On March 21, 2019, the Federal Energy Regulatory Commission (FERC) issued a notice of inquiry (NOI) seeking comments regarding whether and, if so, how FERC should revise its policies on determining the base return on equity (ROE) used in setting rates charged by jurisdictional public utilities. FERC also seeks comment on, among other things, whether FERC should change its ROE policies for interstate natural gas and oil pipelines to align with its policy for electric public utilities. FERC recently suggested a modified approach to determining the ROE for electric public utilities operating in ISO New England, Inc. (ISO-NE) and Midcontinent Independent System Operator, Inc. (MISO), and in other pending cases. FERC’s action follows the decision of the United States Court of Appeals for the District of Columbia Circuit in Emera Maine v. FERC, which vacated and remanded a series of earlier FERC orders establishing a new base ROE for transmission owners in ISO-NE.

In its orders addressing the base ROE for utilities in ISO-NE and MISO following the Emera Maine decision, FERC proposed that it rely on four financial models to establish ROEs for the subject utilities: its long-used, two-step Discounted Cash Flow (DCF) model; the Capital Asset Pricing Model; the Expected Earnings Model; and the Risk Premium Model. In the NOI, FERC poses a series of questions and invites comments on this proposed new approach, including whether it should apply the new approach to future proceedings involving interstate natural gas and oil pipeline ROEs.

Specifically, FERC seeks comments in eight broad areas, including:

1. the role FERC’s base ROE policy plays in investment decision-making and what objectives should guide FERC’s approach;
2. whether uniform application of FERC’s base ROE policy across the electric, interstate natural gas pipeline, and oil pipeline industries is appropriate and advisable;
3. the DCF model’s performance;
4. the composition of appropriate “proxy groups” used to determine ROEs;
5. FERC’s choice of financial model(s) used;
6. the mismatch between market-based ROE determinations and book-value rate base;
7. how FERC determines whether an existing ROE is unjust and unreasonable under the first prong of section 206 of the Federal Power Act; and
8. the mechanics and implementation of the models (including a series of model-specific questions).

FERC asks a series of specific questions under each topic, notes some key differences between the electric and pipeline industries, and asks how those differences may impact uniform application of the proposed new ROE methodology.

Comments in response to the NOI are due ninety days after publication of the NOI in the Federal Register, with reply comments due thirty days after the date for initial comments.