By Amanda Durish Cook

FERC’s new methodology for calculating return on equity for transmission owners drew several requests for rehearing from TOs dismayed and perplexed that the commission would use a MISO-centric order to set national policy.

The commission adopted the new methodology in late November under two MISO proceedings (EL14-12., et al.). (See FERC Adopts ROE Methodology in MISO Complaints.) Under Opinion 569, the commission set the TOs’ ROE at 9.88%, a figure it determined via both the discounted cash flow (DCF) and capital asset pricing models (CAPM). The new base ROE sheds 250 basis points from the TOs’ prior rates.

Calls for rehearing were filed around the holidays, with several TOs calling the 9.88% base ROE too low to attract investment and wondering why FERC would use the circa-2013 MISO proceeding as a platform to set policy when it had already collected opinions through a Notice of Inquiry.

Some sought assurances that the commission wouldn’t apply the new ROI methodology universally.

‘Artificially Deflated’

FirstEnergy characterized Opinion 569 as “a prime example of government regulation that is arbitrary, capricious, and contrary to law and commission policy.” The company — along with several others — said that by limiting ROE to the DCF and CAPM models while ignoring the expected earnings and risk premium models, transmission ROEs would fall below the capital attraction standards established in 1923’s Bluefield Waterworks Improvement Company v. Public Service Commission of West Virginia and 1944’s Federal Power Commission v. Hope Natural Gas Company.

The company said that under the new rate, transmission ROEs could fall below state-approved distribution ROEs, rendering them “artificially deflated” and “grossly inadequate to incentivize new transmission build that is desperately needed.”

MISO TOs also argued that FERC was violating the Bluefield and Hope standards and said the investor community was voicing “very serious doubts about the future ability of commission-regulated energy companies to attract capital should the commission stand by [the position] that transmission investment warrants only single-digit equity returns.”

The Edison Electric Institute said FERC’s decision “sends mixed signals to investors and transmission owners about the commission’s commitment to ensuring that needed transmission is built.”

Further, FERC circumvented the Administrative Procedure Act by making new ROE policy through the order, FirstEnergy said, adding that several entities weren’t “on notice that the commission intended to use the MISO proceeding to establish new policy.”

Trade association WIRES also expressed surprise that the commission used the “proceeding-specific” MISO dockets to establish a new ROE methodology instead of the NOI it opened in March to collect opinions on using a combination of the DCF, CAPM, expected earnings and risk premium models. (See Tx Incentives NOI Brings Calls for Broader Reforms.)

2 or 4 Models?

WIRES said using only two of the four financial models paints an incomplete picture of the information used to make transmission investments. Transource Energy also urged FERC to adopt the four-model framework it originally considered. PJM TOs said FERC’s new ROE approach “removes half of the models from the methodology and thereby magnifies the flaws in the remaining models and decreases the diversity of the new methodology.”

“Despite receiving approximately 175 initial comments and 30 reply comments in the NOI docket, the commission opted instead to use Opinion No. 569 to make drastic changes to its proposed ROE methodology without substantively addressing the comments in the generic NOI proceeding or taking comment on the new approach,” WIRES said in its request for rehearing. “A specific contested proceeding is not the most appropriate docket for the commission to announce broad policy changes that will impact the methodology for determining transmission ROEs for all FERC-jurisdictional public utilities.”

“The commission adopted a new two-method approach on which it never sought comment, barely mentioning the still-open inquiry docket,” Ameren chimed in, insisting that FERC address the record in the NOI. PJM TOs likewise said the commission should explain its reasoning behind “issuing a potential industry-wide policy change … while the generic NOI docket remains open.”

Other non-MISO TOs, including PPL Electric and American Electric Power’s Indiana Michigan Transmission Co., lodged motions to intervene in the proceedings, explaining that they had expected a new ROE methodology to emerge from the NOI, not dockets limited to MISO TOs.

Southern California Edison and a group of SPP TOs also filed motions to comment. SCE said the commission abandoned “its previous robust and legally sound proposal to rely on four financial models without addressing the questions it raised in the ROE NOI and disregarding the extensive record it requested.”

The SPP TOs were equally bewildered as to why FERC would rely on a proceeding involving “a small subset of the industry” to make changes impacting all jurisdictional public utilities, calling it “legal infirmity.” The group asked for confirmation that Opinion 569 was intended to set national policy and pointed out that the record in the MISO proceeding closed more than three years ago. Exelon also asked FERC if the new ROE method was to be applied universally.

The New England Transmission Owners (NETOs) also seemed unsure as to whether FERC meant for the new ROE method to extend to them and filed correspondence in the MISO proceedings and a supplemental brief in their own ROE complaint dockets that have been ongoing since 2011. (See FERC Discloses Data Behind New England ROE Order.)

San Diego Gas & Electric similarly asked the commission in a motion for clarification if it meant for the decision to apply outside of MISO. If it did, SDG&E also included a request for rehearing, echoing concerns over the departure from the proposed four-model approach and possible violations of the Hope and Bluefield standards and the Administrative Procedure Act.