GUERNSEY’s economists and financial analysts continue to provide expert witness testimony in cost of capital cases across many regulatory jurisdictions. Our analysts evaluate the effects of the current economic environment, regulatory and financial theory, cost of equity, cost of debt, return, capital structure, financial integrity, market structure, industry structure, business and financial risks, incentive regulation and deregulation policies on the total cost of capital.
GUERNSEY consultants provide complete rate case solutions including production of direct and rebuttal expert testimony, cross-examination and deposition analysis, discovery counsel, advice in preparing petitions, responses, briefs, and consultation with legal counsel and commission staff when necessary. GUERNSEY expert witnesses employ recognized cost of capital methodologies such as the discounted cash flow analysis, the capital asset pricing model, risk premium models, the arbitrage pricing model and comparable earnings evaluation.
Featured Article: Linking Risk and ROE - Financial-risk Coverage is Falling Short in Utility Returns (pdf, 182KB)
GUERNSEY Economists' Leading Edge Research |
Allowed ROEs during the economic crisis often fail the equal return for equivalent risk standard – During the financial crisis and recession the Federal Reserve Board has driven the short-term rates to historically low levels, but Baa corporate bond rates increased approximately 1.67%. Although investors are likely to view gas distribution and electric utility common stocks as competitive investments with corporate bonds, allowed ROEs increased only approximately 0.16% during the same period. The commonly cited Hope-Bluefield standard specifies that allowed ROEs should equal returns on investments of equivalent risk, but this differential between allowed ROEs and corporate growth rates suggests that the competitive level component often has not been met during the economic crisis. Moreover, by applying regression analysis of allowed ROEs during this period, we also statistically determined that the links between allowed ROEs of gas and electric utilities and risk measures—the other component of the Hope-Bluefield standard—were, at best, very weak. Download the PDF of the full article here.
|
Utility Indices Lag the Industrials in Recent Markets – Although discerning underlying causes to aggregate market movements may be difficult, the results may be very apparent. For whatever reasons, investors have recently shown strong preference for the industrial common equities, as measured by the S&P 500, of utility equities, as measured by the Dow Jones Utility Index. Since the low point in the common equities market in March 2009, the S&P 500 recovered and grew by over 59% to the year. As shown in the chart, the DJ Utility Index lagged the industrials with a total growth during the recovering market of just 27%. As noted, identifying the causes of investor perceptions are difficult, but surely the uncertainties of the earnings impacts of slowing industrial sales, evolving energy policies and continuing capital needs across the industry have the attention of investors.
Click the chart for a larger PDF version.
|
Regulatory responses to the current financial turmoil and investor risk – A characterization and review of some prescribed ROE responses to the 2008-09financial market crisis. We identified technical problems when analysts apply traditional analytical methods to data from the financial crisis period. (As an example of earlier work in this area, see Linking Risk and ROE.)
|
 |
Angie Salyer
405-416-8203
|
|
|
