FERC Order on Base ROE Complaint against New England Transmission Owners

Transcription

1 May 24, 2012 FERC Order on Base ROE Complaint against New England Transmission Owners The New England Council James T. Brett President & CEO Energy & Environment Committee Chairs In an order issued on May 3, 2012, the Federal Energy Regulatory Commission ( FERC or the Commission ) ruled that it must establish an investigation and conduct a trial-type evidentiary hearing to determine whether the percent base return on equity used in calculating formula rates for transmission service in New England is unjust and unreasonable. The order results from a September 30, 2011 complaint 1 brought by the Massachusetts Attorney General, a number of state officials from throughout New England and several business and consumer groups (the Complainants ) 2 against New England Transmission Owners ( New England TOs or the Respondents ) 3 to reduce the base return on equity used in calculating formula rates for transmission service in New England. Specifically, the complaint: Mark C. Kalpin WilmerHale Daniel A. Weekley Dominion Resources alleges that the current percent base return on equity used in calculating formula rates for transmission service under ISO New England s Open Access Transmission Tariff is unjust and unreason able; asserts that the base return on equity should be set at no higher than 9.2 percent; and seeks an order reducing the current percent base return on to a just and reasonable level at 9.2 percent. In an effort to foster a settlement agreement, the Commission resolved to hold the hearing in abeyance and appoint a settlement judge to work with the parties toward that result. 98 North Washington Street Boston, MA (617) Constitution Avenue NE Washington DC (202)

2 I. Background A. Legal Standard The Federal Power Act empowers FERC to review rates and terms of transmission services to ensure that they are just and reasonable. 4 Thus, rates, terms and conditions cannot be unjust or unreasonable. Where a complainant challenges a previously-approved rate under section 206 of the Federal Power Act and proposes a new one, the Commission has indicated that complainants must satisfy a two-part burden of proof by showing that the existing rate is unjust and unreasonable and a proposed replacement rate is just and reasonable. 5 As the Appeals Court has recently explained, however, a complainant need not propose a new just and reasonable rate. Under section 206, a complainant need only demonstrate that the existing rate is unjust and unreasonable; it is up to the Commission to determine the new just and reasonable rate. 6 Because transmission services are a natural monopoly, FERC will determine whether a particular tariff is just and reasonable through a traditional cost-of-service ratemaking inquiry that balances ratepayer and the utilities financial interests to realize a rate within the zone of reasonableness. A just and reasonable rate of return for a utility is one that does not exceed the level required to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital, and must be commensurate with returns on investments in enterprises with comparable risks. 7 B. Argument 1. Unjust and Unreasonable Base Return on Equity The New England TOs recover their transmission revenue requirements through formula rates included in ISO New England s Open Access Transmission Tariff ( ISO OATT ). 8 Rates for regional network service are calculated using a formula rate that includes a base return on equity ( ROE ) that is fixed and does not change from year to year, as other formula rate inputs. The current base ROE used in the ISO OATT is percent, and was developed in a 2004 proceeding and updated for bond yield information through August The complainants believe that the base ROE is no longer just and reasonable in light of the significantly altered economic conditions and lower costs of raising capital since the base ROE was set in 2006, citing the recent financial crisis as a changed economic circumstance, including the Lehman Brothers bankruptcy and the resulting flight to quality in the capital markets. Page 2

3 The Complainants described FERC s established policy for establishing a just and reasonable base ROE for transmission service, based on applying a discounted cash flow ( DCF ) analysis to a proxy group of comparable risk companies. 10 The Complainants then applied this ROE methodology to identify the appropriate Base ROE under current conditions for the New England Transmission Owners. 2. Reasonable Base Return on Equity The complainants claim that their expert witness s DCF analysis shows that the zone of reasonableness is now 7 percent to 11.4 percent, with a midpoint of 9.2 percent. Based on this analysis, a just and reasonable base ROE for the New England TOs should not exceed 9.2 percent. The complainants maintain that the current Base ROE allows for an excessive return on investments in transmission facilities that results in rate payers in New England being overcharged for infrastructure, by $113 million annually when compared to a 9.2 percent base ROE, which will increase to $206 million annually by 2015 due to expansion of the New England transmission system. The Complainants believe that their complaint provides sufficient evidence both to institute an investigation into the justness and reasonableness of the base ROE and to find that the new rate that they proposed is just and reasonable. Accordingly, the Complainants request that the Commission: institute paper hearing procedures to investigate the Base ROE and establish a just and reasonable equity return to be reflected in rates for transmission service provided by the New England Transmission Owners under the ISO OATT; establish the earliest possible refund effective date consistent with Commission policy; and direct ISO New England to make refunds reflecting the difference between transmission rates reflecting an percent base ROE and rates reflecting a just and reasonable base ROE. Page 3

4 II. Commission Order 11 A. Evidentiary Hearing Required The Commission determined that the complaint raises issues of material fact that cannot be resolved on the existing record and therefore set the complaint for investigation and a trialtype evidentiary hearing under section 206 of the Federal Power Act. The appointed settlement judge must report to the Chief Judge and the Commission within 30 days of his or her appointment regarding the status of settlement discussions. Based on this report, the Chief Judge will provide the parties with additional time to continue their settlement discussions or provide for commencement of a hearing by assigning the case to a presiding judge. III. Commissioner Moeller s Dissent A. Commission Precedent Commissioner Phillip Moeller dissented from the order, stating that to allow the complaint to move forward would depart from Commission precedent regarding the DCF analysis used to derive the base ROE, stating that the Complainants DCF analysis uses an average growth rate data from several financial services, but that the Commission has consistently used only a single investor service. Commissioner Moeller further stated that the Complainants assertion that changed economic circumstances results in lower capital costs for TOs and that the base ROE should thus be lowered lacks proper foundation. He states that utility bond yields are one-half of a utility s cost of capital. The other half is a utility s cost of equity, which can only be estimated using a financial model, such as the DCF analysis. In his view, Complainants have not proven that the New England TOs cost of equity has declined as much as bond yields to warrant further investigation. He would have rejected the complaint based on the record and described the areas where the Complainants DCF analysis differs from the Commission s precedent accordingly. * * * A copy of the order and Commissioner Moeller s dissent is available at This Committee Update provides general information and not legal advice or opinions on specific facts Page 4

5 1 Filed with the Commission pursuant to section 206 of the Federal Power Act, 16 U.S.C. s. 824e (2006). 2 The Complainants include the Massachusetts Attorney General and the Massachusetts Department of Public Utilities, the Connecticut Attorney General and the Connecticut Office of Consumer Counsel and Connecticut Public Utilities Regulatory Authority, the Maine Office of the Public Advocate, the New Hampshire Office of Consumer Advocate and the New Hampshire Public Utilities Commission, the Rhode Island Division of Public Utilities and Carriers, the Vermont Department of Public Service, Massachusetts Municipal Wholesale Electric Company, Associated Industries of Massachusetts, the Energy Consortium, Power Options, Inc., and the Industrial Energy Consumer Group. 3 The Respondents include Bangor Hydro-Electric Co., Central Maine Power Co., New England Power Co. d/b/a National Grid, New Hampshire Transmission LLC d/b/a NextEra, NSTAR Electric and Gas Corp., Northeast Utilities Service Co., United Illuminating Co., Unitil Energy Systems, Inc., Fitchburg Gas and Electric Light Co., Vermont Transco, LLC, and ISO New England Inc U.S.C. ss. 824d and 824e. 5 See, e.g., Louisiana Pub. Serv. Comm n v. Entergy Corp., 132 FERC par. 61,003 at P 28 (2010). 6 Maryland Public Serv. Comm n v. FERC, 632 F.3d 1283, 1285, n. 1 (D.C. Cir. 2011). 7 See Federal Power Comm n v. Hope Natural Gas Co., 320 U.S. 591, 603 (1944); Bluefield Water Works & Improvement Co. v. Public Serv. Comm n, 262 U.S. 679, (1923). 8 The ISO OATT is Section II of the ISO New England Inc. Transmission, Markets and Services Tariff. 9 See ISO-New England Inc., 106 FERC par. 61,280, at PP (2004); Bangor Hydro-Elec. Co., Opinion No. 489, 117 FERC par. 61,129 (2006) (Opinion No. 489), order on reh g, 122 FERC par. 61,265 (2008), order granting clarification, 124 FERC par. 61,136 (2008) (Opinion No. 489 Rehearing Order). 10 See, e.g., Northern Pass Transmission LLC, 134 FERC par. 61,095 (2011); Potomac Appalachian Transmission Highline, L.L.C. ( PATH ), 133 FERC par. 61,152 (2010); Atlantic Path 15, LLC, 133 FERC par. Page 5

6 61,153 (2010); Southern Cal. Edison, 131 FERC par. 61,020 (2010); Golden Spread Elec.Coop., 123 FERC par. 61,047 (2008). 11 The Commission granted ISO New England s motion to dismiss since it is not the beneficiary of any return on equity as it is a not-for-profit corporation with no equity, and is simply the billing agent for the TOs. Page 6