FERC, in an order issued on Sept. 20, established hearing and settlement judge procedures, and set a refund effective date of April 29, 2016, in relation to a complaint by the Eastern Massachusetts Consumers-Owned Systems (referred to as complainants) against the New England Transmission Owners (referred to as respondents or New England TOs).
As noted in the order, the complainants in April filed a complaint against the New England TOs, contending that the New England TOs’ current 10.57% base return on equity (ROE) and the cap on ROE incentives of 11.74% used in the revenue requirement formula rate for ISO New England’s (ISO-NE) Regional Network Service (RNS) transmission, contained in ISO-NE’s open access transmission tariff (OATT), have become unjust and unreasonable and should be reduced to 8.78% and 11.38%, respectively.
FERC noted that the New England TOs recover their transmission revenue requirements through formula rates included in ISO-NE’s OATT. The revenue requirements for the RNS and Local Network Service that the New England TOs provide are calculated using a single base ROE. In 2008, FERC determined that the just and reasonable base ROE for the New England TOs was 11.14%.
FERC added that beginning in September 2011, a series of complaints was filed seeking reductions in the New England TOs’ base ROE:
- On Sept. 30, 2011, a group of complainants consisting mostly of state representatives filed a complaint alleging that the New England TOs’ 11.14% base ROE was unjust and unreasonable; FERC directed the New England TOs to reduce their base ROE to 10.57% effective Oct. 16, 2014, and to provide refunds for the period Oct. 1, 2011 through Dec. 31, 2012
- On Dec. 27, 2012, another group of complainants filed a complaint alleging that the New England TOs’ 11.14% base ROE was unjust and unreasonable and that an updated discounted cash flow (DCF) analysis based on more current financial information than the first complaint indicated that the New England TOs’ base ROE should not exceed 8.7%; FERC set Complaint II for hearing and settlement judge procedures and established a refund effective date of Dec. 27, 2012
- On July 31, 2014, a third complaint was filed alleging that the New England TOs’ 11.14% base ROE was unjust and unreasonable and that an updated DCF analysis based on more current financial information indicated that the New England TOs’ base ROE should not exceed 8.84% (Complaint III); FERC in November 2014 set Complaint III for hearing, consolidated that proceeding with the Complaint II proceeding, and established a refund effective date for the Complaint III proceeding of July 31, 2014
FERC added that in the Complaint III hearing order, it said that, due to the establishment of two refund periods in the consolidated proceeding – the 15-month refund period associated with Complaint II and the 15-month refund period associated with Complaint III – it was appropriate for the parties to litigate a separate ROE for each refund period. FERC said that, for the refund period in the Complaint II proceeding (i.e., Dec. 27, 2012 through March 26, 2014), “the ROE for that particular 15-month refund period should be based on the most recent financial data available during that period, i.e., the last six months of that period,” and for the refund period in the Complaint III proceeding (i.e., July 31, 2014 through Oct. 30, 2015) and for the prospective period, “the ROE should be based on the most recent financial data in the record.”
FERC added that in May 2015, it denied the New England TOs’ requests for rehearing of both the Complaint II and Complaint III hearing orders. FERC found that a public utility’s ROE may be found unjust and unreasonable under FPA 206 despite the fact that it may remain within the zone of reasonableness, and thus rejected the New England TOs’ contention that FERC should have denied the complaints on the ground that their existing ROE was within the zone of reasonableness.
An administrative law judge (ALJ) in March issued an initial decision in the consolidated proceeding on Complaints II and III, finding that the just and reasonable base ROE for all relevant periods should be set at the midpoint of the upper half of the zone of reasonableness, FERC said. That would result in an ROE of 9.59% for the Dec. 27, 2012-March 26, 2014 Complaint II refund period, and an ROE of 10.9% for the July 31, 2014-Oct. 30, 2015 Complaint III refund period and the prospective period. FERC added that the ALJ also found that the top of the zone of reasonableness for the Complaint II refund should be 11.74%, and for the Complaint III refund period and prospectively should be 12.19%, thus capping the total ROE, including transmission ROE incentive adders, at those levels.
Discussing the April complaint, FERC said to support their claim that the current base ROE and incentives cap are no longer just and reasonable, complainants filed testimony of Doctors Jonathan Lesser and Lon Peters. Lesser testified that he conducted a two-step DCF analysis covering a six-month study period ending March 31, 2016, and following FERC’s current guidance determined that the appropriate range of implied costs of equity – or range of reasonableness – for ascertaining the just and reasonable ROE for the New England TOs extends from 6.84% to 11.38%, with a median value of 8.68% and a midpoint of 9.11%. Based on a review of the New England TOs’ financial and business risks, Lesser recommended that FERC set the New England TOs DCF at the midpoint, i.e., 9.11%, FERC added.
The New England TOs contended that this is the fourth successive ROE complaint filed since fall 2011 and that the continuation of repetitive complaints seeking large ROE reductions increases uncertainties and risks borne by investors and contravenes the legislative provisions of section 206 of the FPA.
FERC also said that the New England TOs maintain that the existing base ROE continues to be supported by the result of the DCF analysis and that the proposed base ROE advocated by the complainants would competitively disadvantage the New England TOs when they seek to raise capital for electric transmission infrastructure investment.
The New England TOs claimed that FERC should dismiss the complaint because the existing ROEs are within the zone of reasonableness and are therefore just and reasonable.
FERC added that it finds that the complaint raises issues of material fact that cannot be resolved based upon the record before the commission and that are more appropriately addressed in hearing and settlement judge procedures.
Among other things, FERC said that it “has repeatedly rejected the assertion that every ROE within the zone of reasonableness must be treated as an equally just and reasonable ROE in an FPA section 206 proceeding, and we do so again here.”
The DCF analysis in this complaint is based on financial data that is from a different time period and produces a different proxy group, than the DCF analysis that was included in Complaint III. The DCF analysis in Complaint III was based on financial data from a six-month period ending June 2014 and produced a proxy group of 32 companies, with a range of returns between 6.34% and 12.54%, FERC added. The DCF analysis in this complaint is based on financial data from a six-month period ending March 2016 and produces a proxy group of 28 companies, with a range of returns between 6.84% and 9.11%, FERC said.
FERC noted that in June 2014, it changed its policy on the DCF methodology to be used in public utility ROE cases, by adopting the two-step DCF methodology that FERC has used in natural gas pipeline and oil pipeline cases for many years. Under the two-step DCF methodology, FERC determines a single cost of equity estimate for each member of the proxy group, based on the company’s average dividend yield and a growth rate that is determined by taking a weighted average of a short-term growth estimate and a long-term growth estimate.
FERC also said it encourages the parties to make every effort to settle their disputes before hearing procedures begin.