On October 16, 2014, FERC issued two separate orders addressing the base return on equity (“ROE”) for (1) the New England transmission owners (“NETOs”) operating in ISO-New England Inc., and (2) certain transmission-owning members of the Midcontinent Independent System Operator, Inc. (“MISO TOs”). In the NETO order, FERC determined that the base ROE should be set at 10.57 percent. In the MISO TO order, FERC found that the complaint raises material issues of fact regarding whether the current base ROE of 12.38 percent remains just and reasonable, and therefore set the matter for hearing.
The NETO proceeding was initiated when a group of state utility regulators in New England filed a complaint with FERC alleging that, due to changing market conditions, the NETOs base ROE of 11.14 percent had become unjust and unreasonable. The matter was set for hearing and the presiding administrative law judge at FERC recommended that that the base ROE for the initial 15 month refund period – beginning one day after the complaint was filed (October 1, 2011) and ending on December 31, 2012 – should be set at 10.6 while the base ROE for the following prospective period should be 9.7 percent. In its order on Initial Decision, Opinion No. 531, FERC decided to adopt a new two-step discounted cash flow (“DCF”) methodology for electric utility ROEs that incorporated both short and long-term measures of growth in dividends, and tentatively set the prospective base ROE at 10.57% (see June 20, 2014 edition of the WER). However, due to the newly adopted two-step DCF methodology, parties were previously unable to litigate the long-term growth rate, and therefore FERC instituted a paper hearing that allowed parties to submit briefs on the issue.
In the present order, Opinion No. 531-A, FERC determined that 4.39 percent was the appropriate long-term growth rate, and therefore the NETO’s 11.14 percent base ROE was indeed unjust and unreasonable. Furthermore, FERC, consistent with the prospective ROE set in Opinion No. 531, set NETO’s base ROE at 10.57 percent with a total ROE including incentives not to exceed 11.74 percent.
Meanwhile, FERC’s order regarding certain MISO TOs’ ROE was in response to a complaint filed by a group of transmission customers (“Complainants”) that asserted that certain MISO TOs’ base ROE of 12.38 percent was unjust and unreasonable. FERC held in its order that the analysis by the Complainants established a prima facie case that certain MISO TOs’ ROE might be excessive, but that it did not have enough information to determine whether the existing MISO TOs’ ROE was unjust and unreasonable and therefore set the matter for hearing and settlement judge procedures. While FERC set the base ROE for hearing, it rejected all other challenges by the Complainants, including the complainant’s request to cap the equity component of capital structures, as well as the application of existing transmission incentive adders.