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Title: The Effects of Rising Interest Rates on Electric Utility Stock Prices: Regulatory Considerations and Approaches

Abstract

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.

Authors:
 [1];  [2];  [2]
  1. Seventhwave, Madison, WI (United States)
  2. Lawrence Berkeley National Lab. (LBNL), Berkeley, CA (United States)
Publication Date:
Research Org.:
Lawrence Berkeley National Lab. (LBNL), Berkeley, CA (United States)
Sponsoring Org.:
USDOE
OSTI Identifier:
1372673
Report Number(s):
LBNL-1003952
ir:1003952
Resource Type:
Technical Report
Country of Publication:
United States
Language:
English
Subject:
29 ENERGY PLANNING, POLICY, AND ECONOMY

Citation Formats

Kihm, Steve, Satchwell, Andrew, and Cappers, Peter. The Effects of Rising Interest Rates on Electric Utility Stock Prices: Regulatory Considerations and Approaches. United States: N. p., 2017. Web. doi:10.2172/1372673.
Kihm, Steve, Satchwell, Andrew, & Cappers, Peter. The Effects of Rising Interest Rates on Electric Utility Stock Prices: Regulatory Considerations and Approaches. United States. doi:10.2172/1372673.
Kihm, Steve, Satchwell, Andrew, and Cappers, Peter. Wed . "The Effects of Rising Interest Rates on Electric Utility Stock Prices: Regulatory Considerations and Approaches". United States. doi:10.2172/1372673. https://www.osti.gov/servlets/purl/1372673.
@article{osti_1372673,
title = {The Effects of Rising Interest Rates on Electric Utility Stock Prices: Regulatory Considerations and Approaches},
author = {Kihm, Steve and Satchwell, Andrew and Cappers, Peter},
abstractNote = {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.},
doi = {10.2172/1372673},
journal = {},
number = ,
volume = ,
place = {United States},
year = {Wed Jul 26 00:00:00 EDT 2017},
month = {Wed Jul 26 00:00:00 EDT 2017}
}

Technical Report:

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