By William Opalka

The Federal Energy Regulatory Commission last week affirmed its June order reducing the return on equity (ROE) for the New England Transmission Owners (NETOs), ordering the companies to provide refunds from Oct. 1, 2011.

The commission decided in June that it would begin using a two-step discounted cash flow methodology for electric utility ROEs, similar to that used for natural gas and oil pipelines. Ruling in the New England case, the commission said the new “zone of reasonableness” for ROEs was 7.03-11.74%. (See FERC Splits over ROE.)

The commission said in the June order that it lacked the evidence needed to decide one of the inputs to the two-step DCF methodology: the appropriate long-term growth rate to use.

In the “paper hearing” that followed, FERC said all parties agreed that gross domestic product (GDP) is the appropriate long-term growth rate and that the commission properly calculated the GDP growth rate in this case at 4.39%.

The commission last week unanimously agreed, finalizing the tentative ROE of 10.57% it had assigned.

The NETOs, which include Northeast Utilities, Central Maine Power, National Grid and NextEra, were ordered to provide refunds, with interest, within 30 days for the 15-month period.

The refunds represent all excess revenues the NETOs received since the complaint was filed in October 2011, a period in which the utilities were getting paid an ROE of 11.14%.

The case resulted from a 2011 complaint by state consumer advocates and attorneys general throughout New England, which alleged that the NETOs’ 11.14% base ROE was unjust and unreasonable because capital market conditions had changed since the base ROE was established in 2006.

FERC split 3-1 over its first application of the new formula, tentatively setting the ROE for New England transmission owners at three-quarters of the top of the “zone of reasonableness,” a departure from the prior practice that used the midpoint in the range.

The previous zone ranged from 7.3% to 13.1%. Thus, although the commission chose a higher position within the range, the reduced top end resulted in a decrease from the NETOs’ previous ROE.