Incorporating a Time Horizon in Rate-of-Return Estimations: Discounted Cash Flow Model in Electric Transmission Rate Cases

Abstract

Electric transmission and other rate cases use a form of the discounted cash flow model with a single long-term growth rate to estimate rates of return on equity. It cannot incorporate information about the appropriate time horizon for which analysts’ estimates of earnings growth have predictive powers. Only a non-constant growth model can explicitly recognize the importance of the time horizon in an ROE calculation.