By Order dated March 27, 2020, in Docket No. ER20-276, FERC found that Prairie Power should use its actual capital structure of 19% equity and 81% debt to determine its transmission revenue requirement in its transmission formula rate rather than the hypothetical capital structure of 50% equity and 50% debt requested by Prairie Power. Prairie Power requested rehearing. In its Order on rehearing dated September 17, 2020, FERC sustained its March 27th Order, as FERC found that Prairie Power had failed to demonstrate that its situation warrants an exception to using its actual capital structure. FERC stated that two circumstances demonstrate that a capital structure is anomalous and warrants the use of a hypothetical capital structure: when “(a) the capital structure of the financing entity is not representative of the regulated [entity’s] risk profile, or (b) the capital structure is different from the capital structure approved for other [regulated entities], or if a [discounted cash flow (DCF)] analysis is performed, outside the range of the proxy group used in the DCF analysis.” With Prairie Power, the financing entity and the regulated entity are the same, and so the risk profile is identical. When evaluating the second type of circumstance, the analysis “is performed primarily to determine if the equity component of the capital structure of the financing entity (either the pipeline or its parent) is atypically high” and “‘[i]n general, FERC does not impute equity because this can over compensate the equity holder at the expense of the ratepayer.’” In addition, FERC reviewed all evidence and precedent that Prairie Power submitted – including responses to the deficiency letter regarding credit rating changes, financial metrics, and the effects of cost overruns – and concluded that Prairie Power had not justified its proposed departure from cost-based ratemaking.
Last, FERC was unpersuaded by Prairie Power’s argument that the MISO base ROE for transmission owners, as a small component of Prairie Power’s overall return due to its low percentage equity, inadequately compensates Prairie Power for its risk and thus justifies the use of a hypothetical capital structure. FERC stated that, to the extent that Prairie Power believes that its risks are not captured by the MISO transmission owners’ ROE in its actual capital structure, Prairie Power may file to request a different ROE under FPA section 205.
Dr. Paul Dumais
CEO of Dumais Consulting with expertise in FERC regulatory matters, including transmission formula rates, reactive power and more.