New testimony supports complaint against New England transmission owners

Conditional testimony supporting a reduction in the base return on equity (ROE) used to calculate formula rates for transmission service was submitted Oct. 1 to FERC in an ongoing complaint against New England’s transmission owners.  

A recent independent analysis described in the testimony suggests it is possible to reduce an already proposed ROE cap of 9.2% to 8.2%.  

Eastern Massachusetts Consumer-owned Systems (EMCOS) requested leave to file the direct testimony of John Wilson, president of J.W. Wilson & Associates in FERC Docket No. EL11-66, Martha Coakley, Massachusetts Attorney General, et al. v. Bangor Hydro-Electric Company, et al. The testimony would be effective and available in the event of a favorable ruling for EMCOS’s Sept. 7 request to intervene in the proceedings.

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

Coakley et al. filed a complaint with FERC in September 2011 seeking an order to reduce the base ROE for service rates under the New England ISO open access transmission tariff from 11.14% to 9.2%.  

Wilson’s testimony presents an independent discounted cash flow (DCF) analysis of the required ROE based on data for a group of electric utilities that was used in a 2011 DCF analysis supporting the 11.4% ROE.  

“Based on current data for these proxy companies and avoiding several errors and departures from the commission’s established method for ROE computations,” Wilson said in his testimony, “it is clear that [the complainants’] request to reduce the ROE to no more than 9.2% is, in fact, conservative.”  

In his testimony, Wilson questioned adherence to certain forecasts used in the 2011 DCF model to estimate the required return for a regulated utility’s common equity capital.

“Of particular importance in this case, a cost of common equity that is estimated at one point in time may be quite different from an ROE that was established previously, or different than what may be found to be the case in the future,” Wilson said. “DCF estimates that rely on analysts’ earnings growth forecasts tend to overstate actual investor capital costs to the extent that investors view analysts’ forecasts as bullish. This should temper any outright acceptance of DCF results that are premised on uncritical acceptance of analysts’ earnings growth forecasts.”  

Following the same procedure used in the 2011 DCF analysis with supplemented September 2012 data, Wilson found that the cost of common equity capital for New England transmission owners is far below the 11.14% base ROE that is used now.

The results “indicate that that the required ROE is also below the 9.2% ceiling that has been suggested by the complainants in this proceeding,” Wilson said.  

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.”  

The presiding judge issued on Sept. 25 a notice of oral argument to be convened Oct. 3 for the proceedings.