FERC last week lifted MISO transmission owners’ base return on equity from 9.88% to 10.02% and allowed them to add a third calculation model into the mix.

In approving the new methodology, FERC walked back its own arguments last year against incorporating the risk premium model (RPM) into ROE calculations along with the discounted cash flow (DCF) and capital asset pricing models (CAPM) (EL14-12, et al.).

Thursday’s ruling makes the 10.02% ROE effective Sept. 28, 2016, superseding the 9.88% and 10.32% ROEs approved in 2019 and 2016, respectively. Those figures were at different times intended to replace the 12.38% ROE established in 2002, which FERC deemed excessive years ago.

The ROE for MISO TOs is now capped at 12.62%, including incentives.

The commission used both DCF and CAPM when it set the TOs’ ROE at 9.88% last year. The move was met with consternation and confusion from TOs, who questioned FERC after it hinted at using four models to determine ROE. (See TOs Challenge New MISO ROE Rules and FERC Adopts ROE Methodology in MISO Complaints.) At the time, FERC said RPM, which estimates cost of equity using the premium that investors expect to earn on a stock investment over the return they expect to earn on a bond investment, was “largely redundant with the CAPM,” though less accurate and “would confer too much weight towards risk premium methodologies.”

On rehearing six months later, FERC found “the flaws for the risk premium model, when mitigated by certain adjustments, do not render use of the model unreasonable.” The commission now says it will institute a zone of reasonableness in the RPM — a value it doesn’t naturally produce — using an average of the zones of reasonableness from CAPM and DCF. FERC also said it will eliminate certain cases from the risk premium analysis, such as those TOs that joined MISO and received the prevailing 12.38% ROE before FERC analyzed the reasonableness of that rate.

Several TOs called the 9.88% base ROE too low to attract investment and questioned why FERC would use the 2013 MISO proceeding as a platform to set policy when it had already collected opinions through a Notice of Inquiry. Many said using only two of the four financial models that the commission originally considered paints an incomplete picture of the information used to make transmission investments. Transmission and industrial customers, cooperatives, the Organization of MISO States, and the Mississippi and Missouri public service commissions petitioned the D.C. Circuit Court of Appeals in January over the ROE.

FERC’s latest methodology still excludes the expected earnings model, the fourth model that the commission considered using prior to 2019. FERC said the model was flawed because it estimates returns based on a company’s book value, not a return on the current stock price.

At the commission’s open meeting Thursday, FERC Chairman Neil Chatterjee said the order doesn’t exclude use of the expected earnings model in future proceedings. He described the new ROE methodology in glowing terms and said the changes strengthen the model to “better reflect investor expectations.” The order creates “three equal ranges of presumptively just and reasonable ROEs that cover the entire zone of reasonableness.”

“Orders like this one remind me of how excellent our staff is here at the commission,” Chatterjee said.

Sharp Rebuke from Glick

However, Commissioner Richard Glick lambasted the commission’s longstanding indecision on a just and reasonable ROE as he laid out its journey from preferring four financial models in 2018 to two in 2019 and now three. He said the uncertainty has “probably held back needed investment in the transmission grid.”

Glick denounced the commission’s turnaround in attitude on the RPM after “dismantling” it in the 2019 order.

“You might as well just say, ‘Of course we should use the risk premium model!’ After all, it increases MISO’s transmission owners’ ROE,” Glick said during the meeting. He said public disapproval after the 2019 order led to Chatterjee “practically begging disappointed parties to seek rehearing” at the commission’s December meeting.

Glick also expressed annoyance at the commission for treating ROE composition as an “exact science.”

“I think everyone knows this is more an art than a science,” he said.

“We need to be aware that, as we continually tinker with our ROE methodology, we’re losing sight of what is more important: a stable investment environment for transmission developers,” Glick said. He said FERC’s “tinkering” is sold as being dispassionate and technical, “but with each new twist, it becomes harder to buy that the commission is genuinely reassessing the mechanics of each model rather than disagreeing with the ROE numbers those models produce.” He urged his fellow commissioners to bring “certainty and predictability” to how it sets ROEs.

Glick said his dissent to the order was only partial, as he found the 10.02% rate could actually be just and reasonable “despite the faulty reasoning.”

What he really took issue with was FERC’s inconsistent handling of ROE refunds, he said. The commission ordered MISO TOs to pay refunds for the period of November 2013 to February 2015 in response to the first complaint that the 12.38% ROE was excessive.

But FERC declined to grant refunds stemming from a second complaint lodged in 2015 that covered a period from February 2015 to May 2016, even though ratepayers paid the same 12.38% ROE that was deemed excessive. FERC explained that because the first complaint resulted in a 9.88% base ROE, that was considered the existing rate to investigate under the second complaint.

The commission also declined in its latest order to consolidate the two 15-month refund periods, saying granting more than one such refund period would exceed its authority.

Glick said in refusing to order refunds in one instance but not the other, the commission used “logic that only could make the authors of the Abbott and Costello ‘Who’s on First’ routine proud.” He said it simply boiled down to who paid what, not what rate was hypothetically in place at the time.

Although the 9.88% base ROE was previously ordered effective for September 2016, it didn’t actually exist in FERC proceedings until Nov. 21, 2019, when the decision was authored. But FERC maintains that “rate changes required in [Federal Power Act] Section 206 proceedings should take effect as of the date of the order setting rates, not the date of the rehearing — regardless of whether and to what extent the rehearing order changes the rates originally allowed.”

Glick said he would be “very interested” to see how the commission justifies its position before the courts to “rob consumers tens of millions of dollars in refunds in order to minimize the impact on transmission owners.”