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By Troutman Sanders LLP
On September 16, 2015, the Commission dismissed a petition filed by the Working group for Investment in Reliable and Economic electric Systems (“WIRES”) in which WIRES requested that the Commission institute a generic proceeding to determine whether the Commission’s discounted cash flow (“DCF”) methodology continues to be the most appropriate method of computing public utility Return on Equity (“ROE”).
In its June 26, 2013 petition, WIRES argued, among other things, that a mechanistic application of the DCF methodology can yield unreasonable rates of return, depending on the prevailing economic environment, and does not sufficiently consider expected economic developments or the foreseeable, long-term benefits of transmission projects. WIRES recommended in its petition that the Commission adopt a new ROE policy that: (i) standardizes the selection of proxy groups; (ii) denies complainants a hearing on rates of return for existing facilities unless it is shown that existing rates are at the extremes of the zone of reasonableness; (iii) allows consideration of competing infrastructure investments of other industries; (iv) permits use of other rate of return methodologies; and (v) supports the use of more forward-looking data and modeling.
In its September 16, 2015 Order, FERC dismissed WIRES’ petition, citing the Commission’s June 19, 2014 Opinion No. 531. In that Opinion, the Commission changed the DCF methodology to be used in determining a public utility’s ROE by adopting the two-step DCF methodology that the Commission uses in natural gas pipeline and oil pipeline cases. The Commission also noted in the September 16, 2015 Order that, since issuing Opinion No. 531, it had established hearing and settlement judge procedures in other proceedings that address a public utility’s ROE, explaining that those proceedings should be guided by the Commission’s decision in Opinion No. 531. In light of this guidance, the Commission dismissed WIRES’ petition.
A copy of the Commission’s September 16, 2015 Order may be found here.
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