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Fortis CEO calls for certainty around transmission return on equity

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Essential Energy Insights - October 2021


Fortis CEO calls for certainty around transmission return on equity

The top policy issue that Fortis Inc. President and CEO Barry Perry would like to see the Federal Energy Regulatory Commission tackle is the regulatory process for settling disputes over the appropriate base rate of return on equity for transmission, he told reporters Oct. 4 following a speech to the Detroit Economic Club.

Fortis in 2016 acquired the independent transmission company ITC Holdings Corp., which is headquartered in suburban Detroit, in the largest Canadian takeover of a U.S. utility. The $11.3 billion deal positioned the company to build out new infrastructure as the U.S. moves away from coal-fired generation and toward more natural gas and renewable energy.

Perry said during his speech that Fortis has focused almost 90% of its $48 billion in assets on the grid, with about $3 billion per year in new capital being invested in grid-strengthening efforts.

ROE complaints hanging over industry

With the six-month lapse of a quorum at FERC now over, Perry said during a press briefing after the speech that the first thing his business will be pressing FERC to act on is "the ROE situation," in which there are a number of complaints about allowed return on equity hanging over industry's head.

The Edison Electric Institute, a trade group representing investor-owned electric companies of which Fortis and ITC are members, has accused FERC of perpetuating a wasteful cycle of successive complaints and litigation that threaten much-needed investment in transmission projects.

EEI argued that parties are filing overlapping challenges to ROE rates and in effect "pancaking" their complaints. But even more problematic is that FERC continues to set these matters for trial-type hearings, opening new cases before closing preceding ones.

New England transmission owners, for instance, are fighting the fourth successive ROE complaint filed against them in five years before a FERC administrative law judge.

Complicating matters further is an April federal appeals court ruling critical of FERC's framework for resolving such complaints.

The U.S. Court of Appeals for the District of Columbia Circuit remanded FERC's decision to lower the base ROE approved for New England transmission owners from 11.14% to 10.57%. (Emera Maine, et al. v. FERC, 15-1118)

The D.C. Circuit held that FERC or a complainant bears the burden of demonstrating that an existing rate is unlawful in a Federal Power Act Section 206 proceeding. Thus, FERC must use a two-step process that first finds that an existing rate is unlawful and then sets a new rate. The commission instead erroneously concluded that the existing 11.14% ROE was unlawful based entirely on its determination that a 10.57% ROE was just and reasonable, the court said.

The D.C. Circuit also remanded the commission's decision to set the new ROE halfway between the midpoint and the top of a newly established zone of reasonableness, finding that FERC's reasoning for doing so was unclear.

Matter likely dealt with in 2018

A research note from ClearView Energy Partners on Oct. 4 said the analysts expected FERC "to initiate a remand proceeding before year end given the uncertainty that the April 2017 vacatur of Opinion 531 has created for customers and transmission companies in the Northeast and Midwest."

Perry told reporters he believed that the ROE issue probably would not be dealt with until 2018. "We're looking forward to putting that behind us and hopefully creating a more stable regime so we know what our ROEs are going to be for a prolonged period of time without having to worry about constant complaints," he said. "We're really looking forward to this FERC dealing with that matter."

Also near the top of Fortis' regulatory wish list are Order 1000 reforms. The commission's landmark transmission planning and cost allocation rule "has not worked, and it needs to change," he said, adding he was hopeful that the commission would revisit the order.

ITC Holdings President and CEO Linda Apsey chimed in during the press briefing, saying that "some of the goals around regional planning, interregional planning and cost allocation … were good policy objectives," and there was value in retaining those aspects of Order 1000.

"The competitive bidding piece is clearly broken," and "has actually stifled investment in transmission," she said, adding, "There's just no level playing field in the context of competitive bidding as defined in Order 1000, and that's … problematic."

She added that industry needs to "work with FERC to really revisit and reform Order 1000 into something workable, given where this industry and nation is heading with needed transmission investment."

Jasmin Melvin is a reporter for S&P Global Platts, which, like S&P Global Market Intelligence, is owned by S&P Global Inc.