On November 12, 2013, a group of industrial and commercial end-users in the Midwest filed a complaint at the Federal Energy Regulatory Commission (FERC) against the Midcontinent Independent System Operator, Inc. (MISO) and the transmission-owning members of MISO (MISO TOs).  The complainants are seeking, among other things, a reduction in the base return on equity (ROE) used in the MISO TOs’ formula transmission rates contained in Attachment O of MISO’s FERC-filed Tariff.  The base ROE currently in effect for all of the MISO TOs except American Transmission Company LLC (ATC) is 12.38 percent, and the base ROE currently in effect for ATC is 12.2 percent.  These base ROEs are fixed and do not change from year to year, as do most of the other Attachment O formula rate inputs.  In addition, certain of the MISO TOs have in place incentive adders that increase their base ROEs by 50 to 150 basis points. 

The complainants argue that the base ROEs are no longer just and reasonable “due to changes in the capital markets,” and that the MISO TOs’ base ROE should not exceed 9.15 percent.  The complainants argue that the current cost of equity for the MISO TOs is in the range of 7.97 percent to 10.33 percent, with a midpoint of 9.15 percent.  The complainants conclude that electric consumers are overcompensating the MISO TOs by approximately $327 million annually under the current base ROEs, as compared to rates using the complainants’ recommended 9.15 percent base ROE.

The complainants also argue that the MISO TOs’ ROE incentive adders are no longer just and reasonable and should be removed from their formula rates.  They argue that those adders, which were originally intended to encourage membership in Regional Transmission Organizations and the divestiture of transmission facilities to independent companies, are no longer necessary to promote FERC’s policy goals.  In addition, the complainants allege that some of the MISO TOs employ capital structures with greater than 50 percent equity that are no longer just and reasonable, because a 50 percent common equity ratio is sufficient to support a strong credit standing for the MISO TOs.  They request that FERC establish a 50 percent common equity cap for all MISO TOs, while permitting individual MISO TOs to justify a higher equity ratio as just and reasonable.  We anticipate that FERC will establish hearing and settlement procedures to address the issues raised in the complaint. 

The filing of a complaint by the Midwestern end-users to lower the Midwest TOs’ base ROEs does not come as a surprise given the similar complaint filed by various state commissions, ratepayer advocates and end-users against the New England transmission owners (NE TOs), which is currently pending at FERC in Docket No. EL11-66.  As we reported earlier, on August 13, 2013, the Presiding Administrative Law Judge in the New England proceeding issued an initial decision finding that the NE TOs’ current 11.14 percent base ROE is unjust and unreasonable and that the just and reasonable prospective base ROE should be no more than 9.7 percent.  We anticipate that the outcome of the New England proceeding will likely provide a clear signal as to how the MISO proceeding will eventually be resolved.