Independent Analysis for Complex Utility Decisions
Cost of Capital Analysis: Company Risk Assessment, Cost of Debt Analysis, Return on Equity Evaluation, and Capital Structure Study.
Utility decisions are rarely judged by the decision alone.
They are judged by the analysis behind it.
Rates, cost recovery mechanisms, capital investments, and Cost of Capital recommendations often face scrutiny from regulators, governing boards, customers, consumer advocates, investors, attorneys, and future utility leaders. The analysis supporting those decisions must be technically sound, and capable of withstanding questions that may continue for years.
Guernsey helps consumer advocates, regulatory agencies, attorneys, commissions, and governing boards evaluate complex utility issues through Cost of Service Studies, Rate Design Analysis, Cost of Capital Evaluations, Financial Modeling, Forecasting, and Expert Testimony.
Our Cost of Capital Expert Witness service delivers methodologically sound and economically justified support across all tenets of Rate Return Analysis — from company risk profile to consumer welfare impacts — ensuring a defensible foundation for your regulatory proceedings.
- Is the proposed utility rate of return just and reasonable?
- Does a utility’s proposed Cost of Capital reflect its actual risk?
- Are customers being asked to pay more than necessary?
- Does the evidence support the recommended Cost of Capital?
- Are risk mitigating regulatory adjustments reflected in the risk assessment?
- Can the analysis withstand regulatory, economic and financial scrutiny?
Cost Of Capital and Return on Equity Analysis
Cost of Capital, especially Return on Equity (ROE), remains one of the most debated issues in utility regulation.
Differences of only a few basis points in Cost of Capital or Rate of Return can affect customer costs, utility revenues, and investment decisions for years. Yet Cost of Capital recommendations often depend on assumptions regarding risk, peer group selection, beta estimates, growth expectations, capital market conditions, and financial methodologies, among others.
The debate is rarely about the final number. The debate is about the assumptions behind it.
Guernsey evaluates those assumptions using established financial theories and methodologies, market evidence, regulatory precedent, and published research. Our work helps decision-makers understand whether proposed returns appropriately reflect the risks faced by regulated utilities and the fair burden placed on utility customers.
Services include:
- Return on Equity Evaluations
- Cost of Debt Study
- Capital structure analysis
- Risk assessment and benchmarking
- Rebuttal and review of opposing testimony
- Regulatory proceeding support
- Expert Testimony
Guernsey offers independent analysis for regulatory matters in rate cases concerning electric, natural gas, water, and wastewater utilities.
Expert Witness Services
Complex utility proceedings often require more than analysis. They require experts who can explain economic and financial concepts clearly under scrutiny.
Members of Guernsey’s Analytical Team have provided testimony and analytical support before state commissions and FERC involving electric, natural gas, water, and wastewater utilities.
Our experts assist attorneys, commissions, consumer advocates, and public agencies through:
- Economic and financial analysis
- Expert reports
- Written testimony
- Discovery support
- Hearing preparation
Technical expertise matters.
The ability to communicate that expertise clearly and defend it under questioning matters just as much.
Dr. Zhen Zhu
Dr. Zhen Zhu serves as Guernsey’s lead Cost of Capital consultant and has extensive experience providing expert analysis and testimony in rate proceedings involving electric, natural gas, and water utilities. Over the course of his consulting career, he has advised state public utility commissions, consumer advocate agencies, attorney general offices, federal agencies, and other public-interest organizations on issues relating to return on equity (ROE), capital structure, cost of debt, and the overall weighted average cost of capital. His work spans every stage of the regulatory process, including discovery, testimony preparation, settlement evaluation, and hearing support.
Dr. Zhu has served as a Cost of Capital expert witness before numerous state regulatory commissions, and the Federal Energy Regulatory Commission (FERC). These engagements have involved evaluating complex capital market conditions, developing independent ROE recommendations, and critically assessing the methodologies employed by utility witnesses.
Dr. Zhu’s Cost of Capital analyses are grounded in modern financial theory, empirical capital market evidence, and regulatory precedent. His testimony also addresses broader regulatory issues affecting investor risk and customer costs, including capital structure, formula rates, multiyear rate plans, regulatory lag, affordability, and emerging utility investment trends.
In addition to his consulting practice, Dr. Zhu is a Professor of Economics with expertise in financial economics and energy markets. His academic research on energy markets, commodity pricing, and financial risk enhances the analytical rigor of his regulatory work. This combination of academic scholarship and practical regulatory experience enables him to provide independent, well-supported, and technically sound opinions that assist commissions and consumer advocates in determining fair and reasonable rates of return while protecting the long-term interests of utility customers.
Why Cost of Capital Is Different
Most disagreements involving rate of return begin long before anyone debates a specific recommendation.
They begin with assumptions.
- How should risk be measured?
- Which market evidence should be considered?
- What adjustments are appropriate?
- How much weight should be assigned to competing methodologies?
Research conducted by Dr. Zhu and his coauthors has examined utility risk, Return on Equity, Cost of Capital methodology, financial markets, and regulatory decision-making for nearly two decades.
That research informs our approach to evaluating assumptions, measuring risk, and understanding the implications of regulatory decisions.
Strong utility decisions depend on understanding the assumptions behind the analysis, not simply accepting the final recommendation.
- Linking Risk and ROE
- The Equivalent Risk Standard and Allowed ROEs in the Gas and Electric Utility Industries
- The Hamada Beta Adjustment and the Cost of Capital for the Regulated Utilities
- COVID-19, Utility Stock Risks and Return on Equity
Together, these publications examine how utility risk is measured, how Return on Equity recommendations are developed, and how changing market conditions influence regulatory decision-making.
Start with the Right Questions
Strong utility decisions rarely begin with a recommendation. They begin with a question.
Whether evaluating rates, cost recovery, Return on Equity, forecasting, or regulatory strategy, organizations benefit from understanding the assumptions driving the analysis and the evidence supporting the conclusions.
Guernsey helps clients ask better questions, evaluate complex utility issues, and develop analyses capable of withstanding scrutiny.
Start the ConversationFAQs
Return on Equity, or ROE, represents the return investors expect to earn for providing capital to a utility. Investor-owned utilities often seek ROEs that are comparable to investments with similar risks. Because ROE is part of a utility’s overall cost of capital, it can ultimately influence the rates customers pay.
Utilities rely on investor capital to maintain infrastructure, improve reliability, and meet future service needs. Regulators, consumer advocates, and utilities often debate ROE because it affects both a utility’s ability to attract capital and the costs ultimately borne by customers.
There is no single formula that determines a fair ROE. Regulators typically consider economic evidence, market conditions, risk, expert testimony, and cost-of-capital analyses. Different experts may reach different conclusions because they rely on different assumptions, methodologies, and interpretations of risk.
Experts often agree on broad principles but disagree on how risk should be measured, how historical information should be interpreted, and which analytical methods deserve the most weight. Small differences in assumptions can sometimes produce meaningful differences in recommended ROEs.
A cost-of-capital study evaluates the cost of financing a utility through debt and equity. These studies are commonly used in rate proceedings, regulatory filings, and other situations where decision-makers must evaluate the financial requirements of a utility.
The principle underlying many cost-of-capital analyses is that investments with similar risks should earn similar returns. Determining what constitutes comparable risk, however, is often one of the most challenging aspects of the analysis.
Decision-makers should understand the assumptions driving the analysis, the methods used, the treatment of risk, and whether competing approaches have been considered. Strong experts should be able to explain complex concepts in plain language and discuss the limitations of their analyses.
Independent expertise may be valuable when evaluating utility rate filings, reviewing competing testimony, assessing cost-of-capital recommendations, preparing expert testimony, or addressing complex regulatory economics questions that require specialized knowledge.
Relevant qualifications may include experience with utility regulation, cost-of-capital studies, expert testimony, regulatory proceedings, economic analysis, and published research on utility finance and regulatory economics.
Utility Regulatory Economics is the application of economic principles to questions involving utility regulation, rates, cost of capital, risk, financial performance, and regulatory decision-making. The field helps regulators, utilities, consumer advocates, and other stakeholders evaluate complex economic issues affecting utility service and customer costs.
Organizations hire utility regulatory economists when important decisions depend on understanding risk, cost of capital, utility rates, financial performance, or regulatory impacts.
Attorney General offices, consumer advocates, and residential utility consumer offices often retain utility regulatory economists to evaluate utility filings, review expert testimony, and provide independent analysis in regulatory proceedings. Public Utility Commissions and commission staff may seek economic expertise to better understand complex financial and regulatory issues affecting utilities and customers.
Investor-owned utilities, electric cooperatives, municipal utilities, and industrial customer groups may also engage utility regulatory economists when evaluating cost-of-capital questions, rate proposals, long-term financial planning, mergers and acquisitions, or other matters involving significant economic and regulatory considerations.
Attorneys frequently work with utility regulatory economists when preparing testimony, evaluating competing analyses, assessing damages, supporting litigation, or helping clients understand the economic implications of regulatory decisions.
While the specific issues vary, the underlying challenge is often the same: helping decision-makers understand complex economic questions, evaluate competing assumptions, and make informed decisions based on sound analysis.
