Brief

DC Circuit: FERC must do better in explaining changes to transmission returns

Dive Brief:

  • A circuit court has directed the Federal Energy Regulatory Commission to better explain revisions to how it determines return on equity (ROE) for transmission owners, vacating a 2014 order that lowered rates in the New England ISO.
  • FERC three years ago adopted a new discounted cash flow methodology for electric utility ROEs that is the same used for natural gas and oil pipeline ROEs. That decision led to lower rates for transmission owners in the New England ISO and later the Midcontinent ISO service territory as well.
  • The D.C. Circuit Court of Appeals determined FERC did not provide "rational" decision for lowering the ROE, but did not take issue with the decision to use a discounted cash flow methodology.

Dive Insight:

In an important and complicated decision likely to inject a little chaos into utility rates, the circuit court remanded FERC Order 531 back to the commission for another look. While the judges did not reject the commission's use of the DCF methodology, they determined regulators did not sufficiently explain the rationale for lowering New England rates.

The commission "did not set forth a rational connection between the record evidence and its placement of the base ROE," the court found. In short, lawyers at Jones Day noted the court said FERC did not adequately explain why the existing rate was no longer just and reasonable before replacing it with a lower one. 

In October 2014, FERC set the ROE for transmission owners in New England at 10.57 percent, the result of a 2011 complaint. That decision led to the subsequent lowering of transmission rates in the Midcontinent ISO as well. In MISO, the rate was dropped to 10.3%.

Lawyers at Jones Day say the court's decision is likely to cause short-term uncertainty when it comes to electric utility rates of return. "It's unclear whether the litigants will appeal to the Supreme Court, but either way, FERC could have years of work on its hands," they wrote. It is unclear if the case will be appealed to the U.S. Supreme Court.

The commission will now revisit and frame its policy, but Jones Day warned "that process could take several years." At the moment, FERC has just two commissioners leaving it short of a quorum needed to take up significant action until another one is appointed. 

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Filed Under: Transmission & Distribution Regulation & Policy
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