Adjusting rates to cost of capital

Various methods are outlined for regulating the risk-rate of return status of public utilities in order to restore investor confidence. Equity capital is especially difficult and expensive to raise. Regulatory lag is blamed for much of the problem because of the delays inherent in the rate case procedure. An automatic adjustment mechanism that responds to cost-of-capital changes could make regulatory commissions more efficient and make sales more current, which would benefit customers and utilities alike. A basic goal is to make investments in utilities competitive with other business investments so that utilities can attract a fair share of available capital. Fuel-adjustment clauses are not felt to provide an appropriate response and, in fact, can make utilities more fuel-intensive; while a cost-of-capital adjustment would relate rates to the capital market status of a particular utility. (DCK)