By Christen Smith

FERC adopted a new methodology for calculating return on equity rates for transmission owners and applied it to two MISO proceedings on Thursday (EL14-12, EL15-45).

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 two methods “investors most commonly use to estimate the cost of equity,” it said.

In the first docket, the commission granted the complaint, filed in November 2013, and ordered the TOs to implement the 9.88% ROE effective Sept. 28, 2016 — down from the previously approved 12.38% — and provide refunds for the period from the date of the complaint to Feb. 11, 2015.

FERC, however, dismissed the second complaint, filed by another group of transmission customers Feb. 12, 2015, reasoning that prospectively lowering the ROE in the first complaint rendered the second moot. This led to a partial dissent from Commissioner Richard Glick, who disagreed with the decision not to grant refunds in the second complaint.

The ruling comes two years after the D.C. Circuit Court of Appeals vacated and remanded FERC Opinion 531, finding that the commission’s DCF methodology used to revise rates for New England TOs — including “setting the replacement ROE at the midpoint of the upper half of the zone of reasonableness … rather than the midpoint of the overall zone of reasonableness” — was unjust and unreasonable.

The decision pushed FERC to reconsider the metrics it used to calculate ROEs, a methodology that had been largely unchanged since the 1980s. The commission in a briefing order had previously considered giving equal weight to results from the DCF, CAPM, expected earnings and risk premium models before settling on the methodology used in Thursday’s ruling. (See FERC Changing ROE Rules; Higher Rates Likely.)

The new methodology adopts an equal weighting of the DCF and CAPM models to establish a “composite zone of reasonableness” but rejects use of the expected earnings or risk premium models.

“The commission will use that composite zone of reasonableness to evaluate whether an existing base ROE remains just and reasonable under the first prong of [Federal Power Act] Section 206 and to establish a new just and reasonable base ROE, under the second prong of FPA Section 206, when the existing base ROE has been shown to be unjust and unreasonable,” FERC wrote.

EL14-12 dates back to 2013, when industrial customers argued that the 12.38% ROE rate that TOs were collecting was too high. (See ROE Talks Between Industrials and MISO TOs Collapse.) In 2016, FERC lowered it to 10.32% after its remanded ruling in the ISO-NE case set the “zone of reasonableness” at 7.03 to 11.74%. (See FERC Cuts MISO Transmission Owners’ ROE to 10.32% and FERC Extends New ROE Policy to MISO; Seeks Comments.)