FERC's rate-of-return approach flawed

✍ Scribed by Smead, Richard G.

• Publisher: John Wiley and Sons
• Year: 2007
• Weight: 240 KB
• Volume: 13
• Category: Article
• ISSN: 0743-5665
• DOI: 10.1002/gas.3410130906

✦ Synopsis

FERC's Rate-of-Return Approach Flawed

n this column, I recently started addressing 1 the Commission's current methodology for setting pipeline rates of return. I noted that there was strong concern voiced by industry financial analysts. Accordingly, I tried to answer the question as to whether there was some disconnect between the long-term analysis done by the Commission and the real expectations of investors. Ultimately, the problem seems to lie in the use of the long-term gas-revenue-growth forecasts published by DRI/McGraw-Hill. The criticism is not of the forecasts themselves, but rather of the use to which they are put by the Commission. The forecasts seriously dilute the assessment of investor requirements that are supposed to be yielded by the discounted cash flow (DCF) model used at the Commission.

How significant is the dilution caused by averaging the DRI-derived growth rate with analysts' projections reported by the Institutional Brokerage Estimate System (IBES)? The dilution is very significant.