A Survey of Recent PUC Rulings
A Survey of Recent PUC Rulings
With most restructuring efforts at a standstill in the energy industry, state public utility commissions (PUCs) have tended to shift their attention back to the art and science of ratemaking. For electric and gas utilities, that has meant a renewed emphasis on the mechanics of setting a maximum allowed rate of return on common equity (ROE). In particular, in rate orders handed down during the past 12 months, state PUCs have focused both on declining interest rates and increased financial risks-and how those two factors should affect investor expectations .
The California PUC offers a prime example of the new challenges faced by PUCs across the country in setting ROE. The state PUC sets ROEs for all of its energy utilities in a single, annual generic proceeding, but, in the recent past, the obligatory work of restructuring and deregulation had thrown the annual process off track.
In general, the California PUC begins with a financial model, such as the discounted cash-flow (DCF) model, then tempers those results with a look at interest rates and financial risk. Interest rate trends offer a benchmark to determine whether ROE should move up or down from the last authorized rate. Risk factors help the PUC decide where to place ROE within the range of reasonableness indicated by the financial model.
Lately it appears that California is getting back on track with its ROE reviews. But past disruptions in the procedural schedule have put the state's investor-owned electric utilities on different timetables, introducing staggered start and end dates from company to company for studies used to estimate capital costs, risk, and financial indicators.