Different approach to the fair rate of return

The author presents his thoughts on an approach to the question of what rate of return will enable a utility to raise needed capital at reasonable cost. This approach looks primarily at the utility's credit rather than its common stock position, and rests upon the premise that if the credit factors are such as to permit borrowing at the optimum rate, the common stock position can be financed on a satisfactory basis. His studies indicate that when the credit parameters are those which lead to the optimum borrowing cost, the cost of equity is also in the lowest range; hence, the overall cost of capital is the minimum that current market conditions will permit, and the required rate of return is the lowest that can be achieved under the capital attraction doctrine. Thus, strong credit parameters lead at once to better financial health of the utility and to a lower cost to the ratepayer. Poor credit places an unnecessary burden on the consumer because it results in an unnecessarily high interest cost, a cost which is borne directly by the ratepayer via the rate of return. (MCW)