iCapital-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 requirements — is whether the DCF method is up to the ROE challenge in the current economic climate.
FERC has to decide whether rock bottom interest rates, high market prices for utility stocks, and low electric consumption growth prospects are distorting its traditional DCF analysis and causing that analysis to produce unrealistically low common equity costs. In so many words, if FERC were to adopt the low ROEs generated currently by the DCF model, would that result in missed opportunities for investment in needed new transmission facilities, and, as a consequence, produce short-term customer savings — but at the expense of retarding grid development and causing a long-term escalation in customer costs?
