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Transmission Return On Equity

The Transmission Investment: Revisiting the Federal Energy Regulatory Commission’s Two-Step DCF Methodology for Calculating Allowed Returns on Equity

The white paper identifies shortcomings in the Federal Energy Regulatory Commission’s (Commission’s) approach for estimating just and reasonable returns on equity (ROE) for critical transmission investments. EEI’s member companies invested $20.8 billion in transmission infrastructure in 2016 and expect to invest an additional $90 billion through 2020 to make the transmission system more efficient, more dynamic, and more secure; and to continue to provide customers with the affordable, reliable, safe, and increasingly clean energy they need.
Despite the Commission’s goals of providing adequate returns to encourage transmission investment, the Discounted Cash Flow (DCF) methodology used by the Commission tends to yield estimates below other widely accepted alternative models and market indicators. Accordingly, the paper recommends modifications to amend some of the issues with the DCF methodology. 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. ​​​