FERC issued two Notices of Inquiry (NOIs) at its March 21, 2019 open meeting. The NOIs address transmission rate incentives policy (Docket No. PL19-3) and base return on equity (ROE) policy (Docket No. PL19-4).
The incentives NOI examines, among other things, the objectives and need for all existing transmission incentives and the Commission’s approach to granting those incentives. This initiative follows complaints about the need for reconsidering the justness, reasonableness, and effectiveness of transmission rate incentives in market conditions that have changed considerably in the thirteen years since the Commission issued Order No. 679.
The base ROE NOI addresses the appropriate framework for determining the base ROE of public utilities. In Opinion No. 531, the Commission expressed a concern that anomalous capital market conditions may affect the reliability of the results produced by the discounted cashflow (DCF) model. This prompted the Commission to consider the appropriateness of other financial models (i.e., the capital asset pricing, risk premium, and expected earnings models) and state-ROE determinations in setting the base ROE of public utilities. Following the D.C. Circuit’s remand of Opinion No. 531 in Emera Maine, FERC proposed a new base ROE framework and initiated a paper hearing to address its proposal in the ongoing RTO-wide ROE complaint proceedings involving the New England ISO and MISO transmission owners. The base ROE NOI opens the discussion of FERC’s proposed base ROE framework to all interested parties beyond the New England and MISO complaint proceedings.
Initial comments are due 90 days after publication of the NOIs in the Federal Register and reply comments are due 30 days after that (i.e., likely to be late June and late July, respectively). Highlights of the NOIs are provided below.
Electric Transmission Rate Incentives Policy NOI
In the incentives NOI, FERC is examining whether to continue granting incentives based on the risks and challenges associated with electric transmission projects, or whether to adopt an alternative approach such as considering the benefits that a project provides or, in the alternative, the characteristics of the project. Notably, FERC questions whether there are barriers to non-public utilities’ ownership of transmission facilities and whether FERC should grant incentives to promote joint ownership arrangements with non-public utilities. FERC also seeks comments regarding incentives to encourage transmission development in non-RTO/ISO regions.
FERC seeks comments on whether its existing incentives are appropriate, including the RTO/ISO participation, Transco, and advanced technology ROE adders. FERC also seeks comments regarding limits specific to the existing incentives and generic limits. Among the incentive-specific limits, FERC is considering whether there should be an equity cap in hypothetical capital structure incentive or whether there should be an upper limit for ROE adders. Among the generic limits, FERC seeks comments on the duration of incentives, including whether incentives should be revisited if there is a material modification to the project or a significant change in the expected benefits.To measure benefits and effectiveness of incentives, FERC seeks comments on the appropriate metrics to use and how the Commission should obtain the data necessary to measure the effectiveness of incentives.
With respect to process, FERC is considering whether to adopt a more formulaic approach for determining the appropriate level and combination of incentives, which would replace its typically case-by-case approach.
Base ROE Policy NOI
The base ROE NOI examines FERC’s policies for determining the base ROE of public utilities and questions various aspects of the proposed base ROE framework outlined in its New England and MISO briefing orders. FERC explores application of the same base ROE framework proposed in the briefing orders to pipelines in order to achieve greater uniformity in its ROE policies. FERC also considers broader application of base ROE determinations by using a uniform base ROE level across all RTOs/ISOs.
FERC seeks comments on the regulatory certainty provided by its policies and investors’ ability to forecast ROEs under those policies. With respect to the DCF model, the Commission questions whether it can respond to varying interest rate conditions. FERC is also considering changes to other financial models and questions the importance of the mismatch between market-based ROE determinations and book-value rate base. Proxy group composition, formation, and outlier screens are also explored in the NOI.
Another area of inquiry is whether to use multiple financial models, and if so, how to weigh the results of each in establishing the base ROE. The NOI also seeks comments regarding whether state ROEs are comparable to FERC ROEs.
Finally, FERC is examining how it determines that an existing ROE is unjust and unreasonable under the first prong of FPA section 206. The Commission questions whether the presumptive immunity zones described in its New England and MISO briefing orders should limit pancaking of ROE complaints. The Commission is also considering whether it is appropriate to use the median rather than the midpoint in calculating the presumptive immunity zone of a single utility.
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