By: James Coyne, Senior Vice President; Carrie O’Neill, Assistant Vice President; and Peter Hoegler, Senior Analyst

Investor-owned utility (“IOU”) valuations have increased over the past decade. As measured in the context of merger and acquisition (“M&A”) transactions, price-to-earnings ratios increased from 2010 through 2019 with an average of 25x and a median of 21x. Acquisition premiums over the same time period averaged 28.1% with a median of 25.6%. Excluding the economic downturn years of 2007–2009, there is a clear upward trend, and some industry observers and analysts have questioned whether utilities are overvalued.

By: Josh Nowak, Assistant Vice President

The Federal Energy Regulatory Commission (FERC) recently issued an Opinion which represents its latest iteration in its evolving methodology to determine just and reasonable returns on equity (ROE).  Opinion No. 569-A, issued on May 21, 2020, was a response to requests for rehearing on Opinion No. 569 in the Midcontinent Independent System Operator (MISO) proceeding.  In this decision, several changes were made to the methodology previously adopted in Opinion No. 569.

The methodology established in Opinion No. 569-A relies on an equal weighting of the Discounted Cash Flow (DCF) model, Capital Asset Pricing Model (CAPM), and Risk Premium model, with a detailed account of the source and calculation of each model input. Further, the calculation of both the range of presumptively just and reasonable ROEs, and the just and reasonable ROE determined in this case, relies on a rigid proxy group selection and averaging convention.