Quick Take: Does this seem right to you? Utilities are being asked to do much more. Modernize the grid. Make the system more resilient to storms and disasters. Vastly improve the customer experience. Integrate renewables and distributed generation. And to thank them for standing strong during this period of turmoil regulators are... cutting their pay. Yes, I understand that utility returns typically track interest rates, which are very low. Even so, it seems to me that utilities deserve some "combat pay" for all the extra effort and risk they are assuming in today's turbulent times. I'll be interested to read your comments to see if you agree. â€“ Jesse Berst
Utilities pour massive amounts of capital into building infrastructure. In exchange for taking that risk and responsibility, they get a guaranteed rate of return. But the Wall Street Journal reports that regulators throughout the United States are reducing that return. And the worst is still to come. "I don't think we've hit bottom yet," predicts Lillian Federico, president of Regulatory Research Associates.
As a result, the spread between what utilities pay for capital (their financing costs) and what they are allowed to get in return is the widest it has been in the last 10 years, according to Deutsche Bank Securities.
The fractional declines in the return on equity that regulators are granting may seem small, but David Parcell, president of Technical Associates Inc. told the WSJ that the changes can move profits by millions of dollars. Parcell's firm is a research company that specializes in utility finances.
Read the WSJ article here and use the TalkBack comment form below to tell us if you think this trend seems fair and appropriate.
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Jesse Berst is the founder and chief analyst of Smart Grid News.com, the industry's oldest and largest smart grid site. A frequent keynoter at industry events in the U.S. and abroad, he also serves on advisory committees for Pacific Northwest National Laboratory and the Institute for Electric Efficiency. He often provides strategic consulting to large corporations and venture-backed startups. He is a member of the advisory boards of GridGlo and Calico Energy Services.