A risk-adjusted approach for assessing factors that determine utilities' allowed returns on equity

Abstract

This paper demonstrates that, even after adjustment for risk, state utility commissions are sensitive to the return on equity requests of electric utilities. This supports the hypothesis that commissions and utilities implicitly compensate for other ratemaking factors, so as to arrive at a reasonable rate of return. Publicized differences in allowed returns have superficial informational content with regard to regulatory treatment. An implication is that commissions are more efficient in both the performance of their duties and in the allocation of resources than is usually assumed.