On October 16, 2018, FERC issued an Order in the New England Transmission Owners ROE complaints (NETO Order) 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. There are several other ongoing proceedings involving base ROE disputes. On November 15, FERC provided guidance regarding the effect of the NETO Order on these pending proceedings (five proceedings involving System Energy Resources, Inc., Entergy Services, Inc., Public Service Company of Oklahoma, Southwestern Electric Power Company, AEP, Oklahoma Transmission Company, AEP Southwestern Transmission Company, Oklahoma Gas & Electric Company, Southwestern Electric Power Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company and Southern Company Services, Inc. – MISO complaints addressed in separate order and blog) that have been set for hearing and settlement judge procedures. FERC stated that it expects the participants in these five proceedings to address the NETO Order’s proposed new ROE methodology. This includes presenting evidence concerning the merits of the proposed methodology and whether and how to apply the proposed new methodology to the facts of their respective proceedings. FERC made it clear that its new base ROE methodology is a proposal and not yet final policy.
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.
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Dr. Paul DumaisCEO of Dumais Consulting with expertise in FERC regulatory matters, including transmission formula rates, reactive power and more. Archives
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