Capital structure: Rate-making developments

Journal Article · Fri Mar 01 04:00:00 EST 1991 · Public Utilities Fortnightly; (United States)

OSTI ID:6233808

Cross, P S

This article examines the regulator's use of various capital structures in setting rates of return. Capital structure can be defined as the ratio of debt and equity investment in the utility. Regulators must assume a particular capital structure in the process of setting a rate of return. The return allowance must be high enough to attract capital investment, yet not so high as to inflate rates and harm ratepayers. Tension arises in practice because equity can be both beneficial and harmful. Equity capital is more expensive than debt. Nevertheless, increased equity ratios in capital structure can improve the utility's credit rating and lower overall costs. Reliance on hypothetical capital structures is well established in public utility law. A review of the more recent utility rate orders reveals a number of specific types of capital structure adjustments: removal of nonutility investment from test-year capital structure; use of target or optical capital structures designed to minimize costs to ratepayers by balancing the effects of economical debt ratios against improvements in financial ratings associated with equity.; use of consolidated capital structures that the utility operates as a holding company subsidiary; special calculations to account for prudence review write-offs, interim rates, and new rate indexing schemes.

• OSTI ID: 6233808
• Journal Information: Public Utilities Fortnightly; (United States), Journal Name: Public Utilities Fortnightly; (United States) Vol. 127:5; ISSN 0033-3808; ISSN PUFNA
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
296000* -- Energy Planning & Policy-- Electric Power
BUSINESS
ELECTRIC UTILITIES
INVESTMENT
PLANNING
PRICING REGULATIONS
PUBLIC UTILITIES
RATE STRUCTURE
REGULATIONS