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FERC rejects change in ROE for New England transmission owners

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Essential Energy Insights - January 2021


FERC rejects change in ROE for New England transmission owners

An immediate return to rate of return on equity levels set for transmission in New England before being lowered by a now-vacated regulatory order would further complicate an already complex matter with no real benefit to transmission owners, the Federal Energy Regulatory Commission found Oct. 6.

New England transmission owners, or NETOs, in June sought to have their ROE reinstated to levels in place before FERC in October 2014 in Opinion 531-A lowered their ROE to 10.57% from 11.14%. The NETOs argued in an amended compliance filing submitted June 5 that their request was simply "documenting the legal effect" of an April ruling by the U.S. Court of Appeals for the District of Columbia Circuit remanding FERC's decision to lower their base ROE. "The only lawful ROEs to be used for the NETOs' transmission rates … are those that were in effect prior to the issuance of Opinion No. 531-A, including a base ROE of 11.14 percent," the NETOs asserted.

FERC disagreed and directed the NETOs to continue collecting the ROEs currently on file until a future order addressing the issue on remand is issued.

The NETOs will not be "any worse off following the commission's order on remand," as the commission plans to "exercise its 'broad remedial authority' to make whatever ROE the commission determines to be just and reasonable effective for the refund period and the entire period between Opinion No. 531-A and the date of the order on remand," FERC said. "In short, [the NETOs] will effectively receive the same ROEs regardless whether they return now to their pre-Opinion No. 531 levels."

FERC pointed to D.C. Circuit precedent dating back to 1992 that makes clear the commission may correct a legal error through actions that might otherwise be impermissible under the Federal Power Act. "Consequently, that authority encompasses the ability to order both refunds and surcharges as necessary to 'put the parties in the position they would have been in had the error not been made.'"

While FERC concluded that NETOs would not be harmed financially by not immediately returning to the pre-Opinion No. 531 ROEs, it found that significant complications would arise from an immediate return to those transmission rates.

"In particular, having multiple ROEs in effect during the period for which the commission orders refunds or surcharges will make [the already complicated and time-consuming task of] identifying and allocating the particular refunds or surcharges into a significantly more complex process," FERC said. "A need to consider multiple previous ROEs in performing that exercise will add unnecessary complexity to the commission's task on remand — complexity that ultimately will not benefit any party."

FERC added that granting the NETOs' request would also create "unnecessary and detrimental variability in rates," as its future order on remand has the potential to cause another change to the region's ROE.

Further, FERC said the NETOs' assertion that the remanded case required an immediate reinstatement of previous ROE levels as a matter of law was wrong. Rather, Supreme Court precedent "indicates that when a federal court vacates a commission order under the [Federal Power Act], the court lacks authority to dictate the rate to be in effect as a result of that vacatur," the commission said.

A research note from ClearView Energy Partners on Oct. 9 said the analysts expected FERC "to take some sort of action" this year to address the vacatur of Opinion No. 531.

"At one end of the spectrum, FERC could move forward with action on remand without taking any further comment from stakeholders," ClearView said. "However, if the commission does take comment in a generic proceeding, or seeks additional input from the stakeholders in the relevant cases, we expect that the next round of rate-setting decisions may not occur until mid-2018."

Beyond the specific question of the appropriate ROE for the NETOs, ClearView noted that FERC will also need to address "broader questions such as resolving complaint pancaking or potential shortcomings of the [discounted cash flow] model adopted in 2014.

The Edison Electric Institute last year 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. The trade group accused the commission of perpetuating a wasteful cycle of successive ROE complaints and litigation that threaten much-needed investment in transmission projects.

ClearView said those broader questions could be acted upon in parallel or subsequent proceedings to the court remand proceeding. (FERC dockets ER15-414, EL11-66)

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