Decoupling and the Cost of Capital

The policy of decoupling in regulated ratemaking has been adopted in many state jurisdictions since 2007, but that adoption often was associated with an unresolved dispute over the effect of decoupling on the cost of capital. Because decoupling has the effect of reducing the volatility of the utility's revenues, many assumed that there must be a corresponding decrease in the COC. The basis for this assumption is that volatility is related to risk. If volatility is reduced, then the COC must automatically fall. Although no empirical evidence was provided, a minority of regulatory decisions reduced the company's allowed return on equity in conjunction with approving decoupling.