The Effects of Rising Interest Rates on Electric Utility Stock Prices: Regulatory Considerations and Approaches
- Seventhwave, Madison, WI (United States)
- Lawrence Berkeley National Lab. (LBNL), Berkeley, CA (United States)
This technical brief identifies conditions under which utility regulators should consider implementing policy approaches that seek to mitigate negative outcomes due to an increase in interest rates. Interest rates are a key factor in determining a utility’s cost of equity and investors find value when returns exceed the cost of equity. Through historical observations of periods of rising and falling interest rates and application of a pro forma financial tool, we identify the key drivers of utility stock valuations and estimate the degree to which those valuations might be affected by increasing interest rates.3 We also analyze the efficacy of responses by utility regulators to mitigate potential negative financial impacts. We find that regulators have several possible approaches to mitigate a decline in value in an environment of increasing interest rates, though regulators must weigh the tradeoffs of improving investor value with potential increases in customer costs. Furthermore, the range of approaches reflects today’s many different electric utility regulatory models and regulatory responses to a decline in investor value will fit within state-specific models.
- Research Organization:
- Lawrence Berkeley National Laboratory (LBNL), Berkeley, CA (United States)
- Sponsoring Organization:
- USDOE
- OSTI ID:
- 1372673
- Report Number(s):
- LBNL--1003952; ir:1003952
- Country of Publication:
- United States
- Language:
- English
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