FERC last week ordered Wisconsin Electric Power Co. and a Northern Michigan cooperative into settlement proceedings to resolve a complaint over excessive rates.

Cloverland Electric Cooperative argued that the 11% return on equity it pays to Wisconsin Electric as part of the formula rate under a capacity and load-following service agreement is outside the zone of reasonableness, even considering the COVID-19 pandemic amplifying financial risk (EL20-57).

Cloverland said its analysis found that Wisconsin Electric should use an ROE between about 8 to 9%.

The analysis used a combination of the discounted cash flow model, capital asset pricing model and risk premium model that FERC last year prescribed for transmission owners’ ROE calculation. (See FERC Stands by 10.02% ROE.)

The co-op estimated that every 100-basis-point reduction in Wisconsin Electric’s ROE would lower its costs by about $2.34 million over the remaining life of the agreement.

Wisconsin Electric fired back that Cloverland’s analysis did not account for the “extremely volatile prevailing market conditions created by the COVID-19 pandemic, leading to the erroneous conclusion that risk to Wisconsin Electric’s equity investors has declined since 2007.”

The utility said the pandemic “has caused a level of uncertainty and volatility in the market even greater than during the Great Recession of 2008/2009,” justifying an ROE between 10 and 11%.

FERC said it could not resolve the matter based on the record and put the disagreement to settlement and hearing proceedings.

Commissioner James Danly said a paper hearing would help the two companies work with the most up-to-date information.

“The data and analyses submitted by Cloverland Electric Cooperative and Wisconsin Electric Power Co. cover only the time periods ending on April 2020 and July 2020, respectively. Further, some of the submitted data may not reflect market conditions, particularly in light of the COVID-19 pandemic and the policies adopted in response to the pandemic. Hearing procedures will afford an opportunity for the parties to update the record to reflect more recent data,” Danly said.

However, Danly warned against the matter escalating into an evidentiary hearing, which he called pricey and time-consuming.

“Further, the commission has a record of issuing untimely decisions in ROE proceedings,” Danly warned, pointing to last year’s decision, which was in response to a complaint filed in 2013.