There are two outstanding complaint proceedings involving the return on equity (ROE) of Midcontinent Independent System Operator, Inc.’s (MISO) transmission-owning members (MISO TOs) (Docket Nos. EL14-12-003 and EL15-45-000). FERC set these proceedings for hearing after it issued Opinion No. 531 in October 2014, concerning the ROE of the New England Transmission Owners (NETOS). In the order setting the first MISO proceeding for hearing, FERC stated that it expected to be guided by Opinion 531. On October 16, 2018, FERC issued an Order in the NETO cases in which it proposed a new methodology for analyzing the base return on equity (ROE) component of rates under section 206 of the Federal Power Act (FPA) and directed the participants to the applicable proceedings to submit briefs regarding the proposed new methodology. In their November 15th Order in the MISO cases, FERC similarly establish a paper hearing on whether and how this new methodology should apply to the proceedings pending before the Commission involving MISO TOs’ ROE.
In the first complaint filed in 2013 against the MISO TO’s, FERC calculated the just and reasonable ROE using the two-step DCF methodology from Opinion No. 531 and found that the base ROE to be 10.32%. Following the issuance of that Order (Opinion No. 551), numerous parties submitted requests for rehearing, which are currently pending. In the second complaint filed in 2015, the Administrative Law Judge issued the Initial Decision in 2016 in which he adopted a zone of reasonableness of 6.76% to 10.68% and determined that the just and reasonable ROE was 9.70% percent–halfway between the midpoint and the upper bound of the zone of reasonableness. The participants filed briefs on and opposing exception, which are currently pending before the Commission.
In its November 15th Order, FERC performed an illustrative calculation using record evidence from the First MISO Complaint. That calculation indicates that 1) the range of presumptively just and reasonable ROEs for MISO TOs is 9.55% to 10.95% percent; (2) MISO TOs’ preexisting ROE of 12.38% is therefore unjust and unreasonable; (3) the just and reasonable ROE is 10.32%; and (4) the cap on MISO TOs’ total ROE is 13.06%. FERC stated that these findings are merely preliminary and established a paper hearing on whether and how this new methodology should apply to the two MISO TO complaints. FERC concluded by stating that participants are free to present evidence supporting the proposed new methodology or supporting a different or revised new methodology and that the participants should submit separate briefs regarding each of the two complaints. Initial briefs are due in 60 days (mid-January 2019) and responses are due 30 days later (mid-February).
As a reminder, in the NETO Order, FERC directed the parties to submit briefs regarding: (1) a proposed framework for determining whether an existing ROE is unjust and unreasonable under the first prong of FPA section 206 and (2) a revised methodology for determining just and reasonable ROEs. FERC proposed to establish a composite zone of reasonableness, giving equal weight to the discounted cash flow (DCF) model, capital asset pricing model (CAPM), and expected earnings model. FERC proposed that, in order to find an existing ROE unjust and unreasonable under the first prong of section 206, the ROE must be outside a range of presumptively just and reasonable ROEs for a utility of its risk profile. For average risk single utilities, that range would be the quartile of the zone of reasonableness centered on the midpoint/median of the zone of reasonableness. For below or above average risk utilities, that range would be the quartile of the zone of reasonableness centered on the central tendency of the lower or upper half of the zone of reasonableness, respectively. FERC proposed to determine a replacement ROE under the second prong of FPA section 206 using the above three models, plus the risk premium model. For average risk utilities, the Commission proposed to determine the midpoint/medians of each zone of reasonableness produced by the DCF, CAPM, and expected earnings models and average those ROEs with the risk premium model ROE, giving equal weight to each of the four figures. The Commission proposed to use the midpoint/medians of the lower and upper halves of the zones of reasonableness to determine ROEs for below and above average risk utilities, respectively, and average those ROEs with the risk premium model ROE.
Dr. Paul Dumais
CEO of Dumais Consulting with expertise in FERC regulatory matters, including transmission formula rates.