On May 20, 2021, the Federal Energy Regulatory Commission (“FERC”) issued an Order (Opinion 575) reversing an over six year old Initial Decision regarding the Return on Equity (“ROE”) for the Entergy Operating Companies, in order to apply the since revised base ROE method adopted in Opinion 569 (as modified by Opinions 569-A and 569-B). Applying the revised base ROE method, FERC reverses a 2015 Initial Decision that concluded the just and reasonable ROE was 9.01% (i.e., the median of the zone of reasonableness produced by a two-step discounted cash flow (“DCF”) study), and instead finds 10.37% is the just and reasonable ROE for the Entergy Operating Companies (i.e., the average of the point estimate of the Risk Premium model, and the medians of the DCF and capital-asset pricing model (“CAPM”)).
FERC concludes that, regardless of whether or not anomalous market conditions are present, the revised ROE method (which uses the Risk Premium, CAPM, and DCF models) should apply because “relying on multiple financial models makes it more likely that the Commission’s decision will accurately reflect how investors are making their investment decisions.” FERC finds it of no difference that, rather than the RTO/ISO-wide ROE for transmission owners at issue in Opinions 569 et seq., the instant matter involved a tariff for making unit power purchases and/or power sales between the Entergy Operating Companies. FERC continues to reject the use of the Expected Earnings and Empirical CAPM (“ECAPM”) models.
For determining the proxy group, FERC finds the relevant screening criteria is the inclusion of companies with credit ratings (i.e., S&P and Moody’s) no more than one notch above or below the utility(ies) whose ROE is at issue in the proceeding. Rather than FERC’s prior determination to base the risk profile solely on the one Entergy company making sales under the tariff at the time of the 2015 Initial Decision, FERC in Opinion 575 finds all the Entergy Operating Companies’ risk profiles should be considered since they may all use the tariff in the future. Further, FERC finds it need not consider the parent company’s credit rating under the facts, given the Entergy Operating Companies issue their own debt and have their own credit ratings based on their company-specific risks. In terms of the outlier tests for the proxy group, FERC finds it appropriate to use the low-end outlier test from Opinion 569, and the high-end outlier test in Opinion 569-A, to determine whether any companies should be eliminated from the proxy group. FERC declines to provide concrete guidance on how to apply the natural break analysis, instead finding it appropriate to continue considering on a case-by-case this analysis which serves to allow or discard consideration of certain ROE estimates that would otherwise be excluded or included, respectively, under the high- or low-end outlier tests.
FERC applies its policy that the median for single utilities of average risk should be used, rather than the midpoint of the zone of reasonableness used for RTO/ISO-wide ROEs. While the Entergy Operating Companies are not a single utility, FERC relies on the fact they are affiliated subsidiaries of one holding company with similar risk profiles, unlike a “diverse group of utilities” comprising an RTO/ISO.
While agreeing Opinion 575 reasonably applies FERC’s revised ROE method, Commissioner Clements’ dissenting opinion urges FERC to revisit that current policy out of consumer protection concerns, especially in light of anticipated unprecedented transmission development in the years to come. Commissioner Christie’s concurring opinion similarly calls for a revision to the existing ROE method, as well as for a policy of improved efficiency in ruling on ROE matters.
Opinion 575 and the separately authored Commissioner opinions are available here in Docket Nos. ER13-1508 et al.