Ratemaking Special Report
Ratemaking Special Report
Return on Equity:
Fixing an appropriate rate of return on equity (ROE) for electric utility investors marks a fundamental component of the typical cost-of-service rate case conducted across the nation by state public utility commissions (PUCs). The following survey demonstrates the results of such cases, as observed over the past year.
As usual, the debate over ROE centers on current trends in interest rates, plus changes in the overall pattern of industry risk-as affected by on-again, off-again efforts at utility industry restructuring. Consider a recent decision from Connecticut as a good example of the broad range of issues that arise. In a case setting rates for Connecticut Light & Power Co. (CL&P), the state PUC said it was unable to justify the company's then-current ROE allowance of 10.3 percent-last set in Connecticut in a 1998 rate order-since a number of changed circumstances had intervened. It lowered ROE to 9.85 percent-below the 10-plus level often awarded by other states for other utilities during the same period. It cited factors such as:
- Lower interest rates. (20-year T-Bond yields down from 5.5 to about 5.3 percent.)
- Improved financial strength. (Bond ratings up from Ba2 to A2 [Moody's], and from BBB- to A- [S&P]. Equity ratio up from 33.4 to 51.1 percent.)