We specialize in the primary capital recovery mechanisms involved in utility ratemaking: the authorized rate of return and depreciation rates. These mechanisms allow the utility to recover a “return on” and a “return of” its capital investments, respectively. In rate case applications, these issues often represent a substantial portion of a utility’s proposed revenue requirement.
Rate of Return Analysis
Determining a regulated utility’s authorized rate of return involves legal and technical analysis. While determining a “fair” rate of return cannot be solely reduced to an equation, it must begin with analysis of utility’s cost of equity capital. We use specialized financial models to develop reasonable estimates for the cost of equity, and we base our recommendation for the authorized rate of return on the utility’s actual costs, as well as other pertinent factors. In addition, a utility’s capital structure is a significant component of its overall capital costs. We use technical analysis to estimate a utility’s optimal capital structure in a regulated environment. After the technical analysis is complete, legal standards and other factors must be considered to determine a fair rate of return for the utility.
Depreciation Rate Analysis
Determining appropriate depreciation rates for utility asset accounts involves service life and net salvage estimates as part of an overall depreciation system. Service life estimates for grouped utility assets involves complex statistical analyses. We use actuarial techniques developed specifically for industrial property analysis to determine the historical retirement rate of grouped utility assets. After the historical mortality pattern is determined, we use Iowa curves and a variety of curve-fitting techniques to estimate the future retirement rate and average life for each utility account. Net salvage analysis includes the study of historical trends in the cost of removal and gross salvage of utility assets. For electric production accounts, we must also consider how to account for terminal decommissioning costs and interim retirement rates. Once service life and net salvage is estimated, we can develop proposed depreciation rates for each account.
