On November 18, 2010, FERC clarified through three different orders that when a transmission developer submits a proxy group for return on equity (“ROE”) proposals, the proxy group does not have to be located in the same geographic region as the developer. However, the geography is still important in determining comparable risk, but the Commission said geographic proximity is not the only relevant factor.
All developers that apply to FERC to recover the costs of a transmission project usually propose an ROE. That ROE encompasses the risks facing the developer. In a February 2008 order, the Commission approved an ROE, and in that order said it was appropriate to use proxy groups from the same region as an applicant with appropriate screening parameters in calculating an ROE with discounted cash flow. The February 2008 order said that by using a regional proxy group, FERC may allow for more upfront ROE determinations.
In three separate rehearing request orders, FERC stated that the Commission will not require proxy groups to only include those companies located within the same region as the applicant. Instead, the composition of the proxy group will be determined on a case-by-case basis. The Commission’s main concern is that the proxy group is comprised of entities that face similar business or financial risk.
Copies of the three FERC orders are available at www.ferc.gov or through the following links: Atlantic Path, Startrans IO, L.L.C., and The Nevada Hydro Company, Inc.