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On May 21, 2020, the Federal Energy Regulatory Commission (“FERC”) issued an Order on Rehearing of Opinion No. 569 (“Opinion No. 569-A”), again revising its methodology for determining whether a base Return on Equity (“ROE”) for a jurisdictional electric public utility is unjust and unreasonable, and if so, determining a just and reasonable replacement ROE under Federal Power Act (“FPA”) § 206. In the context of the Midcontinent Independent System Operator, Inc. (“MISO”) transmission owners’ complaint proceedings, Opinion No. 569-A revises the ROE methodology to:

1)   include use of the Risk Premium model (modified to reflect a zone of reasonableness, among other adjustments), in addition to the two-step Discounted Cash Flow (“DCF”) model and Capital-Asset Pricing Model (“CAPM”), equally weighting the three models;

2)   modify the weighting of short- and long-term growth rates in the DCF model to give long-term growth rates less weight;

3)   modify the high-end outlier test for screening companies in a proxy group used for the DCF or CAPM models to include a higher exclusion threshold;

4)   consider use of Value Line short-term growth estimates in the CAPM methodology in future proceedings (while reaffirming exclusive use of Institutional Brokers’ Estimate System data in the DCF model); and

5)   modify the approach to developing ranges of presumptively just and reasonable base ROEs.

Applying its revised methodology, FERC finds on rehearing that the just and reasonable replacement ROE for the MISO transmission owners is 10.02% (as opposed to the 9.88 % determined in Opinion No. 569). FERC recognizes that in other proceedings, parties may argue that the base ROE methodology employed in the instant complaint proceedings should be modified based on the specific facts of the subject proceeding. Commissioner Glick issued a separate opinion concurring and dissenting in part, remarking that it appears FERC “again has chosen a path directed by the results, in this case the perceived need to award a higher ROE, rather than the law and the facts”, and calling for “certainty and predictability” to how FERC sets transmission owner ROEs. Among other issues, Glick’s opinion takes issue with the lack of record evidence before the Commission “supporting such an odd repurposing of the risk premium model.”

Also on May 21, 2020, FERC issued a Policy Statement applying the aforementioned ROE policy changes to interstate natural gas and oil pipelines, with certain exceptions including that: 1) only the DCF and CAPM (but not the Risk Premium) models will be applied and equally weighted; 2) FERC will retain the existing weighting of the short- and long-term growth rates in the DCF model; and 3) FERC will not adopt any outlier tests, but will continue to address outliers in pipeline proxy groups on a case-by-case basis. FERC encourages oil pipelines to file updated FERC Form No. 6, page 700 data for 2019 reflecting the revised ROE methodology in FERC’s Policy Statement. The Policy Statement will become effective when posted in the Federal Register (TBD).

For more information regarding FERC’s ROE policy, please contact Joshua Adrian, Michael Postar, Kristen Connolly McCullough, Matthew Rudolphi, Sean Neal, and Lauren Perkins.