June 27, 2014
Median authorized returns on equity (ROEs) continue to slowly decline for U.S. Utilities, with the long-term downward trend stabilizing at or near current levels, according to a Fitch Ratings report. Fitch does not believe this trend will reverse in the mid- to intermediate-term.
Fitch's analysis found that 2013 median authorized ROE fell to 10%, compared with a median ROE of 10.25% for 2012 and 10.17% for 2011. Fitch noted regional disparities in authorized ROEs. Median ROEs were highest for utilities serving the south, at 10.05%. Authorized ROEs continue to be lowest in the northeast, with a 9.6% median authorized ROE, with slightly higher figures for midwestern and western states.
Median authorized ROEs in 2013 were higher for investor-owned utilities (IOUs) at 10% and lower for electric and gas network utilities UDCs at 9.75%. Fitch believes higher ROEs for integrated utility companies (IUCs) reflect increased compensation for higher operating risk.
The spread between the median approved ROEs and 30-year U.S. Treasury rates has widened over time, increasing to about 590 basis points (bps) at the end of 2013, up by 150 bps from a spread of 440 bps in 1990. Fitch believes this increase reflects delays by regulators in incorporating changes in the 30-year U.S. Treasury rates into approved ROE figures.
Fitch also noted a decline in the intensity of general rate case (GRC) applications over 2008-2013. This trend could be attributable to a winding down of capex for some utilities, possibly linked to environmental expenditures. Many utilities have also been successful in implementing cost trackers and riders that have lowered regulatory lag and reduced the need for filing general rate cases.
The full report 'Fitch Updated Utility ROE Trends' is available at 'www.fitchratings.com.' Fitch's analysis is based on 179 rate determinations for utilities within Fitch's ratings portfolio spanning a 36-month period from 2011-13.
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