An apparently routine rate incentive request from a MISO transmission developer who has yet to be assigned a project turned into a debate between FERC commissioners over capital structures in ratemaking (ER25-2312).

Midcontinent Grid Solutions (MGS) Iowa — a subsidiary formed by MGS to bid on MISO competitive transmission projects in the state — approached FERC for a 9.98% base return on equity, a 50 basis-point adder for participation in an RTO, regulatory asset treatment to recover its pre-commercial and start-up costs later, and a hypothetical capital structure of 60% equity and 40% debt until it establishes long-term debt.

The company has not yet been awarded any competitive projects in MISO.

FERC’s resulting Sept. 8 ruling allowed MGS Iowa the incentives, with the caveat that it include the cost of its actual short-term debt from construction financing in initial debt costs in its formula rate for the period when it has yet to acquire long-term debt. The commission also allowed the company to use the depreciation rates of its affiliate, Transource Wisconsin, until it has its own facilities to glean historical data.

The 60/40 equity-to-debt split was a point of contention among commissioners.

Commissioner Judy Chang dissented from the order, arguing that hypothetical capital structures in which equity skews higher can cost ratepayers more and should be evaluated more closely.

“The capital structure used in ratemaking affects the size of the overall revenue requirement by impacting the return on rate base, depreciation and even income tax allowance for the life of the project,” Chang wrote. “These components then flow into the resulting rates. The relationship between the assumed capital structure and rates therefore presents a direct impact to ratepayers: the higher the assumed equity component of an applicant’s capital structure (without changing the corresponding return on equity), the greater the potential rate impact for customers.”

Chang said MGS Iowa did not support its requested capital structure and only cited past commission precedent granting the same figures for other companies. She said FERC’s past decisions should not automatically validate MGS Iowa’s request.

She pointed out that while FERC has accepted developers’ request for 60% equity with “minimal support,” it also has applied greater scrutiny, evidenced by its recent order concerning Valley Link Transmission Maryland.

FERC generally allows up to 60% equity share. But in May, it rejected Valley Link’s proposed 60% equity/40% debt hypothetical capital structure, with the Maryland Office of People’s Counsel arguing the proposed ROE was too high and would transfer risk to ratepayers (EL25-77).

“The commission should not perpetuate an error simply because it has approved a similar structure in the past for other entities,” Chang concluded. “Accordingly, I would reject MGS Iowa’s proposed capital structure and establish a paper hearing to determine the appropriate hypothetical capital structure.”

Commissioner Lindsay See agreed with Chang that a hypothetical capital structure of 60% equity and 40% debt can “heighten the potential for unjustified rates” and MGS Iowa’s argument was “less than ideal.”

“Future applicants might take note that bringing stronger record support for their chosen hypothetical capital structure could make for a smoother path,” See wrote in a concurrence to the order.

But See said the temporary capital structure is within the bounds of what FERC previously approved and would last only until MGS Iowa attains long-term debt financing with a project placed into service. She also said new transmission is associated with “significant financing risks” and noted that no one objected to the capital structure.

“I cannot overlook how the commission has granted similar requests in similar cases very consistently over the better part of a decade. Regulatory certainty drives stable investments, and we need smart investments to build out the grid now more than ever. Taking a sharp turn from the commission’s nearly unanimous precedent in this area thus gives me pause,” See said.