Independent analyses reinforce Mass. AG’s complaint against New England TOs

Testimony submitted Oct. 1 for Massachusetts Attorney General Martha Coakley’s ongoing complaint against New England transmission owners (NETO) will join growing evidence that a reduction in the base return on equity (ROE) used to calculate formula rates for transmission is warranted.

Coakley’s office submitted to FERC the testimony of Randall Woolridge, professor of finance at Pennsylvania State University and president of Nittany Lion Fund, for the AG’s September 2011 complaint (FERC Docket No. EL11-66) that seeks to reduce the base ROE from 11.14% to 9.2%

In an independent analysis of current market data and equity cost rate, Woolridge concluded that the base ROE set in 2006 is no longer reasonable.

“The cost of common equity capital invested in NETO’s transmission investments is low, and a 9.0% return is an appropriate base-level ROE,” he said in his testimony.

Additional indicators for the proposed rate outlined in the testimony included a decline in capital costs for utilities and the results of an independent discounted cash flow (DCF) analysis under FERC guidelines.

“While the financial markets have recovered somewhat in the past three years, the economy has not,” Woolridge said. “The economic times are still viewed as being difficult, with unemployment high by historical standards. As a result, interest rates and inflation are at relatively low levels, and the expected returns on financial assets — from savings accounts to Treasury bills to common stocks — are low.”

Similar testimony by John Wilson, president of J.W. Wilson & Associates, also was submitted to FERC Oct. 1 for Coakley, et al. v. Bangor Hydro-Electric Company, et al., by Eastern Massachusetts Consumer-owned Systems (EMCOS).

EMCOS requested leave to file the direct testimony to be effective and available in the event of a favorable ruling for EMCOS’s Sept. 7 request to intervene in the proceedings.

Wilson described his independent DCF analysis in his testimony and suggested that the 9.2% ROE cap proposed by the complainants could be reduced further.

Given findings for a best estimate on the cost of common equity capital of between 8.2% and 8.7%, Wilson recommended FERC “adopt an ROE allowance in this case of 8.2% … because the allowed ROE will be used in conjunction with formula rates, which mitigate some of the risk of cost and revenue fluctuations.”

EMCOS includes Braintree Electric Light Department, Hingham Municipal Lighting Plant, Reading Municipal Light Department, and Taunton Municipal Lighting Plant.