On October 17, 2024, after more than two years, the Federal Energy Regulatory Commission (FERC) issued an Order on Remand providing guidance on the methodology for setting a return on equity (ROE) for electric transmission rates.  FERC’s order responded to a remand from the United States Court of Appeals for the District of Columbia Circuit (DC Circuit) vacating a series of earlier orders addressing ROE complaints dating back to 2013 that FERC had previously decided in the Order No. 569-series of orders addressing the based ROE of Transmission Owners in the Midcontinent Independent System Operator, Inc (MISO).

FERC’s Order on Remand affirmed the use of a combination of a two-step Discounted Cash Flow (DCF) model and Capital Asset Pricing Model (CAPM) to determine the base ROE for a group of electric transmission utilities.  FERC also affirmed its earlier methodology of assessing whether an existing ROE is presumptively just and reasonable by dividing a “composite” zone of reasonableness into thirds based on relative risk.  FERC rejected the use of a “Risk Premium” model as part of FERC’s methodology for analyzing the base ROE in the remand proceeding, finding insufficient record evidence to justify its use.  However, FERC did not foreclose the use of the Risk Premium model in future proceedings if justified based on the record developed in those proceedings.  FERC also noted it could consider the use of a “blended” historical and forward-looking risk premium in the CAPM in future proceedings as a potential means to mitigate volatility concerns with the Commission’s ROE methodology.

FERC Removes Use of Risk Premium Method for ROE Determination

In the underlying ROE complaint proceeding, FERC had considered four alternative benchmark models for determining ROE: (1) the Risk Premium model, (2) the CAPM, (3) the expected earnings model, and (4) a comparison with ROEs as approved by state public utility commissions.  The Risk Premium model estimates cost of equity with an implied premium provided over Baa credit-rated utility bonds by regulatory decisions and settlements.  The CAPM model finds the ROE through the risk premium observed from the risk premium of a DCF review of S&P 500 dividend-paying companies. 

In the Opinion No. 569-series of orders, FERC decided on the use of the two-step DCF, CAPM, and Risk Premium models to establish the base ROE, after previously rejecting the Risk Premium model in the same proceeding.  The DC Circuit vacated FERC’s orders because FERC did not justify its reversal in approving the use of the Risk Premium model, but did not address other aspects of FERC’s orders such as the determination of refunds or FERC’s method for addressing successive complaints challenging the same ROE.

In the Order on Remand, FERC reversed the portions of Opinion Nos. 569-A and 569-B that pertained to use of the Risk Premium model and referenced the “circularity concerns” created by the Risk Premium model relying on previous FERC-approved ROEs as a basis for future ones.  FERC clarified that it will rely on the CAPM and DCF models alone for determining a just and reasonable ROE moving forward.  However, FERC did not foreclose using the Risk Premium model in future proceedings if the issues with it are resolved.

FERC Adopts New Base ROE for MISO Transmission Owners

With the Order on Remand, FERC found the MISO Transmission Owners’ existing ROE rate is unjust and unreasonable and set a just and reasonable replacement ROE at 9.98%, effective as of September 28, 2016.  Specifically, FERC directs the MISO Transmission Owners to provide refunds based on a 9.98% base ROE, with interest, for two periods: from November 12, 2013 through February 11, 2015, and from September 28, 2016 to October 17, 2024.  FERC also maintains its dismissal of the second complaint.