FERC hearing of New England ROE case feeds speculation on impact to industry

FERC’s decision to grant a hearing to Massachusetts Attorney General Martha Coakley and other complainants regarding whether base ROE rates in New England should be lowered has fed speculation that the commission may also consider lowering rates in other regions.

“The fact that they set [the case] for hearing is a signal that they’re taking the issue seriously,” an industry lawyer told TransmissionHub on May 16. “That procedural step says, ‘We want to dig into this, get into the facts, and decide what we want to do.’”

FERC on May 3 established hearing and settlement judge procedures involving the Coakley-led complaint against New England transmission owners (TOs), which contends that the current base ROE of 11.14% recovered through ISO New England’s open access transmission tariff is unjust and unreasonable and should be lowered to 9.2%.

FERC is hosting a settlement conference on May 17 for relevant parties to the case, with Judge Judith Dowd presiding, according to FERC’s website.

There are a few direct effects the hearing could have on the industry, the lawyer said. If FERC holds a hearing and changes the base ROE, “people would read that order with great interest as a signal for how FERC would think about others’ ROEs and also would provide an important recent precedent for would-be complainants,” he said.

A change to the base ROE would be retroactive to Oct. 1, 2011.

RTOs in other regions, like the New York ISO or PJM Interconnection could partner with attorneys general, ratepayer advocates or transmission customers and also file a complaint, he speculated. “If the New England complaint is successful, it would make it appear like it would be worth it,” he said.

FERC could also initiate an investigation itself, a course of action that has parallels to the natural gas pipeline industry, the lawyer said. The complainants in this electric transmission case are proceeding under Section 206 of the Federal Power Act (FPA); its correlative in the natural gas industry is Section 5 of the Natural Gas Act. These sections allow third parties or FERC to ask for changes in current rates.

“FERC for a number of years had not been initiating any Section 5 cases itself on the natural gas pipeline side, but then three or four years ago it started initiating Section 5 cases, finding that the rates … were substantially above what was just and reasonable,” the lawyer said. “The bottom line is FERC has been more assertive recently on the gas side when it thought rates were high. One question would be whether the New England Attorney General case would provoke FERC to do that in other regions.”

A FERC spokesperson declined to comment on May 16

However, the New England TOs named in the complaint have argued that the analysis used by the complainants does not comply with FERC’s methodology.

The TOs performed their analysis “completely in accordance with the commission’s methodology” and will continue to base their position on that methodology, a source close to the situation told TransmissionHub on May 16.

The TOs, or respondents, include Bangor Hydro-Electric, Central Maine Power, New England Power d/b/a National Grid USA, New Hampshire Transmission d/b/a NextEra, NSTAR (NYSE:NST) subsidiary Electric and Gas; Northeast Utilities (NYSE:NU) subsidiary Northeast Utilities Service, United Illuminating (NYSE:UIL); Unitil (NYSE:UTL) unit Energy Systems and Fitchburg Gas and Electric Light, Vermont Transco and ISO New England.

“The reality is that New England has virtually no congestion on the transmission system now because of the construction by the transmission owners, and it has probably the most robust and flexible transmission system in the country to meet the future,” the source said. “Complaints about the high ROEs that the transmission owners are earning are really just focusing on the wrong things.”

ISO New England expects more than $6bn in new transmission investments over the next four years, Rep. Edward Markey (D-Mass.) said in a letter to FERC Chairman Jon Wellinghoff supporting Coakley’s position. Markey said that as a percentage of total power costs, transmission costs will increase from less than 6% in 2008 to about 21% in 2014.

But projects currently in the queue in ISO-NE are proposed to meet reliability mandates, the source said.

The case reinforces the tightrope walk FERC has to execute with regard to setting ROE rates that are attractive enough to entice transmission investment, yet not so attractive that they attract consumer backlash, the lawyer said.

The source close to the situation said if FERC lowers the base ROE, it will be an “untimely and counterproductive” decision. “[FERC’s] policy has been working; I don’t know why they’d abandon it just as investment has ramped up,” he said. “The FERC policy provided an impetus to the transmission owners to go out and fix the transmission system in New England and in that regard, they’ve outperformed the rest of the country.”

Not all parties believe FERC’s decision to grant a hearing has wider implications, however. A UIL spokesperson cautioned against such speculation.

“I wouldn’t jump to the conclusion that this is somehow a signal of more than hearing out all the components and aspects related to this issue,” the spokesperson said. “I’d assume there is due process; FERC granted their request, everyone is being heard, they’re listening to various points, as well they should.”

UIL President and CEO Jim Torgerson during the company’s earnings conference call May 4 said FERC’s decision to grant the hearing was “disappointing,” but that he took comfort in FERC Commissioner Philip Moeller’s dissent to the decision.

Like the respondents, Moeller noted that the complainants used a discounted cash flow analysis that departs from commission precedent.

“[I]f complainants had adhered to commission precedent in developing their DCF analysis, the resulting zone of reasonableness, with a high-end exceeding approximately 15%, would have been wider than that proposed in the complaint, and the existing base ROE would have been well within the middle of that range,” Moeller said.

Moeller also argued one of the points that the complainants made, specifically that the base ROE should be lowered, commiserate with lower financing and interest costs.

“[T]his assertion is not well-supported,” Moeller said. “Utility bond yields are one-half of a utility’s cost of capital. The other half is a utility’s cost of equity, which can only be estimated using a financial model, such as the DCF analysis. Complainants have not convincingly proven that the New England transmission owners’ cost of equity has declined as much as bond yields to warrant a hearing in this case.”

ITC Holdings (NYSE:ITC) CEO Joe Welch and CFO Cameron Bready have expressed confidence that FERC will reinforce the base ROE used in New England.

“The nation’s transmission infrastructure has seen decades of under-investment, resulting in inefficient, less reliable electricity systems in many regions of the country,” an ITC spokesperson told TransmissionHub on May 16. “A lack of investment in transmission also keeps new forms of energy locked out of the market. Rate structures that make investments in the grid more attractive are working and have already brought value to ratepayers in many regions. So while there may be appropriate re-evaluations, we believe this commission recognizes the need to attract new investment.”

Torgerson and the source estimated that a FERC decision, after hearings and negotiations, would take place around mid-2014.

About Rosy Lum 525 Articles
Rosy Lum, Analyst for TransmissionHub, has been covering the U.S. energy industry since 2007. She began her career in energy journalism at SNL Financial, for which she established a New York news desk. She covered topics ranging from energy finance and renewable policies and incentives, to master limited partnerships and ETFs. Thereafter, she honed her energy and utility focus at the Financial Times' dealReporter, where she covered and broke oil and gas and utility mergers and acquisitions.