FERC to use GDP to Estimate Equity Return

Fortnightly Magazine - August 1997
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Through two orders issued on June 11, the Federal Energy Regulatory Commission has set policy on return on equity for interstate natural gas pipelines (em specifically, the component of long-term dividend growth in the discounted cash flow model.

In both cases, the FERC applied the long-run growth rate of the economy, as measured by the U.S. gross domestic product. (See, Re Northwest Pipeline Corp. Opinion No. 396-B, Docket Nos. RP93-5-025 and RP93-96-005; Re Williston Basin Interstate Pipeline Co., Docket Nos. RP92-163-007, et al.)

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With these two rulings, the FERC said its method to determine rate of return has reached maturity, and that it intends to use the approach in future cases. (The DCF method is based on the premise that a stock is worth the present values of its future cash flows, discounted at a market rate commensurate with the stock's risk.)

The FERC noted that a perfect method does not exist for determining the long-term growth figure for a particular pipeline or the industry overall. Linking with GDP made the best fit, because as companies reach maturity over the long term, their growth slows. As the rate slows, it will approach that of the economy as a whole, the Commission said.

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