Dive Brief:
- Texas regulators are preparing to finalize a decision in Oncor Electric’s pending rate case, and on Thursday determined to set the utility’s return on equity at 9.7% and to maintain its capital structure at 57.5% debt and 42.5% equity.
- Staff of the Public Utility Commission of Texas will use those inputs to perform a final analysis to determine Oncor’s commission-approved revenue requirement. Commissioners will review the results of the final “number run” at a future open meeting and issue a final order, according to a PUCT spokesperson.
- A proposed decision recommended an ROE of 9.3%, but Oncor CEO Allen Nye told regulators that would result in a credit downgrade and force the utility to increase its debt load at a time of rising interest rates.
Dive Insight:
The higher ROE reflects Oncor’s work to minimize customer outages and reduce costs, as well as a challenging business environment — though the return also factors in lagging interconnection times, regulators said in Thursday’s discussion.
Nye addressed regulators before their discussion and warned that if the proposed decision “or anything like it is adopted, we will drop below the credit metrics necessary to maintain our current credit ratings.”
“We will face a downgrade,” Nye said. “We will have to increase our debt at a time when the markets are tightening and interest rates are rising, which is not good for us or our customers.”
A 9.7% ROE would be above the industry average of 9.5%, according to Fitch Ratings. The utility is currently authorized a 9.8% ROE.
PUCT Chair Peter Lake kicked off the Oncor rate discussion using a 9.4% ROE as the baseline, to reflect the returns approved for Centerpoint Energy and AEP in 2020. He then recommended subtracting 25-basis points from Oncor’s ROE due to “frustrations about interconnections” and the pace at which new resources are brought online.
“That being said, I would want to recognize Oncor’s outstanding safety and their performance on reliability and their outstanding cost per consumer,” Lake said. “They have put in a lot of work to ... minimize outages, to recover from storms quickly, and they've done a good job of minimizing the frequency and duration of outages.”
The 9.7% ROE also reflects a more challenging business climate and rising interest rates, commissioners said. They also indicated the commission would maintain Oncor’s debt-equity ratio at the same level set in its 2017 rate case.
Oncor expects to invest about $15 billion in its system over the next five years, Commissioner Lori Cobos noted, with two thirds of that going to expand transmission and distribution assets. The utility’s rate of return should reflect the uncertainty in that investment, she said.
“Their substantial capital investment plan comes with significant investor risk in a very ... volatile economic climate that's just riddled with inflation,” Cobos said. “And I know that projections show that [inflation] will reduce in the future, but I'm not convinced.”
“We need to make sure that [Oncor] is in a position moving forward to be able to execute,” said Commissioner Kathleen Jackson, “so I would favor the higher end” of ROEs.
Oncor said its proposed rate increase reflects an annual revenue increase of approximately $251 million, potentially meaning a 4.2% overall increase on bills for the average residential customer. The higher rates will support system growth and investments in reliability, the utility said.
“Since the last comprehensive rate review, Oncor has added nearly 10,000 miles of new and re-built transmission and distribution lines, nearly 355,000 new customer connections, and more than 200 new substations,” according to the utility’s web site.
