This case involves the base ROE for transmission owners in MISO. A group of customers thought the base ROE provided by FERC was too generous and they asked FERC in 2013 and in 2015 in Section 206 proceedings to reduce that aspect of MISO’s rates. FERC did. In the process, FERC completely overhauled its approach to setting an appropriate ROE. Both the customers and transmission owners challenged several aspects of the FERC proceedings as unlawful or arbitrary and capricious. The Court agrees with the customers that FERC’s development of the base ROE methodology was arbitrary and capricious, so the Court vacated FERC’s base ROE orders and remanded for further proceedings.
The customers challenge FERC’s new base ROE methodology on five grounds. First, they argue that FERC should not have altered its previous approach to balancing long-term and short-term growth rates in the discounted-cash-flow model (Model 1). Second, they challenge three aspects of FERC’s approach to the capital-asset model (Model 2). Third, they argue that FERC’s creation of presumptively just and reasonable ranges at step one of the Section 206 analysis was arbitrary and capricious. Fourth, they argue that FERC should have set the new Return based on the median of the zone of reasonableness rather than the midpoint. And fifth, they challenge FERC’s decision to resuscitate the risk-premium model (Model 4) in its second rehearing order shortly after interring the model in its first rehearing order. The Court found the first four of those arguments unpersuasive, but it agreed with the customers’ final argument. FERC failed to offer a reasoned explanation for its decision to reintroduce the risk-premium model (Model 4) after initially, and forcefully, rejecting it. Because FERC adopted that significant portion of its model in an arbitrary and capricious fashion, the new base ROE produced by that model cannot stand. The Court therefore vacated FERC’s MISO base ROE orders to reopen the proceedings.
Dr. Paul Dumais
CEO of Dumais Consulting with expertise in FERC regulatory matters, including transmission formula rates, reactive power and more.