Electricity Markets

FERC offers guidance on how cases are affected by ROE ruling

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The Federal Energy Regulatory Commission on Nov. 15 provided guidance regarding how other pending cases are affected by a recent Commission order that proposed a new approach for calculating the allowed return on equity (ROE) to be included in the rates of transmission owners in ISO New England. 

The orders that were voted on by FERC Commissioners at the agency’s regular monthly meeting tie back to an Oct. 16 decision issued by the Commission related to calculating the allowed ROE to be included in the rates of transmission owners in ISO-NE. 

The Oct. 16 order (Docket No. EL-66) was issued in response to an April 2017 decision by the U.S. Court of Appeals for the D.C. Circuit that found FERC had not adequately explained its conclusion that the base ROE included in the rates of ISO-NE transmission owners was unjust and unreasonable. In that decision, the appeals court also found that FERC had not adequately justified the replacement ROE it adopted for the ISO-NE transmission owners. 

In response to the court’s rulings, FERC’s order proposed a new approach to determining, under Federal Power Act (FPA) section 206, whether an existing ROE remains just and reasonable. The decision also puts forth major changes to FERC’s framework for calculating a new just and reasonable ROE.

FERC issues orders at meeting

In one decision at its Nov. 15 meeting, the Commission issued an order directing parties in two proceedings involving the base ROE of the transmission owning members of the Midcontinent Independent System Operator to submit briefs concerning the Commission’s proposed change in approach to determining the base ROE. 

FERC also issued an order that offers guidance regarding the effect of the Oct. 16 order on a number of other pending cases where ROE is under review.  The Commission said that it expects the parties to address the proposed new ROE methodology in the context of their respective proceedings.

Chatterjee says FERC intends to consider possible additional changes

During discussion of the ROE orders, FERC Chairman Neil Chatterjee announced that the Commission intends to consider whether it should make additional changes to both its calculation of base ROEs and transmission incentives under FERC Order No. 679. 

While expressing the view that the ROE methodology proposed in the Oct. 16 order in the ISO-NE case would produce just and reasonable rates, he said that FERC’s incentive policies under Order 679 were overdue for a “fresh look,” with input from all interested stakeholders, not just those involved in the pending ROE proceedings. 

He said it was “high time” to see if the Commission’s ROE and incentive policies are producing “the level and type of transmission investment the nation needs.” 

Chatterjee noted that this effort had been initiated by then-Chairman Kevin McIntyre and he also emphasized that any policy changes arising from the review would only be applied prospectively.

“FERC needs to stay laser-focused on adopting and enforcing policies that ensure reasonable transmission rates. This especially applies to making sure equity returns included in transmission rates are not excessive,” said Delia Patterson, senior vice president and general counsel at the American Public Power Association.