By Amanda Durish Cook

MISO transmission owners will be taking a pay cut, as FERC ordered their 12.38% return on equity reduced by more than 2 percentage points.

The Wednesday order (EL14-12-002) affirms an administrative law judge’s initial decision in December. The TOs will now receive a 10.32% ROE. With incentives, the rate is not to exceed 11.35%. The previous 12.38% rate had been untouched since 2002.

The decision affects more than 20 TOs, which FERC said must issue refunds, with interest, from Nov. 12, 2013, through Feb. 11, 2015.

The companies are ALLETE, Ameren, Cleco Power, Duke Energy, Entergy, Indianapolis Power & Light, ITC Holdings, MidAmerican Energy, Montana-Dakota Utilities, Northern Indiana Public Service Co., Northern States Power, Otter Tail Power, Southern Indiana Gas & Electric Co. and their affiliates. The order puts American Transmission Co. back on an equal footing with other MISO TOs; the company was operating at a 12.2% ROE.

Minnesota officials have estimated the cut will save ratepayers in the 15-state MISO footprint $200 million a year.

The commission said the 10.32% rate “represents the midpoint of the upper half of the zone of reasonableness” of 7.23 to 11.35%.

Setting the rate nearer the “midpoint of the zone of reasonableness [at 9.29%] could impair investment in transmission” and put MISO Transmission Expansion Plan investments at risk, the commission said.

“There is record evidence that a decrease in ROE of that magnitude — a 309-basis-point reduction from 12.38% to 9.29% — could undermine the ability of MISO TOs to attract capital for new investment in electric transmission,” FERC said.

A 9.29% ROE would also have been lower than all of the state-authorized rates of integrated electric utilities.

Challenge Filed in 2013

MISO’s major industrial customers challenged the region’s transmission rate in 2013, requesting it be cut to 9.15%.

FERC arrived at the new rate using a discounted cash flow model that analyzed about 40 similar companies with the same range of credit as the MISO TOs over six months. The commission said the midpoint of the zone of reasonableness was adjusted upward because of “unusual capital market conditions” attributed to temporarily low interest rates, historically low bond yields and the Federal Reserve holding record high bond amounts during the study period.

FERC said a “mechanical application” of the discounted cash flow model would fail to meet capital attraction standards under the Hope and Bluefield fair return standard. The commission adopted the two-step discounted cash flow method for setting ROEs in 2014’s Opinion 531. (See FERC Splits over ROE.)

A witness for the TOs had presented a capital asset pricing analysis that produced an ROE range of 7.50 to 12.61%, with a midpoint value of 10.06%. FERC said the analysis, along with expected earnings and risk premium analyses supplied by the TOs, persuaded it that a higher midpoint on its own range — produced under the discounted cash flow analysis — was in order.

FERC also dismissed protests that it had not provided evidence to support its north-of-the-midpoint decision, saying it had “discretion to use its judgment in weighing factors specific to a given proceeding to determine where within the zone of reasonableness the final base ROE should be placed.”

The commission also declined transmission customers’ request to reduce the base rates of utilities with 55% equity by 20 basis points.