FERC reduces return on equity for MISO Transmission Owners

An order issued by the Federal Energy Regulatory Commission (FERC) on Sept. 28 could have big financial impact for transmission owners in the Midcontinent Independent System Operator (MISO) footprint.

FERC Commissioners Norman Bay, Cheryl LaFleur, and Tony Clark (who just departed FERC on Sept. 30) issued the rate reduction order in culmination of a long-running case brought against MISO and other parties by petitioners including the Association of Businesses Advocating Tariff Equity, Coalition of MISO Transmission Customers among others.

The Sept. 28 order affirmed an initial decision in December 2015 by the presiding administrative law judge in a complaint filed pursuant to section 206 of the Federal Power Act (FPA). The complaint concerns the MISO Transmission Owners’ (TOs) base return on equity (ROE) reflected in MISO’s Open Access Transmission, Energy and Operating Reserve Markets Tariff.

The recent FERC order cuts transmission owners return on equity (ROE) by more than 200 basis points, so ratepayers in the MISO footprint could save an estimated $200m per year, according to an online analysis by two Stoel Rives LLP attorneys.

Spurred by industrial customers’ challenge to MISO’s ROE rate in 2013, FERC ultimately found in its Sept. 28, order that MISO’s ROE of 12.38% – which had been in place since 2002 – was unjust and unreasonable, and reset it to a base rate of 10.32%, said attorneys Richard Bonnifield and Kate D’Ambrosio.

Transmission owners may also qualify for transmission incentive ROE adders, although the maximum ROE rate may not exceed 11.35%.  FERC also ordered that refunds be issued on a prospective basis for the period from November 12, 2013 through February 11, 2015, according to the Stoel Rives attorneys.

Generally the ROE rate is set by applying the Discounted Cash Flow (DCF) methodology to determine the midpoint of the zone of reasonableness, the Stoel Rives attorneys said. In this case, however, as was the case in a dispute involving New England transmission owners, FERC found that “unusual capital market conditions” rendered the “central tendency of the DCF zone of reasonableness” inapplicable.

“These market conditions included “historically low” bond prices during the study period in which the ROE was set, driven in part by the Federal Reserve’s Quantitative Easing measures to buy U.S. Treasury bonds and mortgage-backed securities in the wake of the 2008 financial crisis,” the Stoel Rives attorneys said.

Following FERC’s decision in this case, MISO transmission owners must submit compliance filings to revise their tariffs to reflect a 10.32% base ROE and issue refunds for the period of November 13, 2013 through February 11, 2015 by the end of October 2016.  Several complaints regarding calculation of ROE remain pending with FERC.

The Sept. 28 FERC order is 129 pages. The case is Docket No. EL14-12-002.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.