Ruling on a series of complaints dating back to 2011, FERC ordered a reduction in the return on equity for New England transmission owners, from 10.57 to 9.57% (EL11-66, et al.).
The commission set an Oct. 16, 2014, effective date for the rate and directed the TOs and ISO-NE to refund with interest all excess funds collected since this date. FERC also required refunds for a 15-month period beginning in October 2011.
The ruling appears to be a win for consumer advocates at a time of elevated concern about energy affordability in New England, though the 330-page order appears likely to face additional challenges and clarification requests.
The ruling comes “three presidents and 11 chairmen” after the initial complaint, FERC Chair Laura Swett noted.
“This ping-ponging of judicial review and agency action that has gone for 15 years is a great example of how our regulatory processes combined with unending ability to seek judicial review can cost ratepayers a huge amount of money,” she said at FERC’s open meeting March 19.
The order follows a convoluted series of petitions, rulings and court challenges.
The initial 2011 petition was filed by a group of utility regulators, consumer advocates and end users, who argued that the 11.14% base ROE in place at the time was unjust and unreasonable.
In rulings following the original complaint, FERC updated its methodology for setting ROE to include longer-term growth projections and alternative financial models. It set the base ROE at 10.57%, with an effective date of Oct. 16, 2014 (Opinion 531, et seq.).
Both the TOs and the complainants challenged this determination in court. The TOs argued FERC had not adequately justified its findings invalidating the original ROE rate, while the complainants argued the commission failed to justify the new 10.57% rate. The D.C. Circuit Court of Appeals agreed with both arguments and sent the case back to FERC.
As the TOs and consumers battled over the first complaint, transmission customers filed two additional complaints about the 11.14% base ROE in 2012 and 2014, along with a complaint in 2016 about the 10.57% base ROE established by FERC in 2014.
To address the issues identified by the D.C. Circuit over the first challenge, FERC in 2018 proposed a new methodology for calculating ROE, which it refined in a 2019 order regarding complaints about the ROE for TOs in MISO (Opinion 569).
The order set a new methodology, based on two financial models, for determining whether a ROE rate is just and reasonable and setting a new rate if needed. FERC amended this determination in follow-up orders in 2020, adjusting the modeling methodology and adding an additional risk premium model (RPM).
But the D.C. Circuit vacated the order and sent it back to FERC, finding that the commission failed to justify the inclusion of the RPM after originally finding this model defective.
FERC responded with an order in 2024 omitting the RPM from its ROE methodology, citing a lack of evidence to support its use. It set a new 9.98% rate for MISO TOs and required refunds for a 15-month period following the initial MISO complaint in 2013 and for the period from the 2016 effective date through 2024 (EL14-12-016, EL15-45-015).
Amid the court challenges, the New England TOs have continued to collect a 10.57% base ROE, though FERC has maintained its authority to set a different rate with an October 2014 effective date.
Determinations
In its ruling March 19, the commission set a 9.57% base ROE for the New England TOs, relying on the same methodology it ultimately used in the MISO proceeding. It found the TOs to have an average risk profile and set the “applicable range of presumptively just and reasonable ROEs” in the first complaint proceeding at 8.72 to 10.41%.
“In light of this and the other circumstances of the case, we find that [the TOs’] 11.14% base ROE is unjust and unreasonable,” FERC ruled.
The 9.57% replacement rate represents the midpoint of the applicable range identified by the commission.
It also set a refund period of October 2011 to December 2012 for the first complaint. Meanwhile, it dismissed the second, third and fourth complaints and did not issue refunds for these proceedings. It found the 9.57% ROE to be within the zone of reasonableness for these complaints.
The refund periods for the second complaint and part of the third complaint would have occurred in between the refund period for the first complaint and the 2014 effective date of the new 9.57% rate. The 11.14% base rate was in place at the time of these complaints.
While consumer advocates argued for refunds for this in-between period, FERC ruled that Section 206 of the Federal Power Act limits its ability to order refunds when not ordering a new rate. It noted that the FPA “explicitly limits the length of time that public utilities may be subject to potential refunds as a result of a commission determination in a proceeding to 15 months after the refund effective date.”
It wrote that issuing refunds for the second complaint and the pre-Oct. 16, 2014, portion of the third complaint “would exceed our statutory authority under FPA Section 206 because it would effectively extend the refund period in the first complaint proceeding beyond the statutory 15-month limit.”
While the TOs argued that the FPA also limits FERC’s ability to require refunds after the 2014 effective date, FERC disagreed.
“In this order, we establish a different replacement base ROE under Section 206 than was set previously,” it wrote, referencing the previous 10.57% rate invalidated by the D.C. Circuit. “In making the 9.57% rate effective prospectively from Oct.16, 2014, and requiring refunds to reflect that rate, the commission is only requiring [the TOs] to reconcile this difference.”
Chair Swett said FERC is “doing everything we can within the limitations of our jurisdiction” to refund customers.
“Given the statutory limitations on FERC’s ability to issue refunds, unfortunately, we could only give relief to ratepayers on the first of the four complaints … because the Federal Power Act limits our authority to revise rates to a 15-month period,” she said.
Implications
The order sets the stage for significant refunds to New England transmission customers amid broad concerns about energy affordability in the region.
According to ISO-NE’s External Market Monitor, transmission rates in New England are more than twice the average rates of other RTOs, largely because of investments made over the past two decades to improve reliability and reduce congestion.
In recent years, consumer advocates have pushed for increased scrutiny around upgrades of existing transmission lines. These asset condition projects account for the vast majority of new transmission investment in the region.
According to some consumer advocates, a lower ROE should reduce the profit incentive for aggressive spending, potentially saving customers money directly by cutting the rate and indirectly by reducing overall spending.
Meanwhile, TOs argue higher ROEs are necessary to attract the level of investment needed to maintain a reliable grid.
“We are pleased that FERC has finally ruled in this matter; that it has lowered base allowed returns on equity and has established a refund requirement back to 2014,” said Drew Landry, deputy public advocate of Maine. “However, we believe that allowed ROEs remain too high and expect to continue to fight for more reasonable rates in future proceedings.”
