The Federal Energy Regulatory Commission (FERC) cannot keep changing its return on equity (ROE) methodology, FERC Chairman Richard Glick recently said in comments at a Commission meeting, adding that companies need to have some level of regulatory certainty if they are going to continue to make multi-million and, in some cases, multi-billion dollar investment decisions.
Glick made his remarks at FERC’s monthly open meeting on May 20 in the context of a Commission order that set a ROE for an Entergy unit power sales agreement. The order employs the same methodology the Commission used when establishing the ROE for Midcontinent Independent System Operator, Inc.’s (MISO) transmission owners in Opinion Numbers 569-A and 569-B.
Glick noted that when FERC issued Opinion Numbers 569-A and 569-B, he expressed concern about the Commission’s decision to add the risk premium model “because the first MISO ROE order had thoroughly explained why the risk premium model is not an appropriate tool for assessing a just and reasonable ROE.” While he continues to have his concerns, he also believes that FERC cannot keep altering its ROE methodology.
FERC in May 2020 revised its method for analyzing the base ROE used in setting cost-based public utility transmission rates. FERC’s reference to “public utility” refers to utilities that are subject to FERC’s rate jurisdiction under the Federal Power Act.
The changes adopted by the Commission through the issuance of Opinion No. 569-A are likely to result in higher allowed ROEs than would have resulted from the method outlined in Opinion No. 569 issued in November 2019 and could also make it more difficult to challenge existing ROEs as unjust and unreasonable.
In Opinion No. 569, FERC said it will use the discounted cash flow (DCF) methodology and capital asset pricing model (CAPM) to determine if an existing base ROE is unjust and unreasonable, and, if so, what replacement ROE is appropriate. Applying the new methodology in a pair of complaints against MISO transmission owners, Opinion No. 569 determined that their base ROE should be 9.88 percent.
FERC’s order on rehearing revised the methodology established in Opinion No. 569 and found that the MISO transmission owners’ base ROE should be set at 10.02 percent.
In response to FERC’s decision, Glick concurred in part and dissented in part.
Commissioners offer dissent, concurrence
FERC Commissioner Mark Christie offered a concurrence to FERC’s May 20 order, while Commissioner Allison Clements dissented from the decision.
In his concurrence, Christie said that while the order “correctly applies the Commission’s ROE methodology set forth in Order No. 569 and its progeny, I believe that the Commission’s policy is flawed to the extent it replaces judgment with rote application of pre-set formulae and should be reviewed in a general proceeding to consider possible changes to that methodology. Second, I believe the Commission can, and should, issue ROE orders much more expeditiously in the future and matters of procedure, including setting strict procedural deadlines for FERC itself to follow, should be part of any such future proceeding on the ROE issue.
Clements said that she agrees that the order reasonably applies the Commission’s return on equity ROE policy established in Order 569-A to the facts in these proceedings. “I dissent because I do not believe our existing methodology for setting ROEs in jurisdictional cost-based rates fully carries out our consumer protection responsibility under the Federal Power Act. As a result, I cannot conclude that the ROE established in these proceedings is just and reasonable,” she wrote.
She said that FERC should revisit its existing ROE policy. “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. 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.”