Mr. Winter: You are right, there are cross-currents. From a really big picture, investors are uncertain regarding the potential for the current 15% tax rate on dividends to rise in 2011. The Bush tax cuts are set to expire, and it appears as though the president and his administration support a 20% tax for those that make over 250,000 a year. However, if nothing gets passed, then it appears as though the rate will resort to pre-Bush tax cut days, which was the ordinary income rate. Interest rates for 30- and 10-year treasury yields have risen over the last several months, and there's concern that other stimulus spending is going to lead to some sort of inflation.
On a more utility-specific front, climate change legislation, which appeared as though it might pass in 2009, looks indefinitely stalled. However, most believe it is inevitable that some form of cap and trade, carbon restrictions, renewable energies portfolio standards, etc., will eventually become law. Yet nothing is imminent at a federal level. At the same time, the EPA is going to try to flex its muscle to restrict greenhouse gases regardless of actions in D.C. In addition, the weak economy eroded electric demand and demand growth in 2008 and 2009. The industrial base was especially hard-hit, with sales down by about 15% from peak levels. Uncertainty regarding an economic recovery and associated demand growth is of interest. And last but certainly not least, the number of rate cases recently decided or pending before state PUCs has increased dramatically as a result of higher capital spending to address global warming and the sales declines. These factors combined to reduce the earned returns on equity for most utilities.
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