Glossary

Terms you should know related to utility cost of capital for regulatory purposes:

Beta

The variability of a particular company's stock price relative to the market as a whole

Business Risk

Risk associated with the operations of a business enterprise. Contrast with Financial Risk.

Capital

The means by which an enterprise is financed. See Common Equity and Debt.

Capital Structure

The mix of debt and equity used to finance or capitalize an enterprise. A more leveraged capital structure has a greater proporation of debt versus equity, and is therefore more risky due to the greater level of fixed payments payable to investors.

Common Equity

The riskiest form of capital. Equity return to the investor is variable based on dividends and capital appreciation.

Debt

The least risky form of capital. Debt return to the investor is in the form of (usually) fixed interest payments, which may not be suspended without going into default.

Financial Risk

Risk associated with the capital structure of the enterprise, as opposed to the business operations.

Interest Coverage

A measure of financial risk, pre-tax interest coverage is calculated by dividing annual interest expense into pre-tax income.

Rate Making

The process by which rates or prices are set by regulators so that companies which are so called "natural monopolies" are able to earn a fair return for investors who have provided the capital to finance the companies' assets or "rate base".

Risk Premium

The incremental return earned by an investor for assuming, for example, equity risk rather than debt risk.

ROE

ROE or Return on Equity is usually defined as net income to common stockholders divided by the average common equity balance outstanding during the reporting period, usually annualized for comparison purposes. Under ideal circumstances from the regulator's perspective, a utility's earned ROE should just equal its cost of equity, no more, no less.