In Docket Nos. EL21-66 and ER21-1647, FERC issued an order on rehearing dated March 24, 2022 which denied the NY Transmission Owners’ (NYTO) request to self-fund system Upgrades associated with interconnections and charge interconnection customers a revenue requirement over time that includes a return component. The NYTOs asserted in these cases that the existing funding mechanism is unjust and unreasonable because it does not allow transmission owners to recover a reasonable rate of return to compensate them for the risks and costs associated with owning, operating, and maintaining the System Upgrades. The NYTOs asked FERC to direct NYISO to amend the OATT and Market Administration and Control Area Services Tariff (collectively, Tariffs) to allow the NYTOs to provide initial funding for System Upgrades caused by generator interconnections and charge the interconnection customer to recover a return on and of this cost. In an earlier order, FERC found that the NYTOs did not meet their initial burden under section 206 of the FPA to demonstrate that the existing funding mechanism is unjust, unreasonable, unduly discriminatory, or preferential and therefore did not reach the question of whether the NYTOs’ proposed replacement rate, TO Initial Funding, is just, reasonable, and not unduly discriminatory or preferential. FERC explained that: (1) the precedent cited by the NYTOs – Bluefield Water Works & Improvement Co. v. Public Service Commission, FPC v. Hope Natural Gas Co., and Ameren Services Co. v. FERC – does not require a change to NYISO’s existing funding mechanism for System Upgrades; and (2) the NYTOs had not presented sufficient evidence to show that the existing funding mechanism results in the NYTOs facing uncompensated risks and costs associated with the System Upgrades that force the NYTOs to operate segments of their business on a non-profit basis or prevent the NYTOs from attracting needed capital. FERC affirmed this finding in its rehearing order.
On March 17, 2022, FERC issued an Order in Docker ER16-2320 granting Pacific Gas and Electric (PGE) a return on equity (ROE) of 9.26% for the period March 2017 to February 2018 on its transmission investment. On October 15, 2020, FERC issued an order addressing most exceptions to the October 1, 2018 Initial Decision regarding whether the rates proposed by PGE in its eighteenth revised transmission owner tariff (TO18) filing were just and reasonable and not unduly discriminatory or preferential. The Commission also established a paper hearing on the limited issue of whether and how to apply the revised ROE methodology adopted by FERC in Opinion No. 569 et seq., to determine PG&E’s ROE. With briefing having concluded, we here address outstanding matters regarding PG&E’s ROE.
In its TO18 filing, PGE requested a base ROE of 10.4%, but no lower than 10.25%. To support this proposal, PGE’s witness assessed PGE’s cost of equity by (1) estimating the cost of equity values for other electric utilities with comparable risks to PGE, and (2) considering the effects of current capital market conditions. Acknowledging the process outlined by FERC in Opinion No. 531 (a ROE decision that proceeded Opinion 569), PGE applied a two-step discounted cash flow (DCF) model to determine a zone of reasonableness and then utilized other models to support the placement of a specific ROE value within that zone. According to PGE, the results of the alternative models, as well as a survey of state-approved ROEs, indicate that the median values derived from the DCF methodology are too low to be considered reasonable. Therefore, PGE proposed an ROE from the upper end of its calculated range. PGE also requested a 50-basis point adder to recognize its participation in California Independent System Operator Corp. (CAISO) and thus a total ROE of 10.9%.
FERC applied the revised base ROE methodology adopted in Opinion No. 569, as modified in Opinion Nos. 569-A and 569-B, to PGE for this 2017/2018 period. In Opinion No. 569-A, FERC noted that, in future proceedings, “parties will have an opportunity to argue that the base ROE methodology . . . should be modified or applied differently because of the specific facts and circumstances of the proceeding involving that party.” No party has demonstrated that FERC’s base ROE methodology should be modified or applied differently to the facts and circumstances of this proceeding. Applying FERC’s base ROE methodology to the facts of this proceeding, FERC found that 9.26% is the just and reasonable base ROE for PG&E for the TO18 rate period, i.e., from March 1, 2017 through February 28, 2018.
Dr. Paul Dumais
CEO of Dumais Consulting with expertise in FERC regulatory matters, including transmission formula rates, reactive power and more.