Hawaii: ROE

The Hawaii Public Utilities Commission has approved an $8.896 million rate increase for Hawaii Gas. The natural gas local distribution company had requested an increase in total revenues of $13,470,401. In reviewing an overall settlement presented by the parties to the case, the commission found that the stipulated return on common equity of 9.75%: (1) is within the 8.50% to 10.47% range of common equity percentages derived from Hawaii Gas’s application of the Multi-Stage Discounted Cash Flow, Discounted Cash Flow, Bond Yield Plus Risk Premium, and Capital Asset Pricing financial models; (2) closely approximates the 9.71% average authorized return on common equity for natural gas distribution companies in other jurisdictions during 2017 and 2018; and (3) is approximately 75 basis points lower than Hawaii Gas’ existing, commission-approved return of common equity of 10.5%. The commission also stated that the parties had pointed to the following market factors in support of their stipulated return on common equity: (1) rising interest rates during the near-term; (2) the increased yield on long-term government bonds; and (3) the 2017 Tax Act. Re The Gas Co., LLC dba Hawaii Gas, Docket No. 2017-0105, Decision & Order No. 35969, Dec. 21, 2018 (Hawaii P.U.C.).

Iowa: Executive Performance Pay Plan

While approving a settlement agreement authorizing a rate increase of $13.947 million for Interstate Power and Light Co., the Iowa Utilities Board found reasonable the disallowance of $1.357 million in test year expenses for management performance pay. The agreement also includes a stipulated rate of return on equity (ROE) of 9.6% that is part of a compromise regarding ROE and ratemaking capital structure. IPL had originally proposed to add the cost of the performance plan to rates, stating payments had been awarded each of the last eight years at levels exceeding 100% of target. The company acknowledged that the board had disallowed the recovery of similar performance plan costs in its last rate case but stated that it had restructured the performance pay plan to include operational metrics in addition to the financial metrics. According to the company in 2017, the financial metrics amounted to 60% of the funding, and the operational metrics accounted for 40% of the funding. The operational metrics, with assigned weights, include: diversity (5%), customer satisfaction (15%), environmental (10%), and reliability (10%). IPL argued that the operational metrics demonstrate a strong commitment to customer benefits and that performance pay may be awarded on the operational metrics, independent of financial performance. In approving the elimination of the expenditures, the commission concluded that sixty percent of the plan is premised on financial metrics, which benefit IPL’s stockholders, yet the stockholders do not assist in paying for the performance pay plan.

The agreement includes a hypothetical capital structure where the common equity ratio is 51% instead of the actual common equity ratio of approximately 49%. IPL had argued that due to the pressure on its credit rating caused by the federal Tax Cuts and Jobs Act of 2017 (TCJA), the board should approve a 53% common equity ratio. Supporting the ROE/capital structure compromise reflected in the settlement revenue figure, the board acknowledged that the impact of the TCJA on IPL’s cash flow presents a unique situation in which IPL’s credit rating could be negatively impacted, but it found that the accepted hypothetical capital structure represented a reasonable compromise when viewed in tandem with the agreed-to ROE of 9.6%, a figure slightly above the midpoint of the figures presented in the case. Re Interstate Power & Light Co., Docket No. RPU-2018-0002, Dec. 13, 2018 (Iowa U.B.).

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