one, as in the case of this commissioner, is hesitant to express an opinion.
Complicating things for all concerned has been the new divergence of utility business models, leading to fewer or a more difficult selection of comparable electric companies. No longer are U.S. electric utilities homogeneously vertically-integrated monopolies owning generation, transmission and distribution assets exclusively.
The upshot: If estimating return on equity was tough in the past, it’s even tougher now.
As a reference point, the AUS Monthly Utility Report for August 2016 showed the average earned return on equity for its sixteen electric companies at 8.1 percent. And the average authorized return on equity at 10.31 percent.
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Steve Mitnick, Editor-in-Chief, Public Utilities Fortnightly
E-mail me: mitnick@fortnightly.com
