By Chris O’Malley

MISO consumer advocates last week asked the Federal Energy Regulatory Commission to reconsider their request to cap the equity component of transmission owners’ capital structure at 50%. The advocates also renewed their request to eliminate transmission rate incentives for RTO participation and independence.

The commission rejected both requests Oct. 16, but it ordered an evidentiary hearing on complaints that the base rate of return on equity of MISO’s 24 transmission operators is not just and reasonable (EL14-12).

The commission said the challengers failed to demonstrate that the capital structure and incentive rules were unjust. FERC also ruled that evidence showing that certain MISO TOs have higher amounts of equity than they need to maintain good credit ratings and attract capital was insufficient grounds for investigating their capital structure.

Consumer advocates from Indiana, Iowa, Michigan, Minnesota, Missouri and Wisconsin argue in their latest filing that “the allowed ROE and the ratemaking capital structure must be considered together and both subject to reasonable standards.”

They said there’s evidence that transmission-only companies with lower operating risk can finance with greater amounts of financial risk or leverage while supporting an investment-grade bond rating. They said “today’s changed financial market” warrants a lower cap on the equity component.

ITC Holdings Cited

As an example, the advocates pointed to ITC Holdings and its utility subsidiaries. While those subsidiaries set transmission rates based on a commission-approved 60% equity ratio capital structure, ITC seeks to maintain an adjusted debt-to-total capital ratio of 70%, the advocates said.

Bond ratings of the ITC companies reflect a common equity ratio of 30%, not the 60% used to set ITC’s and Michigan Electric Transmission Co.’s FERC transmission rates, the advocates contend. ITC’s bond ratings are “only slight lower” than its FERC-regulated operating subsidiaries.

“That fact means that the FERC-regulated ITC subsidiaries could be capitalized with much lower (and much less expensive) common equity ratios, just as the parent (ITC) does and still maintain investment-grade bond ratings,” they said.

Customers who must pay for the much more expensive equity capital allowed in ITC’s subsidiaries’ 60% ratemaking capital structure “are not getting any debt cost advantage of that extreme equity ratio because the parent company leverage holds down the bond rating that could otherwise be achieved with such a high equity ratio.”

OMS Weighs In

The Organization of MISO States also requested that FERC rehear TO capital structure and continued use of incentive transmission adders for independence and RTO participation.

“If not reviewed alongside the ROE, the resulting costs in these two areas could lead to rates that will be higher than necessary to achieve investment grade utilities that build needed transmission,” OMS said. “Requiring the parties to review base ROE without looking at all the relevant factors that impact end-use rates rests on the faulty notion that these elements are discrete and disconnected from each other.”

OMS cites the ability of ITC Transmission and METC to receive a 100 basis-point adder for being an independent transmission company.

FERC opened the door to ROE fights in June, when it changed the way it sets return on equity rates for electric utilities to something akin to the process it uses for natural gas and oil pipelines. FERC ruled in a case involving a New England transmission owner, tentatively setting the “zone of reasonableness” at 7.03 to 11.74%.

The TOs’ ROE is currently 12.38%, except for American Transmission Co., which has a base rate of 12.2%.

Settlement Judge Dawn E.B. Scholz reported last week that the parties had made progress in a settlement conference Nov. 13. Another session was set for Dec. 16.

MISO industrial customers said previously they see the potential to reduce transmission rates by $327 million in year.