On November 19, 2020, FERC issued Opinion No. 569-B, in which it made minor modifications to the discussion in, but largely reaffirmed, its previously-issued Opinion No. 569-A wherein FERC revised its return on equity (“ROE”) analysis and methodology. Specifically, FERC reaffirmed the three-model methodology it had established in Opinion 569-A, while clarifying that one of the models, the “Risk Premium Model”, would employ historical rather than forward-looking bond yields. FERC also updated the Risk Premium Model to both correct typographical errors and include an inadvertently omitted case.
Opinion No. 569-B is the most recent action in a series of FERC proceedings related to the Commission’s ROE analysis and methodology. Between 2011 and 2015, various customer groups filed complaints alleging that the base ROE available to Transmission Owners (“TOs”) in ISO New England, Inc. (“ISO-NE”) and Midcontinent Independent System Operator (“MISO”) was unjust and unreasonable. In Opinion No. 531, FERC upheld an elevated ROE for ISO-NE TOs based on a variety of financial models—a methodology that was later applied to two complaint proceedings challenging the base ROEs of MISO TOs, and then ultimately vacated by the D.C. Circuit Court of Appeals in the ISO-NE TOs proceeding. In its order on remand from the D.C. Circuit, FERC proposed a revised methodology, which it then revised in Opinion No. 569 (for additional background, see October 25, 2018 edition of the WER and November 21, 2019 edition of the WER).
In Opinion No. 569, FERC decided to equally weigh a discounted cash flow (“DCF”) model and a capital-asset pricing model (“CAPM”) when determining the “zone of reasonableness” for a ROE. If a ROE was found to be outside of the zone of reasonableness, FERC would re-calculate a new base ROE, using the same two models. FERC applied the newly-revised methodology to the facts of the two MISO TO complaints, finding in the first complaint proceeding that the existing 12.38 percent MISO TO ROE should be readjusted to 9.88 percent and denying the second complaint.
In May 2020, FERC issued Opinion No. 569-A, wherein it partially granted rehearing and clarification on aspects of its decision in Opinion No. 569 (see May 21, 2020 edition of the WER). Notably, in Opinion No. 569-A, FERC established that, in addition to the DCF model and the CAPM, the new methodology would use a third financial model—the Risk Premium Model—when establishing just and reasonable ROE for TOs. FERC applied this revised methodology to the facts of the two MISO TO complaints and again revised the ROE in the first complaint proceeding, this time from 9.88 percent to 10.02 percent, and denied rehearing of its dismissal of the second complaint.
In FERC’s latest action, Opinion No. 569-B, FERC made minor modifications to, and set aside in part, Opinion No. 569-A. While FERC reaffirmed most of its previous findings, including the usage of the Risk Premium Model, it did find that it had included typographical errors and omitted a case when it calculated the Risk Premium model in Order No. 569-A, and based on this, modified, in part, its discussion to remedy these errors. However, FERC also found that the errors had a de minimis impact on the model’s results. FERC also clarified that the Risk Premium model would employ historical Baa utility bond yields and not, as the Commission inadvertently used in a briefing order, forward-looking bond yields.
Commissioner Glick concurred in part and dissented in part to Order No. 569-B, stating that, while he agreed with the end result of the opinion that determined a 10.02% ROE is just and reasonable, he disagreed with the majority’s “fiddling” with FERC’s ROE methodology, the use of the Risk Premium model, and FERC’s refusal to grant refunds related to the rate that it had determined to be unjust and unreasonable.
A copy of Opinion No. 569-B is available here.
