The Federal Energy Regulatory Commission is taking a closer look at San Diego Gas & Electric Co.'s proposed transmission rates, which would boost the utility’s return on equity in part to account for wildfire risks.
The decision is significant because wildfire cost liability is expected to be an ongoing issue for California utilities and FERC is in the midst of overhauling its approach to setting return on equity for transmission owners.
In October 2018, SDG&E proposed revised rates for the costs of its transmission facilities. The utility proposed a base ROE of 10.7%, plus a 50-basis point adder for continuing participation in the California Independent System Operator Corp., for a total proposed ROE of 11.2%. SDG&E’s current ROE is 10.05%.
The utility said it needs a higher ROE because it faces more risk than other regulated utilities, in large part due to catastrophic wildfires in California. SDG&E could face massive uninsured and unrecoverable liabilities if its equipment is involved in a wildfire ignition, according to testimony attached to SDG&E’s proposal.
A number of parties protested the proposal saying that the proposed ROE is too high, with a couple of parties saying it should be below 9%. And state regulators took issue with the adder for Cal-ISO participation, noting the adder is on remand at FERC from the 9th US Circuit Court of Appeals.
FERC on Dec. 31, 2018, accepted the proposed rates, suspended them for five months and set them for hearing and settlement judge procedures. “Based on our preliminary analysis, we find that SDG&E’s proposed rates may yield substantially excessive revenues,” the commission said.
The utility’s proposal comes as FERC has proposed a sweeping new policy on setting transmission ROEs. In October 2018, FERC proposed to set ROEs using several different models rather than relying solely on the discounted cash flow methodology, or DCF. FERC first outlined the proposed policy in an order related to the ROE for New England transmission owners.
Specifically, FERC proposed to use up to four models in considering transmission ROEs. In deciding whether an existing ROE is just and reasonable, FERC would set a composite zone of reasonableness using three models: the DCF, a capital asset pricing model and an expected earnings analysis.
FERC would cap a utility’s total ROE, including incentive adders, using the composite zone of reasonableness. If an ROE has been shown to be unjust and unreasonable, FERC would then add a fourth model — a risk premium analysis — to help set the ROE. FERC is also reviewing its transmission incentives policies.
FERC spokeswoman Mary O’Driscoll on Jan. 2 stressed that the new approach is still just a proposal and not yet established commission policy. Parties in pending ROE cases are submitting briefs on whether the proposal should be adopted.
SDG&E set its proposed ROE using the DCF methodology, the capital asset pricing model, and risk premium analyses. This approach resulted in an ROE range from 9.1% to 10.7%. (FERC Docket No. ER19-221)
Kate Winston is a reporter for S&P Global Platts, which, like S&P Global Market Intelligence, is owned by S&P Global Inc.