Is discounted cash flow (DCF) still a reliable tool for determining equity cost?
Mr. Gentile is a partner and Ms. Berry is counsel at Schiff Hardin LLP. This article represents the authors’ views and not necessarily those of any Schiff Hardin client or of other Schiff Hardin attorneys.
Capital-hungry electric utilities depend on return on equity (ROE) to appropriately compensate existing equity investors and satisfy new equity investment requirements, and look to the Federal Energy Regulatory Commission (FERC), which has extensive transmission jurisdiction, for protection of transmission ROEs. FERC has used discounted cash flow (DCF) analysis to determine ROEs for many years, but the $54 billion question – EEI’s estimate of near-term transmission investment requirements1 – is whether the DCF method is up to the ROE challenge in the current economic climate.