On November 21, 2019, the Federal Energy Regulatory Commission (FERC) issued Opinion No. 569, a ruling on two complaints challenging the base rate of return on equity (ROE) of the Midcontinent Independent System Operator, Inc. (MISO) Transmission Owners under section 206 of the Federal Power Act.  The opinion adopted in part and rejected in part a new approach for evaluating base ROEs which FERC proposed in an Order Directing Briefs on November 15, 2018, to respond to the D.C. Circuit’s 2017 decision in Emera Maine v. FERC.  

The result of Opinion No. 569 is a new, more limited hybrid approach that: (1) establishes a composite zone of reasonableness based on the equal weighing of the discounted cash flow (DCF) and capital asset pricing model (CAPM) analyses for evaluating and determining a base ROE but excludes expected earnings and risk premium estimation methods, which FERC had initially proposed to include in the ROE evaluation; and (2) adopts FERC’s proposed quartile approach for evaluating whether an existing base ROE remains just and reasonable.  Under this approach, an existing ROE is rebuttably presumed to be just and reasonable if it falls within the range of ROEs for the quartile corresponding the utility’s (or group of utilities’) risk profile.  In addition, FERC provided a number of clarifications regarding the implementation of the DCF and CAPM models.

The opinion granted the complaint in Docket No. EL14-12 (First Complaint), repeating its September 2016 finding in Opinion No. 551 that the MISO Transmission Owners’ pre-existing 12.38% base ROE is no longer just and reasonable. In the new ruling, FERC calculated that the composite zone of reasonableness for the relevant study period is 7.52% to 12.24%, with the middle quartile of the range (i.e., the range of presumptively just and reasonable returns) running from 9.29% to 10.47%. The ruling thus granted rehearing in part of Opinion No. 551 in order to set the MISO Transmission Owners’ region-wide base ROE at 9.88%, the midpoint of the composite zone of reasonableness. The new base ROE is effective for the fifteen-month refund period of November 12, 2013, to February 11, 2015 (the First Complaint refund period), and on a going-forward basis beginning September 28, 2016, the date FERC issued its original ruling on the First Complaint in Opinion No. 551.  Under this ruling, each MISO Transmission Owner’s total ROE (base ROE plus incentives) is capped at the upper end of the newly derived composite zone of reasonableness, 12.24%. The opinion directed the MISO Transmission Owners to provide refunds for two time periods: (1) the fifteen-month period commencing on the date of the First Complaint, and (2) from the date of Opinion No. 551 (September 28, 2016), to the date of Opinion No. 569.

Opinion No. 569 also dismisses a second complaint in Docket No. EL15-45 (Second Complaint). The opinion reasons that, in order to grant the second complaint, FERC would need to find unjust and unreasonable the 9.88% base ROE established in Docket No. EL14-12. FERC determined instead that the 9.88% base ROE falls within the range of presumptively just and reasonable ROEs calculated for the second proceeding (from 9.23% to 10.20%), and that the Docket No. EL15-45 record presented no evidence to rebut the presumption that 9.88% is just and reasonable. The opinion thus dismissed the Second Complaint and required no refunds in that proceeding.

While Commissioner Glick joined the majority of the opinion, he dissented from the denial of refunds for the fifteen-month refund period covered by the Second Complaint.  Commissioner Glick asserts that the Federal Power Act provides FERC with authority to require refunds for this period.