Comparative Evaluation of the Predictive Risk Premium Model, the Discounted Cash Flow Model and the Capital Asset Pricing Model for Estimating the Cost of Common Equity

The regulatory process for setting a utility's allowed rate of return on common equity has generally relied upon the Gordon Discounted Cash Flow Model and Capital Asset Pricing Model. The Predictive Risk Premium Model, introduced a year ago, resolves several of the widely known problems with these models. Further testing since its introduction a year ago suggests that it produces stable results which are consistent over time.