On November 2, 2022, FERC denied a complaint brought by the Iowa Coalition for Affordable Transmission (“ICAT”) alleging that ITC Midwest, LLC’s (“ITC Midwest”) capital structure, with a targeted 60%-40% equity-to-debt ratio, is unjust and unreasonable. FERC found that ICAT failed to demonstrate that ITC Midwest’s use of its actual capital structure to determine its equity ratio is unjust and unreasonable and that ICAT’s reliance on prior FERC precedent was misplaced. Given these findings, FERC declined to address ICAT’s arguments for a 53% equity ratio.
ICAT originally filed its complaint on May 10, 2022. As noted in its order, the Commission uses a three-prong test to determine whether a regulated operating company may use its own capital structure for rate purposes or whether it must use the capital structure of its parent or a hypothetical proxy. The three prongs are met if the company: (1) issues its own debt without guarantees, (2) has its own bond rating, and (3) has a capital structure within the range of capital structures approved by FERC.
ICAT argued that several circumstances have changed since FERC accepted ITC Midwest’s current capital structure in 2007, such that ITC Midwest now fails all three prongs of the test. As to the first prong, ICAT argued that ITC Midwest’s debt is effectively guaranteed by its parent companies because all its officers are shared with its parent; it lacks management-level employees; and it relies heavily on its parent for debt placement. As to the second prong, ICAT argued that ITC Midwest does not have its own credit rating separate from its parent companies because credit rating agencies view ITC Midwest’s credit as significantly influenced by its parent companies. Lastly, ICAT argued that ITC Midwest fails the third prong because, compared to comparable companies used by FERC in recent cases, its capital structure is overly weighted toward equity.
FERC denied ICAT’s complaint, finding the arguments unpersuasive. Regarding the first prong, FERC held that ITC Midwest’s reliance on its parent companies’ management-level employees does not demonstrate that its parent companies guarantee its debt. FERC further noted that “significant, financial, operational, and managerial ties” between corporate subsidiaries and their parents “do not preclude using the subsidiary’s actual capital structure.” FERC similarly found ICAT’s second prong analysis lacking because, according to FERC, even where credit rating agencies assign a subsidiary and parent the same credit rating, the “mere existence of financial connections” between parents and subsidiaries does not, alone, preclude the use of the company’s actual capital structure. Finally, FERC found that it would be illogical to conclude that ITC Midwest’s equity ratio fails the third prong as being outside the range of previously approved capital structures. FERC pointed to its 2007 order which approved ITC Midwest’s capital structure, and found that an equity ratio of 60% was not unusually high. FERC also rejected ICAT’s arguments that ITC Midwest’s equity ratio is unjust and unreasonable because it differs from the mean and median of three hypothetical proxy groups it studied. FERC held that ICAT failed to cite any precedent that would constrain the just and reasonable capital structure to the mean or median of proxy groups and noted that Commission policy is instead to analyze the company’s equity ratio to a range of previously approved equity ratios.
You can find a copy of the order here.