Power & Infrastructure · Regulated Utilities
Regulated Utilities Sector Primer
A 42-page primer plus Excel valuation model on regulated utility equity analysis: rate base, allowed and earned ROE, the EPS build, FFO/debt and P/E screening.
2026 Edition · data as of July 2026
- pages
- 42
- sections
- 15
- model sheets
- 13
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The full primer
£25 / ~$32
- 42 pages, 15 sections
- Worked examples and applied cases
- 2026 Edition, data as of July 2026
Excel model
Valuation template
£45 / ~$58
- 13 sheets (.xlsx)
- Runs the primer's worked valuations live
PDF + Excel model Best value
Both files together
£59 / ~$76
- The 42-page primer
- The 13-sheet Excel model
- £70 bought separately · £11 less
Complete Power & Infrastructure Library
All three Power & Infrastructure industries: three primers, three Excel models (Regulated Utilities, Renewables & IPPs, and Transport Infrastructure).
Inside the primer
The 15-section contents, a worked valuation page, and the Excel dashboard.
Contents
- 01 How Regulated Utilities Make Money
- 02 Listed Utility Types
- 03 The Capex and Rate-Case Ladder
- 04 Segments and Sub-Markets
- 05 Revenue Drivers: Generic Build
- 06 Cost Structure: Lag, O&M and Earned ROE
- 07 Valuation Frameworks
- 08 Worked Example: Free Cash Flow to Equity
- 09 Applied Cases: P/E Premium and Growth
- 10 Applied Cases: Credit and Payout
- 11 Applied Cases: Hybrids and Rate Cases
- 12 The Companies in This Primer
- 13 Key Metrics and Screening
- 14 Risks, Benchmarks and Case Study
- 15 Glossary and Cheat Sheet
Worked examples and applied cases · 42 pages · 15 sections · 2 worked archetypes
The Excel model
Educational material. This primer and its model are not investment advice or a recommendation to buy or sell any security, and they are not personalised. Worked valuations use illustrative calibrations, not fair-value estimates for any company.
A regulated utility earns what its regulator allows: a return on the equity share of its rate base, set in a rate case and held until the next one. Growth therefore comes from growing the rate base, and the two questions that decide the equity are how fast the base can grow and whether the balance sheet can fund it without issuing shares. A price-to-earnings premium is the market paying for the first; the FFO/debt ratio is the credit market policing the second.
Utility valuation benchmarks by rate-base growth
Utilities are ranked on how fast the rate base grows, and only once credit is shown not to bind. These are the primer's price-to-earnings bands against a peer median of 17x.
| Rate-base growth (a year) | P/E versus the peer median | On a 17x median | Condition |
|---|---|---|---|
| Below 7% | In line | 17x | Growth is not the differentiator |
| 7-9% | +1-2 points | 18-19x | Modest premium when credit permits |
| 9-11% | +2-4 points | 19-21x | Faster asset growth compounds EPS |
| Above 11% | +4-5 points | 21-22x (the screen caps at 22x) | Full premium only if FFO/debt is not binding |
Credit is the gate. The primer treats funds from operations to debt (FFO/debt) of 14-16% as comfortable and 14% as the floor where dilution risk starts, and it flags a plan that needs outside equity once its tightest year falls below 14.5%. Allowed returns in January-September 2025 rate cases clustered at a median of 9.70% against a 4.50% ten-year Treasury, and the worked cases use costs of equity of 9.0% and 8.5%. The bands rank peers. The valuation below shows why the value itself comes out lower.
Worked example: a utility valuation on free cash flow to equity
Take a hypothetical high-growth utility with a $60 billion rate base, a 50% equity ratio and a 10.3% allowed ROE, growing its rate base 11% a year. Allowed income is earned on the average rate base, and regulatory lag of about 12 months trims what is actually earned. The equity book has to grow as fast as the rate base, and that growth is paid for out of earnings.
| Step | Amount |
|---|---|
| Year-1 allowed net income (average rate base × 50% × 10.3%) | $3.26B |
| Year-1 earned net income, after lag | $3.10B |
| Less year-1 growth in the regulated equity book | -$3.30B |
| Year-1 free cash flow to equity | -$0.20B |
| PV of the five plan years at a 9.0% cost of equity | -$0.96B |
| PV of terminal value (2.5% growth from year 6) | +$39.43B |
| Equity value | $38.47B |
| Value per share (700M shares) | $54.96 |
| Implied P/E on year-1 allowed income; price to regulated equity book (P/RAB) | 11.8x; 1.28x |
Free cash flow to equity is negative in all five plan years. At 11% growth the equity book absorbs more than the utility earns, so the value sits in the terminal, once growth settles and the book stops eating the earnings. That is why the answer is 11.8x, well below the 21x the band would give an 11% grower: the band prices allowed earnings as if all of them were distributable, while the valuation first charges for the equity that funds the growth.
Run a steady compounder through the same engine, 9% growth at an 8.5% cost of equity, and it comes out higher, at 12.7x and 1.33x regulated equity book. The premium over book tracks the spread of earned return over the cost of equity, 1.52 points against 1.33, and growth only multiplies that spread. The primer prints the full five-year build and reconciles it to a residual-income check; the Excel model runs both cases from your own rate base.
Which utility valuation method fits which company
| Company type | Primary method | Check with | Why |
|---|---|---|---|
| Any regulated utility, for value | Free cash flow to equity at the cost of equity | Residual income; P/RAB | Charges for the equity the rate-base build absorbs |
| Pure-regulated large-cap | Rate-base growth against the P/E band | FFO/debt headroom | Earnings are the regulated build |
| Regulated-plus-growth hybrid | Split regulated EPS from the growth leg | Wholesale marks on the merchant leg | A group P/E blends unlike risks |
| High-growth repositioning | Payout and equity-issuance screen | Project prudence on large builds | Retained earnings have to fund the capex plan |
What the full primer adds
The primer builds those tools in order: how a regulated utility makes money, the listed company types, the capex and rate-case ladder, then the revenue build and the cost side with regulatory lag, operating costs and earned ROE. Two worked examples, a high-growth utility and a steady compounder, run free cash flow to equity (earned net income less the increase in the regulated equity book, discounted at the cost of equity) from first input to value per share. Applied cases follow on NextEra Energy, Duke Energy, Southern Company, Dominion Energy, American Electric Power and Sempra. Screening closes with rate-base growth, FFO/debt headroom, payout and the P/E premium read as a growth screen.
Free guides on the site cover the individual pieces, so you can revise one idea without reopening the PDF: rate base, allowed vs earned ROE, allowed ROE benchmarks, forward vs historical test years, the regulated EPS build, FFO/debt and the funding gate, FFO/debt benchmarks and P/E premiums and rate-base growth. Research profiles for NextEra, Duke, Southern, Dominion, AEP and Sempra run the same screens on filed results. The companion Excel model spans thirteen sheets, from two archetype tabs through the rate-base roll-forward, the FFO/debt headroom and funding screens to a live sensitivity grid, so swapping in your own utility rebuilds the valuation from the rate base up.
Sheets: Quick Start, Instructions, Assumptions, High-Growth Utility, Steady Compounder, Valuation Summary, Rate Base & ROE, FFO Debt Headroom, Funding Plan, Dividend & Payout, Jurisdiction ROE, Sensitivity, Dashboard.
Utility valuation: free guides
Utility valuation FAQ
- How do you value a regulated utility?
- Build regulated earnings as rate base times equity ratio times allowed ROE, trim them for regulatory lag, then subtract each year's growth in the regulated equity book. What is left is free cash flow to equity, discounted at a cost of equity built from the ten-year Treasury plus an issuer-specific premium, with a terminal value once growth settles. P/E bands are a screening cross-check.
- What P/E should a regulated utility trade on?
- The primer reads P/E against a peer median of 17x and adds points for rate-base growth: in line below 7%, +1-2 points at 7-9%, +2-4 points at 9-11% and +4-5 points above 11%, capped at 22x. The premium holds only when FFO/debt and allowed ROE are not binding. The primer's own free-cash-flow-to-equity valuation lands well below the band, because the band treats all allowed earnings as distributable.
- What FFO/debt ratio does a utility need?
- The primer treats 14-16% as comfortable headroom and 14% as the floor where dilution risk starts. A growth plan that needs outside equity and whose tightest year falls below 14.5% trips its issuance screen. Rating-agency scorecards are wider: the Moody's Baa guideline on the related cash-flow-to-debt measure spans 13-22%, so there is no single cutoff.
- What is a typical allowed ROE for a US utility?
- Authorised electric ROEs in January-September 2025 rate cases clustered at a median of 9.70%, with an average of 9.66%, against a 4.50% ten-year Treasury. Earned ROE trails allowed ROE when rate-base growth is fast, because regulatory lag of about 12 months delays the return on new plant.
- Does faster rate-base growth mean a higher utility valuation?
- Not on its own. Each extra point of growth is equity-funded in cash today, while the earnings it buys arrive later and discounted. In the primer's worked cases a 9% grower is worth more per unit of regulated equity than an 11% grower, 1.33x against 1.28x, because its earned return beats its cost of equity by a wider margin. A quarter-point on the cost of equity moves value more than two points of growth.
See this methodology applied to a real company:
NextEra Energy (NEE) →