The consequences of a flawed strategic choice unfold slowly, but they carry great weight. Consider IBM, which in 1980 chose to outsource to Intel the 16-bit processor needed for its entry into the personal computer market. The Intel chip, however, could not use the operating system that IBM had designed for its older 8-bit processors. And so the company had to outsource the operating system as well as the chip—to a startup company called Microsoft.

FERC proposed a new set of regulations, under the new section 219 of the Federal Power Act, explaining in broad outline how it might approve generous financial incentives for new investments in transmission—incentives once dubbed as “candy.” As of mid-January, the new NOPR had spawned more industry comment than just about any other FERC proposal in recent memory.

This overview of ratemaking and rate-design principles should ease the myriad tasks awaiting new rate analysts and attorneys, while provoking nostalgia among industry veterans still manning the ratemaking stations.

A material capital structure mismatch, which occurs frequently, can lead to material misestimates of the appropriate allowed return on equity, perhaps on the order of 2 percentage points. That is, a 9 percent estimate of the cost of equity can imply an allowed rate of return on equity of 11 percent.

Ratemaking Special Report

Regulatory Uncertainty:

In a joint survey conducted by Navigant Consulting and , utility executives identify the biggest challenge to their business.

No matter what position you subscribe to when characterizing the degree of competition in today's energy industry, it is clear that regulation continues to serve as a major influence on the business strategies and operations of the gas and electric distribution utilities in North America.

Commission Watch

Incentive regulation is not a cure-all for the continuing controversy over return on equity.

Regulated utilities are all too familiar with the contentious disputes that surround how the allowed return on equity (ROE) is set in a traditional cost-of-service setting. These disputes, which are reappearing as numerous utility rate-stabilization plans signed as part of deregulation come to an end, are likely to hinge, as always, on the riskiness of utility operating environments.

(November 15, 2003) 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).

Commission Watch

The industry requires new analytical tools to incorporate the realities of today's higher risk operating and investment environment into the equity allowance process.