The Effects of Rising Interest Rates on Electric Utility Stock Prices: Regulatory Considerations and Approaches

This technical brief identifies conditions under which utility regulators should consider implementing policy approaches that seek to mitigate negative outcomes due to an increase in interest rates. 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. 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.