Edison Electric Institute calls on FERC to rework base return-on-equity methodology
The Federal Energy Regulatory Commission (FERC) must act to foster needed investment in transmission infrastructure by reworking its methodology for determining allowed base return on equity (ROE) for regulated electric utilities, according to the Edison Electric Institute (EEI).
“In light of the COVID-19 crisis, ROE is now more important than ever as we plan for future infrastructure investments that will help us to deliver a clean energy future for our customers, while creating and maintaining jobs for many skilled Americans,” said Phil Moeller, executive vice president of EEI’s Business Operations Group and Regulatory Affairs.
EEI, which represents all of the nation’s investor-owned electric companies, on May 11 filed supplemental comments in FERC’s ongoing proceeding to determine base ROE.
In its comments, EEI responds 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 (NOI); and the most recent Opinion No. 569 in the MISO proceeding.
For instance, FERC’s Opinion No. 569, issued in November 2019 — which established a new methodology for setting the ROE that electric utilities are entitled to earn on electric transmission investments — isn’t really the best way to help EEI members increase profits so they can continue to attract capital needed for future infrastructure upgrades that meet consumer demands, the association says.
In fact, EEI member companies already have allocated billions of dollars of capital that’s required to build complex, large-scale transmission projects, according to EEI, and such projects have created thousands of jobs, provided states and localities with significant tax revenues, and helped ensure that the lights stay on during difficult times, such as the COVID-19 pandemic.
There’s significant competition for investment dollars, EEI says, which in turn requires regulatory certainty and a base ROE that reflects this competition, as well as the substantial risks associated with building and operating such assets.
However, “FERC’s decision in Opinion No. 569 produced precisely the opposite outcome,” according to EEI’s comments. “By issuing a decision that potentially makes sweeping changes to the base ROE methodology the commission proposed in the Briefing Orders and NOI, without providing interested parties other than intervenors in that docket notice or opportunity for comment and without explaining the precedential weight of that decision, the commission has increased regulatory uncertainty surrounding its base ROE policy.”
To alleviate this uncertainty, and to allow affected parties a meaningful opportunity to comment, EEI called on FERC to use this NOI proceeding to implement any revisions to its base ROE methodology that will be applied to all FERC-jurisdictional public utilities in future proceedings under sections 205 or 206 of the Federal Power Act.
“Without such action, the base ROE methodology adopted by the commission in Opinion No. 569 could have damaging effects on the ability of public utilities to attract capital for investment in transmission infrastructure,” according to EEI.
Since the issuance of the NOI, and particularly in the wake of Opinion No. 569, EEI and its members have conducted a comprehensive review of FERC’s base ROE methodology and its application in a variety of different market conditions and determined that FERC should utilize the Expected Earnings model, the Risk Premium model, the Empirical Capital Asset Pricing Model (ECAPM), and the one-step discounted cash flow (DCF) model in the commission’s base ROE methodology.
“FERC should not rely solely on any single financial model (or a combination of only two financial models, for that matter) in its base ROE methodology because there are limitations associated with each model that can only be appropriately mitigated by using a more robust methodology involving all four financial models,” according to EEI’s comments. “Using all four models will result in a base ROE methodology that is less susceptible to the limitations of any one particular financial model and its underlying assumptions.”
And EEI wrote that an accompanying report it requested from Concentric Energy Advisors, combined with other evidence in the record, makes clear that the investment community relies on various forms of all of these models to make investment decisions.
EEI also included recommendations that it thinks provide FERC with flexibility to use the methodological tools at its disposal under a variety of market circumstances. “These recommendations do not completely revamp FERC’s approach, but embrace those elements that make economic and financial sense, as well as recognize the need for both structure and flexibility,” according to the filing.
“EEI appreciates that the commission is reevaluating the methodology for determining base ROE for transmission infrastructure projects,” EEI’s Moeller said Monday. “A base ROE that is set at a level sufficient to attract capital and to compensate investors for the risks associated with the development and construction of transmission infrastructure is necessary to help ensure that electric companies are able to continue providing safe, reliable and affordable energy to their customers.”
