Cost of Capital & Rate of Return
A utility’s requested rate of return is a critical component of its rate case filing and directly impacts customers’ bills. Synapse evaluates the utility’s requested returns and develops evidence-based recommendations that balance the utility’s need to raise capital and with the public interest.
Return on Equity
The utility’s “allowed” return on equity (ROE) is one of the most controversial topics in a rate case. It is easy to see why: it represents a large share of a customer’s bill and estimates of the value can widely diverge. A sound ROE recommendation should be based on a robust set of data, transparent assumptions, unbiased methodologies, and a careful assessment of the utility’s risks.
Synapse carefully reviews the utility’s ROE request including:
- The forecasted data used to estimate growth
- The basis for the assumed “equity risk premium” between bonds and stocks
- The appropriateness of the methods used
- The impact on the financial health of the utility
Based on this review, Synapse develops an independent recommendation for a reasonable ROE.
Capital Structure
The utility’s proposed mix of equity and debt is also a key factor that affects its overall cost of capital and customers’ bills. Synapse evaluates the utility’s proposed capital structure and, where warranted, proposes a more reasonable mix that better accounts for ratepayers’ interest.
