Utility Return on Equity and the Regulatory Risk Premium Approach

Abstract

The return on equity for a regulated utility is decided by state utility commissions and the FERC on a national level. One approach often considered by experts is the Risk Premium Methodology that is based on a comparison of historical allowed rates of return on equity from decided rate cases, as compared to various sources of debt capital and their corresponding costs.

This paper examines this approach and presents its strengths and weaknesses as an indicator of a regulated utility's cost of equity capital.

Keywords: Regulated, Utility, ROE, Return, Equity, Rates