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US FERC cuts level of transmission ROE in New England

Highlights

The US Federal Energy Regulatory Commission on Thursday maintained its position that the existing 11.14% base rate of return on equity for transmission in the ISO New England region is unjust and unreasonable and upheld an order cutting the rate to 10.57%.

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FERC's decision to reduce the ROE stemmed from a complaint filed in 2011 by states and industrials in New England who argued that a lower rate was warranted because capital market conditions had drastically changed since the commission set the ROE in 2006.

"The whole purpose of our rate regime, including the ROE cases, is to make sure that the rates are just and reasonable to give a fair opportunity for a fair return on investment," FERC Chairman Cheryl LaFleur told reporters Thursday during a briefing following the commission's public monthly meeting.

In Thursday's order (EL11-66-001), FERC directed the New England Transmission Owners to submit a compliance filing within 30 days with revised rates, effective October 16, reflecting a 10.57% base ROE and a maximum ROE, including incentives, of no more than 11.74%.


NETO must also provide customers with refunds, including interest, for the period between October 1, 2011, and December 31, 2012.

FERC voted in a June 19 order to have its discounted cash flow methodology used in determining transmission ROEs weigh both short-term and long-term measures of growth in dividends -- the approach the commission has long used for setting ROEs for natural gas and oil pipelines. Previously, the DCF analysis had only considered short-term measures.

The reform to its process was intended to balance the need for new investment while also protecting consumers, and marked the first time in more than a decade that the commission had changed the policy.

Applying the new approach, FERC in June affirmed in part and reversed in part Administrative Law Judge Michael Cianci's August 2013 ruling that the 11.14% base ROE was unjust and should be set at 9.7%.

The commission, however, determined that, subject to the outcome of a paper hearing launched on the matter, the base ROE would be 10.57%, the point halfway between the 9.39% midpoint of the zone of reasonableness and the 11.74% top of that zone. Although FERC in the past had placed ROEs at the midpoint, commission officials said in June that unusual capital market conditions and other factors warranted the higher ROE.

The 10.57% ROE drew ire from both New England transmission owners who felt the rate was set too low and public power and state interests who argued that it was still too high.

"We're not trying to get the ROEs higher or lower," LaFleur said Thursday. "We're trying to get them fair and correctly reflective of the economic conditions in which the transmission developers are operating."

She added that the commission's decision to revise the DCF methodology "would over time give more predictability of our transmission return ... [and] we thought that predictability would be good for investment and would also reflect the true market conditions," she said.

The paper hearing that was launched following issuance of the June order gave stakeholders a chance to comment on what long-term growth rate would be appropriate to use in the new two-step DCF methodology.

The commission, in Thursday's order, settled on gross domestic product as the best measure of long-term growth to be used in its calculation of ROEs. GDP is also used as an input in calculating ROE for gas and oil pipelines.

--Jasmin Melvin, jasmin.melvin@platts.com
--Edited by Katharine Fraser, katharine.fraser@platts.com