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FERC affirms ALJ decision lowering MISO transmission owners' ROE

Agreeing with a FERC administrative law judge'sdetermination regarding anomalous market conditions, FERC on Sept. 28 ruledthat the base rate of return on equity currently approved for mosttransmission-owning members of the Midcontinent Independent System Operator Inc. is unjustand unreasonable and should be reduced to 10.32%, effective immediately.

In doing so, the commission stuck with its recently adoptedpractice of setting the base ROE halfway between the midpoint and the top of azone of reasonableness established based on a proxy group of similarly situatedutilities.

The order at issue addresses only the first (EL14-12) of twopending complaints alleging that the 12.38% base ROE approved in 2002 forgeneral use by MISO transmission owners and the 12.2% base ROE in effect forAmerican Transmission Co.LLC pursuant to a 2004 settlement agreement are far too high inlight of major changes in market conditions that have occurred in the interim.

Filed in November 2013 by a group that includes theAssociation of Businesses Advocating Tariff Equity and the Coalition of MISOTransmission Customers, the complaint asked that the base ROE for transmission-owning membersof MISO be limited to a "just and reasonable" maximum of 9.15%. WhenFERC in October 2014 set the complaint for hearing, it dismissed two aspectsof the challenge related to MISO transmission owners' common equity ratios andcertain ROE incentive adders previously granted to two utilities.

Following a hearing on the matter, Judge David Coffman inDecember 2015 issuedan initial decision finding that the commission should continue to deviate fromits usual policy of setting utilities ROEs at the midpoint of the zone ofreasonableness. The judge said the anomalous market conditions that promptedthe agency in 2014 to find that the base ROE for New England transmissionowners should be set at halfway between the midpoint and top of the zone ofreasonableness still existed.

In affirming Coffman's initial decision, FERC reached thesame conclusions as the judge regarding the ongoing anomalous capital marketconditions and the appropriate level for the ROEs even though the agency reliedon a different rationale for doing so. For instance, while Coffman rejected theMISO transmission owners' expected earnings analysis, FERC reversed thatdecision and said the analysis is "sufficiently reliable" tocorroborate its decision to set the ROE above the midpoint.

FERC accordingly directed MISO to file tariff revisions thatreflect a base transmission owner ROE of 10.32% with an overall ROE ceiling of11.35%. MISO and its transmission owners also were ordered to return any excessrevenues they collected, plus interest, for the 15-month period extending fromNov. 12, 2013, through Feb. 11, 2015.

The new ROE may not stand for long, however, given thatCoffman in June issued an initial decision in the other pendingcomplaint proceeding (EL15-45) finding that the MISO transmission owners' baseROE should be lowered further to 9.7%. The refund effective period for thatcomplaint, which was filed in February 2015 by a group of transmissioncustomers headed by the ArkansasElectric Cooperative Corp., was set for Feb. 12, 2015, the dayafter the refund period for the earlier complaint expired, through May 11, 2016.