The time-honored discounted cash flow method for determining appropriate utility returns falls short when interest rates are low. Inadequate ROEs ultimately increase cost of capital and wipe away...
Bargain or Bonanza
Is discounted cash flow (DCF) still a reliable tool for determining equity cost?
its part of the regulatory bargain by engaging in required new construction regardless of the ROE allowance imposes a corresponding FERC obligation. There must be assurance that allowed ROEs aren’t simply the artifact of a disembodied arithmetic or statistical formula, but must be the product of judgment that takes account of the financial and economic conditions that affect the capital markets, provide definition to investor risk perceptions, and determine a utility’s true common equity cost.
2. Editor’s Note: Recent Fortnightly articles also have addressed these topics. See “ Investor Sequester ,” by Bruce W. Radford, June 2013; and “ Transmission Policy in Flux ,” by David Raskin, May 2013.
3. Bluefield Waterworks & Improvement v. Pub. Serv. Comm’n of W. Va. (“Bluefield”), 262 U.S. 679 (1923); FPC v. Hope Natural Gas (“Hope”) , 320 U.S. 591 (1944). See also, Duquesne Light v. Barasch , 488 U.S. 299 (1989).
5. Remarks by the President on Climate Change , June 25, 2013.
6. The Brattle Group on behalf of the Edison Foundation, Transforming America’s Power Industry: The Investment Challenge 2010-2030, at 13 & 43 (Nov. 2008): “[C]apacity expansion would entail spending $697 billion over the 2010 to 2030 period … assuming a 1.9-percent annual inflation rate,” and “[t]he total distribution costs for the 2010 to 2030 period … are $582 billion in nominal terms.” WIRES, a non-profit association concerned with transmission development, in a petition to FERC regarding ROE policy reported a $300 billion transmission investment need for the 20-year period ending 2030. See Petition for Statement of Policy, Docket No. RM13-18-000 at p. 7 (filed June 26, 2013).
7. See Federal Reserve Press Release dated June 19, 2013 describing the policy action of the Federal Open Market Committee.
8. See, e.g. , Complaint Requesting Fast Track Processing of Seminole Electric Cooperative and Florida Municipal Power Agency, Docket No. EL13-63-000 (filed May 13, 2013), renewing complaint pending in Docket No. EL12-39-000 (filed Feb. 29, 2012).
13. Commissioner John R. Norris, Remarks at the 992nd Commission Meeting (March 21, 2013) (grouping ROEs with Order No. 1000 proceedings) (transcript available at: www.ferc.gov).