Transmission Investment: Revisiting the Federal Energy Regulatory Commission’s Two-Step DCF Methodology for Calculating Allowed Returns on Equity
On behalf of the Edison Electric Institute, ScottMadden prepared a white paper reviewing the “Two-step” Discounted Cash Flow (DCF) model to set allowed Returns on Equity (ROE) for electric transmission investments, as adopted by the Federal Energy Regulatory Commission in Opinion No. 531. Despite the Commission’s goals of providing adequate returns to encourage transmission investment, the DCF approach used by the Commission tends to produce ROE estimates below other widely accepted alternative models and market indicators. The paper therefore recommends modifications to address some of the concerns with the Commission’s DCF approach.
The paper also suggests that the Commission benchmark DCF results against those of alternative ROE models to help ensure that electric transmission ROEs are just and reasonable and continue to encourage transmission infrastructure investment.
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