FERC on Thursday reduced Entergy’s base return on equity to 10.37% from 11%, applying the methodology it adopted for MISO transmission owners in Opinion 569-A a year ago (ER13-1508-001).
The order reversed an initial decision issued in 2015 by the presiding administrative law judge governing sales of energy and capacity among the Entergy operating companies (NYSE:ETR). It also addressed briefs submitted in response to a 2019 order seeking input on the commission’s methodology.
The commission said it was not persuaded by the briefs to change its methodology, choosing to continue using the procedure it laid out in Opinion 569-A, which incorporated 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.).
That ruling reversed the stance the commission had taken in Opinion 569 in 2019, which rejected use of the RPM. (See FERC Ups MISO TO ROE, Reverses Stance on Models.)
In 569-A, FERC said that in future proceedings, “parties will have an opportunity to argue that the base ROE methodology … should be modified or applied differently because of the specific facts and circumstances of the proceeding involving that party.”
But, the commission said, “no party has demonstrated that the methodology applied in those proceedings should not be applied to the facts and circumstances of this proceeding.”
It ordered Entergy to revise its unit power sales tariff and submit a report quantifying refunds with interest within 30 days. The new rate was made effective Dec. 19, 2013, when the tariff took effect, prompted by Entergy Arkansas’ withdrawal from the Entergy System Agreement.
Commissioner Mark Christie (R) concurred in Thursday’s order, saying that the commission’s policy is flawed because “it replaces judgment with rote application of preset formulae.” He called for a general proceeding to consider changes to the methodology.
He also said the commission should set procedural deadlines requiring FERC to act much more quickly in future ROE proceedings.
“We are today putting into place an ROE with an effective date of Dec. 19, 2013 — roughly seven and a half years ago — ostensibly on the theory that these rates are required to incentivize investment in a future that began, at this point, several years in the past,” he said. “Although a certain amount of ‘lag’ is perhaps inherent in any regulatory system, I do not accept that this degree of delay is inevitable. Going forward, I believe we can and should do better.”
He added, “As indicia of why this commission’s ROE policy needs to be revisited, I would note that as of May 14, 2021, the 30-year U.S. Treasury bond — one of the most commonly used benchmark ‘safe’ investments — was yielding 2.36%. Thus the ROE approved in this order represents a risk premium of approximately 800 basis points. As compared to the 10-year Treasury bond, which was yielding 1.64% May 14, 2021, the ROE approved herein represents a risk premium of nearly 900 basis points.”
He acknowledged that rates on Treasury bonds were somewhat higher in December 2013 — with 30-year bonds slightly below 4% and 10-year bonds slightly below 3%. “On a going-forward basis, however, as well as for most of the past eight years, the risk premium represented by a 10.37% ROE is extraordinarily generous for a regulated utility.”
Commissioner Allison Clements (D) dissented, saying the 569-A methodology including the RPM does not protect consumers.
“The order of magnitude of transmission investment required to achieve [decarbonization, resilience and replacement of aged infrastructure] is unprecedented, which translates into a massive opportunity for utilities and transmission developers. But the value proposition for consumers is in no small part dependent on this commission’s rigorous scrutiny of the rates charged for transmission service, of which ROE is a central component,” she said.
“Given this context, I believe the commission must revisit its existing ROE policy. I appreciate that this policy has been unsettled for years, a state that increases investment uncertainty and extends litigation,” she added. “To be sure, I share the goal of a stable ROE policy that will speed rate proceedings and allow for timely ROE updates as market conditions change. But we should not double down on the desire for near-term stability to strong detriment of consumer protection, and I worry our current ROE policy does just that.”
But FERC Chair Richard Glick, who had dissented on inclusion of the RPM in the May 2020 order, indicated at the commission’s open meeting Thursday that he wasn’t eager to reopen the issue.
“When we issued opinions 569-A and 569-B, I expressed concerns about the commission’s decision to add the risk premium model, because the first ROE order had thoroughly explained why the risk premium model is not an appropriate tool for assessing a just and reasonable ROE,” he said. “I continue to have my concerns, but I also believe we cannot keep on changing our ROE methodology. Companies need to have some level of regulatory certainty if they are going to continue to make multimillion- — in some cases, multibillion- — dollar investment decisions.”
