Unreasoned Decisionmaking: Ferc's Ever-Changing Methodology for Estimating the Return On Equity
The financial crisis that began in 2008 led to unprecedented actions by the U.S. Federal Reserve (Fed) to lower interest rates and stimulate the economy.
Synopsis
The financial crisis that began in 2008 led to unprecedented actions by the U.S. Federal Reserve (Fed) to lower interest rates and stimulate the economy. The Fed kept interest rates low through 2020, long after the financial crisis had ended. The low-interest-rate environment contributed to lower return on equity (ROE) estimates produced using the Federal Energy Regulatory Commission's (FERC) discounted cash flow (DCF) methodology. In response, FERC revised its DCF methodology and introduced several new approaches, including the Capital Asset Pricing Model (CAPM) and a Risk Premium (RP) model, effective with Opinion No. 531 in 2014. FERC continued to modify its methodologies in Opinion No. 551 and its progeny, culminating in Opinion No. 569-A in 2020. FERC recently reaffirmed those methodologies in Opinion No. 594. Nevertheless, none of these changes meet the standard for reasoned decision- making.
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