Transmission owners will continue to receive a 10.02% return on equity, FERC said last week, rejecting several complaints from consumer organizations and one of its own commissioners.

The commission adopted the figure in May, determining it through a discounted cash flow model (DCFM), capital asset pricing model and risk premium model (RPM). (See FERC Ups MISO TO ROE, Reverses Stance on Models.)

With the exception of correcting typographical errors on inputs to the RPM, FERC said in an order Thursday that it stands by the ROE it established under a longstanding MISO docket (EL14-12-015, EL15-45-014).

The commission said it will move ahead with dividing the overall zone of reasonableness into equal thirds instead of using a quartile approach. Several industrial customers, cooperatives, public service commissions and consumer advocates said the framework creates an overly broad zone of reasonableness. The Louisiana Public Service Commission said it leaves “very little space between ROEs that are presumptively just and reasonable and ROEs that are excluded as low-end outliers.”

FERC said the zone of reasonableness’ bottom eighth and top eighth are nevertheless “potentially lawful ROEs.”

The groups also said FERC’s use of an 80% weighting of the short-term growth rate and a 20% weighting on the long-term growth rate under the DCFM was arbitrary and unexplained. But the commission responded that it has “broad discretion in its weighting choice.”

FERC also brushed off the Louisiana PSC, which lambasted the RPM as a model that “would not be relied on by an investor to determine the cost of equity, does not use a long time period [and] involves numerous judgement calls, and the output of the method does not produce a range of just and reasonable ROEs.”

“The risk premium model has a strong theoretical basis. We continue to find that the defects of the risk premium model do not outweigh the benefits of model diversity and reduced volatility resulting from the averaging of more models,” FERC said.

The commission said it will continue to use a test that regards a company as a high-end outlier if its estimated equity cost is more than 200% of the median of the zone of reasonableness. The PSC contended that FERC raised the threshold so high that it rendered the high-end outlier test “essentially useless.” The commission originally set the high-end outlier at 150% of the median.

“The high-end outlier test is an objective test to identify proxy group ROEs that are irrationally or anomalously high because, for example, they are the result of atypical circumstances that are unrepresentative of the subject utility’s risk profile or are otherwise likely to be in error,” FERC wrote. “We again note that the high-end outlier test is the first, but not the only, method for screening a high-end result from the proxy group.”

FirstEnergy and the Edison Electric Institute tried for a broad rehearing of the order, but FERC said the two lacked standing because they were not parties to the proceedings. It also said the order was only regarding the changes it made to the ROE methodology since prescribing a 9.88% ROE in late 2019. (See TOs Challenge New MISO ROE Rules.)

EEI argued it “actively participated” in the commission’s Notice of Inquiry proceeding regarding its base ROE policy, but that “it was not reasonably foreseeable that the commission would establish a new methodology for analyzing base ROEs” under a seven-year old MISO docket. Based on the commission’s reasoning, EEI said it would have to “intervene in all company-specific rate filings” to make sure it is able to participate in orders in the event that FERC “unexpectedly” uses a company-specific order to make policy for all jurisdictional public utilities.

Several TOs were also perturbed last year that the commission would use a MISO proceeding from 2013 as a platform to set policy when it had already collected opinions on adjusting ROE through an NOI.

MISO has had a chameleon-like ROE since 2013, when industrial customers argued that the 12.38% rate that TOs were collecting was too high. In 2016, FERC lowered the rate to 10.32% after its remanded ruling in an ISO-NE case set the zone of reasonableness at 7.03 to 11.74%.

The PSC pointed out that FERC contradicted itself in its reasoning when it switched from a 9.88% ROE and two financial models in late 2019 to a 10.02% ROE and three models in May.

Glick Chides Again

FERC Commissioner Richard Glick also condemned the commission’s longstanding indecision on a just and reasonable ROE and its framing of the issue as more science than art. He again partially dissented on the latest ROE order.

“For more than a decade now, the commission has struggled with the fact that its longstanding ROE methodology produces cost-of-equity estimates well below the ROEs it permitted public utilities to collect in the years before the Great Recession,” he said.

While he agreed that a 10.02% ROE is just and reasonable, Glick said FERC was not being open and transparent about what guides its decisions.

“The experience of the last decade has made it hard to believe that the commission’s history of fiddling with its ROE models is a purely technocratic exercise in financial modeling rather than a concern about the output of those models, i.e., the ROE itself,” he said. “If the commission has concerns about the ROE produced by the various models on which it relies, we ought to come right out and say so rather than papering those concerns over with hundreds of pages worth of discussion about dividend yields, growth rates, proxy groups and the like.”

Glick added that FERC’s “about-face” on using the RPM was indefensible and admitted he wasn’t sold on its use. He said that no court or commission precedent “has endorsed the proposition that every point within the zone of reasonableness established by the commission’s financial models must be presumptively just and reasonable.”

He said again that the commission should order refunds to all ratepayers who paid the 12.38% ROE rate that it later deemed excessive. By granting refunds for a period from November 2013 to February 2015, but not from February 2015 to May 2016, Glick said FERC was relying on a “bizarre and overly complex interpretation” of an “otherwise straightforward statute.” (See “Sharp Rebuke from Glick,” FERC Ups MISO TO ROE, Reverses Stance on Models.)

Glick said, however, he would back the ROE result to bring badly needed constancy to transmission-investment decisions.

“ROE is an area where stability is paramount and, in an effort to bring stability to what has been a particularly turbulent aspect of the commission’s authority, I can support an outcome that is just and reasonable even if it might not be the most just and reasonable,” he said. “All approaches to setting ROEs have their shortcomings, but the worst outcome by far is to continually fiddle with those approaches, undermining the certainty and predictability that help transmission owners make long-term investments.

“If the commission is going to purport to rely entirely on financial models to evaluate and set ROEs, it has to take those models at face value without second-guessing them when it does not like the results,” Glick said. “Otherwise, we’re going to end up promoting full employment for energy lawyers rather than a stable investment climate for transmission owners.”