Determining the Required Return on Equity (ROE) Value for Regulated Electric Utilities: Challenges and Opportunities for Designing Regulatory Decision Support Tools
Abstract
Public utility commissions (PUCs) across the country face challenging decisions as
regulated electric utilities adapt to the opportunities and risks within the new energy
landscape. The natural gas boom, the need for replacement of aging infrastructure,
and the threat of potential environmental regulations have brought the energy future
of the United States to a crossroads. Consequently, PUCs have seen an increase in
the number of rate cases filed by electric utilities to recover capital and operating
costs of new and existing electric generation infrastructure.
In general, rates are approved or adjusted based on a “cost-plus method,” which is
comprised of a utility’s operating costs and capital investments plus a risk-adjusted
profit margin, also referred to as the return on equity (ROE). Determining the required
ROE for an electric utility is the most contentious and difficult component of a rate
case due to its highly subjective and variable inputs. PUCs are responsible to approve
an ROE that corresponds to a utility’s level of risk, so that it can attract the capital
needed to ensure safe and reliable service at reasonable costs for consumers. As utilities
and consumer advocates present arguments for different ROE values, PUC decision making
becomes extremely challenging. This study analyzes the major challenges in estimating
ROEs through a case study of the Duke Energy Carolinas rate cases from February 2013
and July 2011. This analysis identifies the objective and subjective components of
a required ROE determination and highlights the need for setting standards and developing
decision support tools to enhance the transparency and efficiency of PUCs decision
making process regarding this contentious issue.
Type
Master's projectSubject
Duke Energy CarolinasUtility Ratemaking
Public Utility Commission
Return on Equity
Electric Utility Regulation
Rate of Return
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https://hdl.handle.net/10161/6863Citation
Ketchum, Whitney; & Kim, Jenny (2013). Determining the Required Return on Equity (ROE) Value for Regulated Electric Utilities:
Challenges and Opportunities for Designing Regulatory Decision Support Tools. Master's project, Duke University. Retrieved from https://hdl.handle.net/10161/6863.Collections
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