The presiding administrative law judge in the FERC proceeding involving the base return on equity (ROE) for New England transmission owners (NETOs), in his Aug. 6 initial decision, ruled that the current 11.14% ROE is unjust and unreasonable (Docket No. EL11-66-001).
The just and reasonable ROE for the locked in/refund period is 10.6% and for the subsequent period, 9.7%, subject to further updating or modification by FERC, Michael Cianci Jr., said in his initial decision.
With regard to the time period(s) to which the RTO-wide ISO-NE base ROE determined in the proceeding apply, Cianci noted that the NETOs argued that if their current base ROE was found to be unjust and unreasonable, he will have to choose a new base ROE from a point within the zone of reasonableness.
According to the NETOs, Cianci continued, the new base ROE established in the case will have to apply to two different time periods. First, Section 206 of the Federal Power Act establishes a 15-month refund period, which ended on Dec. 31, 2012. The base ROE established for this “locked-in” period must be based on the cost of equity evidence that applies to that time period.
Second, at the end of the proceeding, a new base ROE will be established that will be in effect prospectively from the date of FERC’s order fixing the new rate. The base ROE established for that period must be based on the updated discounted cash flow (DCF) and other financial analysis proposals submitted on April 17 and April 26, according to the NETOs.
“The undersigned finds the arguments for the NETOs that a separate higher ROE is appropriate for the locked in/refund period to be persuasive,” Cianci added, later adding: “This defined refund period should be representative of what the true ROE was when calculating refunds, otherwise it would allow for a windfall and a return of excessive refunds, based upon supporting data which did not exist at the time. The lower ROE of 9.7% should then be utilized for the prospective period (a reduction of some 144 basis points).”
The NETOs include Northeast Utilities’ (NYSE:NU) NSTAR Electric and Gas; UIL Holdings’ (NYSE:UIL) United Illuminating; Emera’s Bangor Hydro Electric; New England Power d/b/a National Grid USA and Iberdrola USA’s Central Maine Power. National Grid is a subsidiary of National Grid plc. Iberdrola is a subsidiary of Iberdrola S.A.
The complainants, including Massachusetts Attorney General Martha Coakley, Connecticut Attorney General George Jepsen and such state regulators as the New Hampshire Public Utilities Commission, filed in September 2011 a complaint against the NETOs, contending that the current 11.14% base ROE for NETOs recovered through ISO New England’s (ISO-NE) open access transmission tariff (OATT) is unjust and unreasonable.
A Northeast Utilities spokesperson told TransmissionHub on Aug. 6 that the company is still reviewing the decision.
Similarly, a Central Maine Power spokesperson told TransmissionHub that since it is a recommended decision, “we will need to review it with our New England counterparts before we can formulate a response.”
Also, a National Grid spokesperson told TransmissionHub on Aug. 6 that the company “is not prepared to comment on the FERC order regarding [the] ROE as we have only just received the order and are still in the process of reviewing the document in its entirety.”
ISO-NE is not involved in the matter. “The return-on-equity rates for transmission are established by [FERC]; ISO New England does not establish the rates,” an ISO-NE spokesperson told TransmissionHub on Aug. 6. “The ISO does not own any transmission or generation and does not receive any of this return on equity. The ISO acts only as the billing agent for the transmission owners and has no position on this return on equity.”
In general, Cianci said, the opinions of Sabina Joe, who is employed by FERC as an energy industry analyst, Dr. J. Randall Woolridge, who was asked by Coakley’s office and others to prepare a study on the appropriate base-level ROE applicable to the NETOs, and Dr. John Wilson, who has been sponsored by the Eastern Massachusetts Consumer Owned Systems as an expert witness, were found to be probative to corroborate the finding that the current 11.14% ROE is no longer just and reasonable.
To other issues, Joe’s testimony was found to be probative that the complainants’ experts’ methodologies differed greatly from FERC precedent to be more useful in the case, as well as Dr. William Avera’s opinion on the issue. Avera is the NETOs’ witness.
Cianci also found that Avera’s testimony using his traditional DCF analysis approach to be highly probative in establishing the new just and reasonable ROEs for the respective time periods.
In responding to what policy objectives should be taken into account in determining the just and reasonable RTO-wide ISO-NE base ROE in the proceeding, Cianci said that policy objectives should be left to FERC’s discretion, noting that in reaching the findings, he followed relevant legal precedent.
He also said that all parties acknowledge that the burden of proof is on the complainants and staff to establish that the current ROE is unjust and unreasonable, adding that the burden has been met.
Cianci further noted that he rejects the NETOs’ position that the current ROE of 11.14% should be retained merely because it falls within the broad range of reasonableness of the experts’ DCF analysis.
“A bright line litmus test of this sort is contrary to FERC precedent and is simply illogical when applied to the facts of this case,” he said, adding that all of the evidence in the case “supports the finding that the ROE of 11.14% is no longer just and reasonable.”
He agreed with the NETOs to the extent that the new just and reasonable base ROE should be based upon the appropriate market conditions available within the relevant time periods, which include the refund and prospective periods, but agreed with the complainants and others and found that the traditional DCF analysis as set by firm FERC precedent should be followed in this case. “[A]ny deviation, or adoption of alternative methodology must necessarily come from the commission,” he said. “Market conditions are considered within the DCF analysis.”
Cianci rejected the NETOs’ arguments that the traditional DCF methodology has understated their true cost of equity in these unusual financial and economic times, but, he added, FERC is free to consider any policy changes it believes are warranted to address the NETOs’ arguments.
The complainants and others argued that the ROE should be established under traditionally recognized and adopted FERC DCF analysis precedent, he noted, adding, “Again, the undersigned finds that any deviation from commission precedent, exceptions to, or exemptions made, must necessarily come from the commission itself.”
The NETOs had argued that while Avera does a traditional DCF analysis, he additionally performs numerous alternative analysis, including an expected earnings approach.
“Aside from his initial opinion that because the current ROE is within the broad range zone of reasonableness used in his DCF analysis it continues to be just and reasonable, the undersigned finds the testimony and analysis of Dr. Avera to be highly probative and well-reasoned, and supported by the evidence,” Cianci said. “However, the undersigned’s findings are based upon the traditional DCF analysis offered by Dr. Avera, as set by firm commission precedent, not upon his alternative methodologies.”
In discussing what are the appropriate proxy group screening criteria and proxy group members, Cianci said he agrees with the NETOs that it appears as though FERC has since 2010 favored national versus regional proxy groups.
Among other things, he noted that Avera and Joe calculated their dividend yields in accordance with FERC policy, where the high dividend yield and the low dividend yield are calculated for each month of the six-month dividend yield period. The high dividend yield for a given month is equal to the current annualized dividend divided by the lowest stock price on any day in the month, while the low dividend yield for a given month is equal to the current annualized dividend divided by the highest stock price on any day in the month, he said.