Of the eight criteria Wall Street firms claim to use to measure the regulatory climate for public utilities, only two—the allowed rate of return on equity and the inclusion of construction work in progress in the rate base—are statistically significant. The higher the allowed return on equity, the higher the utility’s realized return, hence the higher the value of its stock. It is thus not surprising that public utility commissions are perceived as more favorable, the higher the rate of return on equity they allow.
Use of the construction work in progress method of accounting allows the utility to earn an immediate return on its investment. Under the alternative approach to accounting for construction, the utility accrues an allowance during the construction period that can be earned only when the plant becomes operational. The construction work in progress method improves the utility’s cash flow over the short term—a result investors obviously view with favor.