FERC Adopts New Base ROE Methodology, Addresses Complaints Against MISO

FERC Adopts New Base ROE Methodology, Addresses Complaints Against MISO

The Federal Energy Regulatory Commission (FERC) “adopted a new methodology for determining whether a jurisdictional public utility’s rate of return on equity (ROE) is just and reasonable under section 206 of the Federal Power Act.” FERC applied it to “complaints against the Midcontinent Independent System Operator (MISO) transmission owners” and determined their “current base ROE should be 9.88 percent.”

In 2017, “the U.S. Court of Appeals for the District of Columbia vacated and remanded FERC Opinion No. 531, which had adopted certain changes to the Commission’s use of the discounted cash flow (DCF) methodology for evaluating and setting the ROE for the New England transmission owners.” They concluded that FERC did not sufficiently demonstrate that the “existing ROE was unjust and unreasonable and that setting the replacement ROE at the midpoint of the upper half of the zone of reasonableness produced by a two-step DCF analysis, rather than the midpoint of the overall zone of reasonableness, was just and reasonable.”

FERC responded to the 2017 ruling, along with “complaint proceedings against the MISO transmission owners,” that it will be using the “DCF model and capital asset pricing model to determine if an existing base ROE is unjust and unreasonable, and, if so, what replacement ROE is appropriate.” FERC said they found that those models were the “two methods investors most commonly use to estimate the cost of equity.” FERC said it plans to “use ranges of presumptively just and reasonable ROEs in its analysis of whether existing ROEs have become unjust and unreasonable.”

As part of this, FERC implemented the “revised methodology in two complaints against the MISO transmission owners’ base ROE,” granting a “rehearing on the first complaint (EL14-12), finds the existing 12.38 percent ROE unjust and unreasonable, and directs the MISO transmission owners to adopt a 9.88 percent ROE, effective September 28, 2016, and to provide refunds.” FERC also dismissed the second complaint, saying it found the record for that proceeding did “not support a finding that the 9.88 percent ROE established in the first complaint proceeding has become unjust and unreasonable.”

FERC Commissioner Richard Glick issued a statement dissenting in part the new methodology and the complaints against MISO.