New England Transmission Owner ROE - Reply Briefs Filed
- March 13, 2019
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Currently there are four pending complaints against the New England Transmission Owner’s (NETOs) ROE that go back to 2011. Each complaint has been fully litigated before an Administrative Law Judge (ALJ) with only the first complaint resulting in a FERC Commission decision (Opinion 531). The D.C. Circuit of Appeals vacated the Commission’s determinations in its order on the First Complaint (Opinion No. 531). In the meantime, the NETOs are continuing to collect their 10.57% base ROE from Opinion 531, although the Commission has indicated that it will exercise its “broad remedial authority” to correct its legal error to make whatever ROE it sets on remand effective as of the date of that Order.
On October 16, 2018, FERC issued an order in these complaint cases. In its Order, FERC set forth its methodology for addressing ROE complaints while considering the remand from the DC Court. In its proposal, FERC gives equal weight to the results of the four financial models in the record in the NETO cases, instead of primarily relying on the DCF model. In relying on a broader range of record evidence to estimate the NETOs’ cost of equity, FERC states that this will ensure that the selected ROE is based on substantial evidence and bring its methodology into closer alignment with how investors make investment decisions.
The October 16 Order evaluated the justness and reasonableness of existing ROE of the NETOs by dividing a “composite zone of reasonableness” bounded by the average of the highest values obtained in the DCF, CAPM and Expected Earnings analysis, and the average of the three lowest values obtained in those analyses, into quartiles. The Order compares the pre-complaint NETO ROE of 11.14% to a “middle quartile” extending from 37.5% (three-eighths) to 62.5% (five-eighths) of a range from 7.51% to 13.08%, or from 9.6% to 10.99%. Since the NETOs’ Opinion No. 489 ROE of 11.14% exceeds 10.99%, FERC would find it unjust and unreasonable, and reduce it to 10.41%. FERC would also set the total ROE cap at 13.08%.
In January 2019, parties filed briefs in these four ROE cases. There is a summary of these briefs at https://www.dumaisconsulting.com/blog/category/electric-transmission-roe. Below is a summary of the reply briefs. The next step in this process for all four ROE cases is a FERC decision.
The NETOs in their reply brief state that FERC should disregard the recommendations of Complainants and FERC Trial Staff because the end-result of all of the ROEs proposed are too low to meet the requirements of Hope and Bluefield, where a ROE must be “commensurate with returns on investments in other enterprises having corresponding risks. . . . [and] sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and attract capital.” In Opinion No. 531, FERC found that a DCF midpoint of 9.39% failed to satisfy the Hope and Bluefield standards. Similarly, in Opinion No. 551, FERC found that a base ROE for the MISO transmission owners at the 9.29% midpoint of the DCF range would fail to meet these standards. The base ROEs recommended by the CAPs range from 8.91% for Complaint I to 8.33% for Complaint IV. The base ROEs recommended by EMCOS range from 8.70% for Complaint I to a shockingly low 7.67% for Complaint IV. FERC Trial Staff recommends base ROEs from as high as 9.41% for Complaint III to as low as 8.82% for Complaint IV. The fact that capital market conditions during the record periods underlying Complaints II, III, and IV remained comparable to the conditions that the Commission took into consideration in Opinion No. 531 along with FERC’s incontrovertible findings in Opinion Nos. 531 and 551 demonstrate that the ROEs proposed by the Complainants and Trial Staff fail the standards of Hope and Bluefield.
The Complainants and Trial Staff continue to advocate that the Expected Earnings approach to ROE should not be used as it does not measure the market cost of equity as it uses accounting data. Eliminating the Expected Earnings approach would lower the base ROE and ROE Cap. They also state that the CAPM and Risk Premium ROE methodologies are not precluded from critique as the way FERC proposed to use them in their October 2018 Order makes them more significant than how they were used to corroborate the ROE result in Opinion 531. Eastern Massachusetts Consumer-Owned entities (EMCOs) continues to state that the DCF remains a sound and reliable method to determine the market cost of equity. However, EMCOS recognize the FERC’s flexibility to incorporate other methodologies so long as those methodologies similarly seek to estimate the market cost of equity capital and are applied consistent with the economic theory and academic literature which underlie them. EMCOS’ identify concrete modifications, supported by significant evidence, which would create a methodology capable of fairly and accurately identifying a return that appropriately balances the needs of the NETOs’ investors against FERC’s obligation to protect customers from excessive rates. The Complainants and Trial Staff do not agree with the NETOs’ CAPM and Risk Premium results. As to the ROE Cap, EMCOS and CAPs both explain that FERC’s proposal that a broader zone – bounded at the top by the average of the three highest values produced by a DCF analysis, a CAPM analysis and an Expected Earnings analysis – should operate as the limit on total ROE is contrary to Order 679 on incentives as the rulemaking on Order 679 determined that the total ROE is limited by the top end of a DCF determined zone of reasonableness. CAPS state that the record supports a base ROE well below 10% for each of the four ROE periods. Complainants and Trial Staff all argue that there should be a high-end cut-off and a lower low-end cut-off than that proposed by the NETOs.