Inflation-driven rate shocks: the problem and possible solutions

Journal Article · Thu Feb 17 04:00:00 EST 1983 · Public Util. Fortn.; (United States)

OSTI ID:6135878

Kolbe, A L

Among the many causes of the financial problems facing investor-owned electric utilities is the frequent failure of the regulatory process to result in realized rates of return that match the current cost of financial capital to utilities. One important reason for such failures is a fundamental difference in the way inflation affects the prices charged by regulated and unregulated companies. The basic problem is that the traditional rate base approaches (original cost and fair value as often practiced) lead to rate shocks for customers: changes in capital charges that greatly exceed the changes seen in competitive, unregulated industries. This guarantees repeated conflicts between current ratepayers and investors that regulators cannot resolve in a way that treats both sides fairly. When this problem is recognized, the pros and cons of the potential solutions to utilities' financial problems change and new solutions are suggested. This article assesses five potential solutions to the rate shock problem and finds that some of them seem to offer a practical way for regulated companies to live with a high and variable cost of equity capital. 8 figures, 1 table.

• Research Organization: Charles River Associates Inc., Boston, MA
• OSTI ID: 6135878
• Journal Information: Public Util. Fortn.; (United States), Journal Name: Public Util. Fortn.; (United States) Vol. 111:4; ISSN PUFNA
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
296000* -- Energy Planning & Policy-- Electric Power
32 ENERGY CONSERVATION, CONSUMPTION, AND UTILIZATION
320603 -- Energy Conservation
Consumption
& Utilization-- Municipalities & Community Systems-- Public Utilities-- (1980-)
COMPARATIVE EVALUATIONS
ECONOMIC IMPACT
ELECTRIC UTILITIES
INFLATION
PUBLIC UTILITIES
RATE STRUCTURE