State regulators go with the [open quotes]flow[close quotes]

Journal Article · Tue Mar 01 04:00:00 EST 1994 · Fortnightly; (United States)

OSTI ID:7169597

Cross, P S

Regulators must allow utilities to earn enough profit to attract capital. And because utilities are capital intensive, the issue of the appropriate allowance for return on common equity (ROE) is both vital and contentious. In the past, debate has focused primarily on technical questions involving the appropriate values for dividend yield and growth rate under the discounted cash flow (DCF) analysis that most regulators use to set the ROE rate component. A review of base-rate rulings at the state level over the past year, however, finds more and more utilities arguing that the DCF method itself is irreparably flawed. For example, Dr. William Avera, a utility witness in a recent Public Service Company of Colorado rate case, said that current capital markets are distorted as a result of the Federal Reserve Bank's attempts to ignite economic recovery by lowering short-term interest rates. He concluded that the DCF does not provide acceptable cost-of-equity estimates under the current economic conditions, because many of the indicated rates are not substantially higher than the yields on less risky capital investments, such as utility bonds. Dr. Avera also contended that DCF-calculated equity rates did not account for the additional market-structure risk that results from a utility's heavy reliance on purchased power as opposed to other resource options.

• OSTI ID: 7169597
• Journal Information: Fortnightly; (United States), Journal Name: Fortnightly; (United States) Vol. 132:5; ISSN FRTNE8
• 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-)
CAPITALIZED COST
COST
ELECTRIC UTILITIES
PRICING REGULATIONS
PROFITS
PUBLIC UTILITIES
REGULATIONS
STATE GOVERNMENT