Electricity Markets

Appeals court vacates FERC orders on transmission ROE

The U.S. Court of Appeals for the District of Columbia Circuit on April 14 vacated orders issued by the Federal Energy Regulatory Commission in 2014 and 2015 that established base return on equity rates for New England transmission owners, saying that FERC "failed to provide any reasoned basis" for choosing 10.57 percent as its new base return on equity.

The federal appeals court granted petitions for review that were filed by both transmission owners and transmission customers in Emera Maine (formerly known as Bangor Hydro-Electric Company), et al., v. FERC, and remanded the case back to the commission.

In 2011, Massachusetts and various consumer stakeholders filed a complaint under Section 206 of the Federal Power Act, alleging that New England transmission owners' return on equity had become unjust and unreasonable because of changing economic conditions.

In June 2014, in Opinion No. 531, FERC adopted a new methodology for determining the rate of return on equity (ROE) for electric utilities that fall under the commission's jurisdiction. The commission then applied this new methodology in Opinion No. 531-A to determine the ROE in the pending complaint case involving New England transmission owners.

In doing so, FERC said that the just and reasonable base ROE for the New England transmission owners should be set halfway between the midpoint of a "zone of reasonableness" and the top of that zone. The commission further concluded that the base ROE should be 10.57 percent, "the point halfway between the 9.39 percent midpoint of the zone of reasonableness and the 11.74 percent top of that zone."

About a month after FERC's June 2014 order, the American Public Power Association, the National Rural Electric Cooperative Association and other parties asked the commission to rehear the case, arguing that this rate of return was excessive, and had not been justified. They said that Opinion No. 531 would saddle New England electricity customers "with hundreds of millions of dollars of unjust and unreasonable charges."

In March 2015, FERC denied requests for rehearing of its Opinion No. 531 that were made by a broad range of stakeholders. It issued a new directive, Opinion No. 531-B, which upheld the commission's new two-step methodology as outlined in Opinion No. 531.

Both sides file court petitions

Transmission owners went to court, arguing that the FERC directives should be vacated because, before setting its new ROE, the commission had not first found that the existing ROE was unjust and unreasonable.

Transmission customers also went to court, arguing that FERC had arbitrarily placed the new ROE at the midpoint of the upper half of the "zone of reasonableness."

The court of appeals, in its April 14 ruling, said both transmission owners and customers had made good points in asking for the court to review the case.

Under Section 206 of the Federal Power Act, FERC can exercise its authority to impose a new just and reasonable rate "only after having made the determination that the utility's existing rate fails that test," said Senior Circuit Judge David B. Sentelle, who wrote the court opinion.

"We conclude that FERC did not meet the first requirement of Section 206 that it demonstrate the unlawfulness of transmission owners' base ROE," the court said. Since the commission failed to do this, "FERC acted arbitrarily and outside of its statutory authority in setting a new base ROE for transmission owners."

"Customers' petition is also well taken," wrote Judge Sentelle. "After performing its analysis, FERC abandoned its traditional use of the midpoint of the zone of reasonableness in setting transmission owners' base ROE. Instead, FERC picked the midpoint of the upper half of the zone of reasonableness as the new base ROE."

The commission did not set forth a rational connection between the evidence in the case and its decision on the new base ROE, wrote the judge.

The commission "never explained how 10.57 percent was just and reasonable when the alternative benchmarks and additional record evidence it used to justify a departure merely pointed to a base ROE somewhere above 9.39 percent," the court added.

"When making adjustments in setting a utility's base ROE, FERC must adequately explain how the evidence it relied on ‘support[ed] the conclusion it reached,'" the court said, citing a 1985 case, Wisconsin Gas Co. v. FERC. "FERC's explanation for selecting 10.57 percent as the base ROE was insufficient."

Court's rule is ‘limited'

The federal appeals court emphasized that its review was "limited to ensuring that FERC ‘made a principled and reasoned decision supported by the evidentiary record.'"

"It is not our job to tell FERC what the ‘correct' ROE is for transmission owners," Judge Sentelle wrote, "but it is our duty to ensure that FERC's decision is ‘the product of reasoned decision-making.'"

Concluding that FERC had "failed to provide any reasoned basis" for selecting 10.57 percent as its new base return on equity, the court said, "We therefore vacate FERC's orders and remand the case for proceedings consistent with this opinion."