Interest rates are a key factor in determining a utility's cost of equity and investors find value when returns exceed the cost of equity. We are pleased to announce the release of a technical brief, entitled The Effects of Rising Interest Rates on Electric Utility Stock Prices: Regulatory Considerations and Approaches, quantifying the impacts of rising interest rates on utility stock prices and discussing policy approaches state regulators could implement to mitigate negative financial impacts.
Through historical observations of periods of rising and falling interest rates and application of a pro forma financial tool, we identify the key drivers of utility stock valuations and estimate the degree to which those valuations might be affected by increasing interest rates. We also analyze the efficacy of responses by utility regulators to mitigate potential negative financial impacts.
We find that regulators have several possible approaches to mitigate a decline in value in an environment of increasing interest rates. The policy discussion also considers the regulator's obligation to consider consumer interests as well as those of investors and the tradeoffs of maintaining investor value with potential increases in customer costs when interest rates increase. Furthermore, the range of approaches reflects today's many different electric utility regulatory models and regulatory responses to a decline in investor value will likely fit within state-specific models.
Contact: Steve Kihm, email@example.com