Advancing FERC’s Methodology for Determining Allowed ROEs for Electric Transmission Companies

Published on May 12, 2020

Concentric Energy Advisors recently produced an important report at the request of Edison Electric Institute which proposes several fundamental changes to the Federal Energy Regulatory Commission’s (“FERC” or the “Commission”) methodology used to determine the composite zone of reasonableness and base return on equity (“ROE”) for regulated electric transmission utilities. In this report, we respond to FERC’s ROE methodology as it has evolved from Opinion No. 531 for the New England Transmission Owners (“NETOs”), Opinion No. 551 for the transmission owners in the Midcontinent Independent System Operator (“MISO”), the subsequent Briefing Orders for both proceedings, the Notice of Inquiry and most recently Opinion No. 569 in the MISO proceeding. We conclude that its recommendations improve both the reliability and predictability of base ROE results for all concerned parties under a variety of market circumstances.

Our proposed changes are comprehensive, addressing both the determination of the zone of reasonableness and the models used to estimate ROE. Key among our findings is the recommendation that the Commission expand the middle range of the composite zone for purposes of section 206 filings and give equal weight to four models—Discounted Cash Flow (“DCF”), Capital Asset Pricing Model (“CAPM”), Expected Earnings, and Bond Yield Plus Risk Premium (“Risk Premium”)—in establishing the zone and determining a new base ROE for proceedings under both sections 206 and 205 of the Federal Power Act.

“Our recommended changes to the ROE methodology embrace those elements that make economic and financial sense and recognize the need for both structure and flexibility,” said James Coyne, Senior Vice President at Concentric and co-author of the report. “Practical modifications to the models proposed to the Commission better reflect available investor information, and when taken together, will promote stability and predictability of results, create confidence in the resulting ROE determinations, and better connect the determination of the range of reasonableness to the base ROE.”

More from Concentric:

FERC’s Evolving ROE Methodology in a Period of Market Uncertainty

Factors Influencing Utility Cost of Capital in a Period of Market Turmoil

The report was authored by James Coyne, Joshua Nowak, and Julie Lieberman with analytical support from Peter Hoegler and administrative support from Jillian Barrile. All views expressed by the authors are solely the authors’ current views and do not reflect the views of Concentric Energy Advisors, Inc., its affiliates, subsidiaries, or related companies. The authors’ views are based upon information the author considers reliable. However, neither Concentric Energy Advisors, Inc., nor its affiliates, subsidiaries, and related companies warrant the information’s completeness or accuracy, and it should not be relied upon as such.

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