Risk Holds Sway

Interest rates not always controlling for return on equity. 

(November 2014) Our annual survey of rates of return on common equity authorized by state public utility commissions in recent rate cases for electric and gas retail distribution utilities.

Utility Capital in the Twenty-First Century

What FERC might learn from Thomas Piketty and his best-selling book on wealth and income.

Thomas Piketty’s best-selling book, “Capital in the Twenty-First Century,” shows why utility transmission owners should not enjoy excessive returns.

Anomaly or New Normal?

Regulators weigh interest rate climate and future Fed policy in setting allowed return on equity.

(November 2013) Consumer advocates argue for lower allowed utility returns, to reflect lower financing costs. Our rate case survey shows mixed regulatory responses.

Bargain or Bonanza

Is discounted cash flow (DCF) still a reliable tool for determining equity cost?

The time-honored discounted cash flow method for determining appropriate utility returns falls short when interest rates are low. Inadequate ROEs ultimately increase cost of capital and wipe away any temporary savings.

Investor Sequester

State complaints over FERC-granted equity returns could dry up funding for transmission expansion.

Perhaps sensing the weight of evidence allayed against them, transmission owners have thrown caution to the wind by openly and admittedly submitting an ROE analysis that doesn’t comport with FERC precedent.

How Much is Enough?

Utilities face rate pressure as financing costs hit rock bottom.

(November 2012) Fortnightly’s annual rate case survey is designed to give readers a look at rates of return on equity (ROE) awarded in state-level retail base rate proceedings for electric and natural gas utility companies. An examination of the reasoning and commentary contained in these orders provides a glimpse into economic factors considered by regulators as they seek to balance the interests of investors and consumers when authorizing utility ROEs.

Autopilot Error

Why similar U.S and Canadian risk profiles yield varied rate-making results.

Cost of capital is often a contentious issue in utility ratemaking. This is due, in part, to the inexact nature of the tools available to financial analysts and the considerable room for divergent opinions on key inputs to cost-of-capital estimation. Perhaps for this very reason, and to achieve regulatory efficiency, Canadian regulators widely adopted a formulaic approach to setting return on equity (ROE). However, an unusual degree of rancor has evolved north of the border as allowed ROEs in Canada, once at parity, have fallen near 200-basis points below their U.S. peers.

Crisis Capital

Volatile markets call for alternative financial models.

Should the power industry adapt its approach to capital markets in this environment? The answer, of course, is yes. Multiple frameworks are necessary to establish a power company’s or project’s current cost of capital, especially under volatile capital market conditions. The analyses reveal that in today’s capital markets, it is critical to balance or combine the alternative approaches to the cost of capital in order to develop a long-term view.

Transmission Incentive Overhaul

FERC’s ROE incentive adder policy sends the wrong signals.

FERC is offering incentive rates to entice transmission investment. But the authors identify serious flaws in emerging policy regarding return on equity (ROE) incentive adders. Determining whether and when ROE adders are appropriate requires a more deliberative approach.

2008 ROE Survey - Rates, Risks & Regulators

Economic uncertainties raise doubts about utility returns.

(November 2008) Economic uncertainties are raising doubts over utility returns. Will regulators feel the need to consider broader economic effects when engaging in ratemaking? While reporting on this year’s rate cases, the author provides insight on what to expect as stock prices fall.