An administrative law judge with the Federal Energy Regulatory Commission has recommended letting the base rate of return on equity for transmission in the ISO New England stand at 10.57%. The administrative law judge's decision hinged on his finding that both complainants and commission trial staff failed to demonstrate that the existing base ROE was unjust and unreasonable.

With no demonstration that the existing 10.57% base ROE, which with transmission incentive adders can grow to a maximum ROE of 11.74%, was unlawful under the Federal Power Act, Administrative Law Judge Steven Glazer said he did not need to dictate what a just and reasonable alternative ROE ought to be.

The initial decision will become a final order by operation of law if no objections are filed within 30 days. But analysts at ClearView Energy Partners said such an outcome was "highly unlikely" as the complainants are expected to challenge the judge's conclusions.

FERC could accept, reject or modify the initial decision, and has said that it would do so within eight months of the filing of briefs on and opposing exceptions, teeing up action around the end of January 2019.

At issue is the fourth successive ROE complaint filed at the commission against New England transmission owners in a five-year period. The matter was further complicated by an April 2017 federal appeals court ruling on the first of the four ROE complaints (FERC docket EL11-66) that vacated FERC's orders establishing the commission's framework for resolving such complaints.

In that case, the U.S. Court of Appeals for the District of Columbia Circuit remanded FERC's decision to lower the base ROE approved for the transmission owners to 10.57% from 11.14% (Emera Maine, et al. v. FERC, No. 15-1118 et al.).

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 first must find that an existing rate is unlawful before taking steps to set a new rate. The commission instead erroneously concluded that the then-existing 11.14% ROE was unlawful based entirely on its determination that a 10.57% ROE was just and reasonable, the court said.

FERC's September 2016 order setting the fourth complaint (FERC docket EL16-64) for hearing relied on the same analysis the D.C. Circuit found to be statutorily deficient. Filed in April 2016 by a group referring to itself as the Eastern Massachusetts Consumer-Owned Systems, or EMCOS, that complaint sought a cut in the ROE used to calculate formula rates for transmission service under ISO-NE's tariff from the 10.57% now on remand to no higher than 8.93%.

DCF approach seen as safe despite remand

In his initial decision on the EMCOS complaint, Glazer acknowledged that FERC has yet to act on the remand.

But he said the court's decision did not cause FERC's rationale for its two-step discounted cash flow, or DCF, methodology for determining ROEs "to perish from the earth." Rather, it specified that a single ROE value produced by a DCF analysis may not be the only just and reasonable result and that FERC had to show a "rational connection" if it chose to set a new ROE halfway between the midpoint and the top of an established zone of reasonableness.

The issues vacated and remanded by the D.C. Circuit "do not bear upon the first question we must face of determining, under the accepted two-step DCF approach, whether the existing base ROE is unjust and unreasonable, and hence unlawful," Glazer said of the task before him regarding the EMCOS complaint.

Glazer's review of expert witnesses' testimony during the hearing led him to conclude that the DCF analyses performed by EMCOS and FERC trial staff in support of a new rate were "fatally defective," as they left Algonquin Power & Utilities out of the proxy groups used to establish zones of reasonableness.

Incorporating Algonquin into the DCF analyses, as the New England transmission owners did, significantly alters the resulting midpoint and maximum ROEs, Glazer noted.

Omitting Algonquin left 'burden of proof unsatisfied'

Had Algonquin not been deliberately omitted from EMCOS' and FERC staff's DCF analyses, the current 10.57% base ROE in New England would have fallen not only within the zone of reasonableness but below the midpoint ROEs of those analyses, Glazer found.

He added that "the decision of the EMCOS and staff to ignore Algonquin's qualifications for inclusion in the proxy group renders their burden of proof unsatisfied."

Further, EMCOS' DCF analysis was plagued with errors that caused its results to change throughout the proceeding, and both EMCOS and staff took liberties with how they performed their analyses that diverged from FERC's typical process, according to Glazer.

"In short, the goal post was moved repeatedly by the EMCOS and staff to wherever the football was in order to score points," Glazer said. He added that these mistakes and lapses prevented EMCOS and staff from meeting "their burden of producing reliable DCF analyses."

Without any usable analysis, EMCOS and FERC staff failed to "prove that the existing base ROE and maximum ROE are unjust and unreasonable, and hence unlawful, under Section 206 of the FPA," he contended.

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