FERC on Thursday shot down the latest attempt by Pacific Gas and Electric to significantly increase its return on equity based on the utility’s risks associated with wildfires and California’s transition to renewable energy (ER16-2320).
PG&E had asked FERC to retroactively increase its ROE from 9.13% to 13.29% in its transmission owner tariff for 2017-18. The utility said it needed larger profits to entice investors wary of the state’s inverse condemnation laws, which hold utilities strictly liable for wildfires ignited by their equipment.
It also contended the state’s ambitious environmental goals saddle it with cost-recovery risks associated with planning and operating a safe and reliable grid.
FERC, however, said the basis for PG&E’s ROE was a six-month test case in 2017 that ended prior to the utility’s equipment sparking the highly destructive wine country fires of October 2017. A series of catastrophic blazes ignited by PG&E equipment followed in each of the next four years, including the state’s deadliest wildfire, the Camp Fire, in November 2018, and its second largest wildfire, the nearly 1 million-acre Dixie Fire, last summer.
PG&E argued the wildfires put it in a high-risk category and justified an increased ROE. The California Public Utilities Commission and others opposed the move because of the potential cost impact on customers. They proposed a rate of less than 9%.
FERC concluded that PG&E was an average-risk utility during the 2017 test period and said its stock price and credit ratings declined dramatically only after the wine country fires and subsequent blazes.
“The October 2017 wildfires and resulting financial consequences and credit rating downgrades for PG&E occurred subsequent to the test period, such that we will not consider them in determining PG&E’s risk profile,” it said.
The commission applied its revised methodology for calculating ROE from Opinion 569-A issued in May 2020 and two related opinions. It ruled an “appropriate” ROE for PG&E was 9.26% based mainly on its risk profile prior to the wine country fires.
Dissents
Commissioner James Danly dissented from what he called the “common-sense defying outcome” in the case.
“In my view, it simply is not credible that PG&E faced the same risks as any other ‘average’ utility in light of rampant wildfires, California’s inverse condemnation laws (which require PG&E to compensate landowners for fire damage), and a host of other risks unique to a utility attempting to survive in California’s challenging legal and regulatory environment, in 2017 and since,” Danly wrote.
The inverse condemnation laws helped drive PG&E into bankruptcy in January 2019 after the Camp Fire, which killed 85 people and leveled the town of Paradise, he said.
FERC’s decision “underscores a fundamental concern I have with the commission’s convoluted ROE precedent and policy,” Danly said. “We have created a Rube Goldberg machine that ultimately can be manipulated into supporting any ROE a majority of commissioners favors at a given moment.”
Commissioner Allison Clements dissented in part but for different reasons. She agreed with the majority’s decision that PG&E was an average-risk utility during the test period, and said FERC had correctly applied the commission’s ROE policy established in Opinion 569-A.
“However, I dissent in part from today’s order because of my continuing concerns with the current ROE policy, which I believe applies a flawed methodology that does not adequately protect consumers and does not yield just and reasonable rates,” Clements said.
Not wanting to repeat herself, she referred readers to her May 2021 dissent in Opinion 575 (ER13-1508-001), in which FERC applied the methodology it had adopted for MISO transmission owners in Opinion 569-A a year before.
In that case Clements said the methodology, including the “risk premium model” applied by FERC to ROE calculations, failed to protect consumers. (See FERC Reduces Entergy’s Return on Equity.)
“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,” she wrote in Opinion 575. “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.”
“Given this context, I believe the commission must revisit its existing ROE policy,” Clements said. “I appreciate that this policy has been unsettled for years, a state that increases investment uncertainty and extends litigation.
“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,” she said. “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.”
