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Author: | Bussa, R. G. Linke, C. M. Zumwalt, J. K. |
Title: | Rate of return - rate base issues in utility regulation. |
Journal: | Engineering Economist
1987 : SPRING, VOL. 32:3, p. 231-245 |
Index terms: | DISCOUNTED CASH FLOW RETURN ON INVESTMENT UTILITY THEORY ECONOMETRIC MODELS ECONOMIC ANALYSIS |
Language: | eng |
Abstract: | The attractiveness of dividend discount or discounted cash flow (DCF) model for security analysts. The DCF methodology has emerged as one of the primary methods used by regulatory bodies for determining investors' required return on equity for utilities. Despite the apparent simplicity, the cost of equity measure emerging from most DCF analyses must be adjusted before being applied to a test year rate base to determine a utility's required earnings. The omission of the necessary adjustments provides a partial explanation of why utlities tend not to earn either their allowed or their required returns. A recent FERC case is used to demonstrate the impact of the incorrect implementation of DCF method. |
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