Executive Summary – Return on Equity and Financial Integrity: Sustaining Investment, Reliability, and Affordability
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Executive Summary
This paper, prepared by Concentric Energy Advisors, Inc., examines the role of return on equity (ROE) in utility regulation and, in particular, the relationship between authorized ROEs, customer bills and the cost of providing service, and utilities’ ability to attract the capital needed to provide safe and reliable service.
The U.S. regulatory model has enabled electric utilities to finance capital-intensive infrastructure with reasonably priced investor capital while protecting customers through comprehensive regulatory oversight. That framework is increasingly important as utilities undertake a major cycle of investment to meet growing electricity demand, strengthen reliability and resilience, connect new customers, and replace aging infrastructure. Maintaining utilities’ ability to attract capital on reasonable terms will help ensure that this investment can be made efficiently and at the lowest reasonable long-term cost to customers.
The Executive Summary outlines the paper’s four principal conclusions:
- Outside investment is critical for regulated investor-owned utilities to meet essential public needs.
- ROE represents a relatively small component of the customer bill and should be considered in the context of the broader cost of providing electric service.
- Utility returns on equity are among the lowest compared to other industries.
- Regulated utilities’ ability to attract investor capital is critical for lower customer rates.
As highlighted in the full paper, a utility’s ability to attract capital on reasonable terms is fundamental to keeping customer rates affordable over the long term. Policy proposals to materially lower ROEs, substitute untested methodologies, or require substantially more debt financing risk weakening credit ratings, raising financing costs, and ultimately increasing costs for customers.
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All views expressed by the authors are solely the authors’ current views and do not reflect the views of Concentric Energy Advisors, Inc., its affiliates, subsidiaries, related companies, or clients. The authors’ views are based upon information the authors consider reliable at the time of publication. However, neither Concentric Energy Advisors, Inc., nor its affiliates, subsidiaries, and related companies warrant the information’s completeness or accuracy, and it should not be relied upon as such.