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165 F.E.R.C. P61,118; 2018 FERC LEXIS 1597; 2018 WL 6015913

Federal Energy Regulatory Commission - Commission

November 15, 2018

Docket No. EL14-12-003, Docket No. EL15-45-000

Opinion

 [*61463] 

1. Two complaint proceedings involving the return on equity (ROE) of Midcontinent Independent System Operator, Inc.'s (MISO) transmission-owning members (MISO TOs) are currently pending before the Commission. The Commission set these proceedings for hearing after it issued Opinion No. 531, concerning the ROE of the New England Transmission Owners (New England TOs). 1 In the order setting the first MISO proceeding for hearing, the Commission stated that it "expect[ed] the participants' evidence and [Discounted Cash Flow (DCF)] analyses to be guided by our decision in Opinion No. 531." 2 Subsequently, in Emera Maine v. FERC, 3 the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) vacated and remanded Opinion No. 531. On October 16, 2018, the Commission issued an order proposing a methodology for addressing the issues that were remanded to the Commission in Emera Maine and establishing a paper hearing on how that methodology should apply to the proceedings before the Commission involving New England TOs' ROE. 4 In this order,  [**2]  we similarly establish a paper hearing on whether and how this methodology should apply to the proceedings pending before the Commission involving MISO TOs' ROE.

 [*61464]  I. Background

A. Opinion   [**3]    No. 531 et seq.

2. In Opinion No. 531, the Commission adopted certain changes to its use of the DCF methodology for evaluating and setting the Commission-allowed ROE for the New England TOs. In particular, the Commission elected to replace the "one-step" DCF model, which considers only short-term growth projections for a public utility, with a "two-step" model that considers both short- and long-term growth projections. 5 The Commission also departed from its typical practice of setting the just and reasonable ROE of a group of utilities at the midpoint of the zone of reasonableness. The Commission explained that evidence of "anomalous" capital market conditions, including "bond yields [that were] at historic lows," made the Commission "less confiden[t] that the midpoint of the zone of reasonableness . . . accurately reflects the [ROE] necessary to meet the Hope and Bluefield capital attraction standards." 6 The Commission therefore looked to four alternative benchmark methodologies: Three financial models--a risk premium analysis, a capital-asset pricing model (CAPM) analysis, and an expected earnings analysis--as well as a comparison with the ROEs approved [**4]  by state public utility commissions. 7 In considering those methodologies, the Commission emphasized that it was not departing from its long-standing reliance on the DCF model, but rather relying on those methodologies only to "inform the just and reasonable placement of the ROE within the zone of reasonableness established . . . by the DCF methodology." 8 Based on these alternative methodologies, the Commission determined that an ROE of 10.57 percent, the midpoint of the upper half of the zone of reasonableness produced by the DCF, would be just and reasonable. Because that figure differed from the New England TOs' existing 11.14 percent ROE, the Commission concluded that the existing base ROE had become unjust and unreasonable and it therefore set New England TOs' base ROE at 10.57 percent, pending a paper hearing concerning the long-term growth projection to use in the DCF analysis. Following that hearing, in Opinion No. 531-A the Commission reaffirmed its conclusion that 10.57 percent was the just and reasonable ROE and that New England TOs' existing ROE was unjust and unreasonable. The Commission required New England TOs to submit a compliance filing to implement their new ROEs [**5]  effective October 16, 2014--the date of Opinion No. 531-A.

 [**6]  

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165 F.E.R.C. P61,118 *; 2018 FERC LEXIS 1597 **; 2018 WL 6015913

Association of Businesses Advocating Tariff Equity, Coalition of MISO Transmission Customers, Illinois Industrial Energy Consumers, Indiana Industrial Energy Consumers, Inc., Minnesota Large Industrial Group, Wisconsin Industrial Energy Group v. Midcontinent Independent System Operator, Inc. ALLETE, Inc., Ameren Illinois Company, Ameren Missouri, Ameren Transmission Company of Illinois, American Transmission Company LLC, Cleco Power LLC, Duke Energy Business Services, LLC, Entergy Arkansas, Inc., Entergy Gulf States Louisiana, LLC, Entergy Louisiana, LLC, Entergy Mississippi, Inc., Entergy New Orleans, Inc., Entergy Texas, Inc., Indianapolis Power & Light Company, International Transmission Company, ITC Midwest LLC, Michigan Electric Transmission Company, LLC MidAmerican Energy Company, Montana-Dakota Utilities Co., Northern Indiana Public Service Company, Northern States Power Company-Minnesota, Northern States Power Company-Wisconsin, Otter Tail Power Company, Southern Indiana Gas & Electric Company, Arkansas Electric Cooperative Corporation, Mississippi Delta Energy Agency, Clarksdale Public Utilities Commission, Public Service Commission of Yazoo City, Hoosier Energy Rural Electric Cooperative, Inc., v. ALLETE, Inc., Ameren Illinois Company, Ameren Missouri, Ameren Transmission Company of Illinois, American Transmission Company LLC, Cleco Power LLC, Duke Energy Business Services, LLC, Entergy Arkansas, Inc., Entergy Gulf States Louisiana, LLC, Entergy Louisiana, LLC, Entergy Mississippi, Inc., Entergy New Orleans, Inc., Entergy Texas, Inc., Indianapolis Power & Light Company, International Transmission Company, ITC Midwest LLC, Michigan Electric Transmission Company, LLC, MidAmerican Energy Company, Montana-Dakota Utilities Co., Northern Indiana Public Service Company, Northern States Power Company-Minnesota, Northern States Power Company-Wisconsin, Otter Tail Power Company, Southern Indiana Gas & Electric Company

Subsequent History:

Related proceeding at Inquiry Regarding the Commission's Policy for Determining Return on Equity, 166 F.E.R.C. P61207, 2019 FERC LEXIS 346 (F.E.R.C., Mar. 21, 2019)

Rejected by, in part, Adopted by, in part Ass'n of Businesses Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., 169 F.E.R.C. P61129, 2019 FERC LEXIS 1708 (F.E.R.C., Nov. 21, 2019)

Prior History:

Ark. Elec. Coop. Corp. v. ALLETE,, Inc., 151 F.E.R.C. P61219, 2015 FERC LEXIS 948 (F.E.R.C., June 18, 2015)

Ass'n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, 149 F.E.R.C. P61049, 2014 FERC LEXIS 1665 (F.E.R.C., Oct. 16, 2014)

CORE TERMS

zone, percent, methodology, Earnings, midpoint, models, investors, unjust, proxy, estimates, projections, proceedings, conditions, composite, risk premium, median, prong, outlier, profile, analyses, capital market, Briefing, corresponding, preexisting, averaged, equal weight, calculate, high-end, two-step, attract