They see leasing and dark fiber as "no-risk" ventures, with more upside potential.
Few seem ready to predict when demand might wane for rights-of-way for long-haul telecommunications....
FERC has adopted a DCF model with a two-stage growth factor, claiming the single-stage model produced unreliable results.
For example, consider this statement made by the FERC in Opinion No. 396, issued in May 1995:
"In Ozark, however, [we] found that a projection limited to five years, with no evidence of what is anticipated beyond that point, is not consistent with the DCF model and cannot be relied on in a DCF analysis."8
In short, the method relied upon by the authors to determine ROE for a "pure play" generating company (em one that is 115 percent of the FERC generic benchmark ROE, as described in Ocean States I & II (em is based upon 1) old precedent, 2) a generic benchmark approach later abandoned by the FERC, and 3) a DCF model with a single-stage growth factor that the FERC has since found unreliable.
Adding Up the Evidence
Undoubtedly, it may prove desirable to unbundle ROE to distinguish the difference in business risk between electric generation and T&D. Generation may carry a higher business risk than T&D.
Nevertheless, the authors have failed to provide any reliable quantification of whatever, if any, is the ROE differential between electric generation and electric T&D. Indeed, it appears the authors have proved, based upon beta, that the market believes competition imposes a smaller business risk than does traditional, rate-base regulation, when the ROE differentials between different types of telephone carriers and different types of natural gas companies are used as a proxy for ROE differential between T&D and generation. The only other conclusion that can be reached is either that beta is flawed, or the market is not efficient.
Moreover, the quantification offered by the authors, relying as it does on past FERC decisions, is supported by outdated and abandoned methods. Finally, even if the quantifications offered by the authors were correct, they offered no clear proof that ROE investment risk differentials between different types of telephone and natural gas companies represent the ROE business risk differential between electric generation and T&D.
The authors ask the question, "Rate Unbundling: Are We There Yet?" Based on their evidence, the answer is, "Not by a long shot." t
Joseph F. Brennan is chairman of the board of AUS Consultants, headquartered in Moorestown, NJ. He has testified on the subject of rate of return in more than 400 utility cases over the past 30 years. J. Robert Malko, Ph.D., is a professor of finance at Utah State University, in Logan, and an associate of AUS Consultants. He is the former chief economist of the Wisconsin Public Service Commission. Messrs. Brennan and Malko gratefully acknowledge assistance by Frank J. Hanley, president of AUS Consultants, in the preparation of this article.
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