EEI report: Federal regulators must end ‘pancaked’ complaint decisions
The Federal Energy Regulatory Commission’s (FERC) propensity to set hearings on return on equity (ROE) complaints doesn’t bode well for the commission’s decision-making reputation among the nation’s electricity utilities and their investors, according to an August report published by the Edison Electric Institute (EEI).
Currently, FERC sets hearings for ROE complaints based on flawed analysis that produces inaccurate rates, which subsequently invite frequent initial and pancaked — a.k.a. concurrent — complaints, according to the EEI report.
“FERC’s recent practice of setting virtually all ROE complaints for hearing has resulted in nearly seven years (and counting) of rate uncertainty for transmission-owning utilities and their investors,” writes report author Suedeen Kelly, an energy expert and former FERC commissioner.
“Numerous complaints have been filed, and few have been resolved,” according to Kelly, a partner at Washington, D.C.-based international law firm Jenner & Block LLC, where she handles cases in the energy, environmental and litigation groups.
“This situation,” she writes, “threatens to erode the confidence of investors in FERC-regulated transmission assets, which threatens the ability of utilities to cost-effectively access capital needed to maintain and expand a robust, reliable, and resilient transmission grid.”
Basically, FERC’s practice is undermining the industry’s confidence in the commission’s ability to establish consistent, stable returns for investment in long-lived transmission assets, according to the report.
The proposed solution? It’s actually in the name of the EEI report, To Ensure That Its Policies Support the Continued Development of Reliable and Resilient Transmission Infrastructure, FERC Should Discontinue Its Practice of Allowing Pancaked Complaints.
Because construction of transmission infrastructure requires a multi-decade commitment of funds, potential and existing investors need to have predictable, adequate and stable ROE on transmission investments, according to the EEI report.
The ROE is a critical component of transmission rates regulated by FERC that provide them a return on their investments in the transmission grid that compensates them for the risks associated in building, owning and operating transmission projects.
The U.S. Supreme Court set precedent on returns in two decisions: its 1923 decision in Bluefield Water Works Co. v. Public Service Commission of West Virginia, and the 1944 decision in Federal Power Commission v. Hope Natural Gas.
Consistent with the high court’s decisions, FERC is required to set a return on shareholder investment at a level that is “commensurate with returns on investments in other enterprises having corresponding risks,” and that’s “sufficient to assure confidence in the financial soundness of the utility, and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise capital necessary for the proper discharge of its public duties.”
However, in recent years FERC has received a growing number of complaints to reduce the ROE component of transmission rates. Many of the complaints have been filed against the same transmission owners, challenging the same ROE already being examined in previously filed complaints — or those commonly referred to as “pancaked complaints,” the report says.
Section 206 of the Federal Power Act mandates a threshold that FERC find that an existing rate is unjust and unreasonable before setting a new rate. But FERC has been setting an ROE complaint for hearing based on the presentation of a new Discounted Cash Flow analysis, which produces a lower number than the rate on file, subsequently producing the pancaked complaints, says the EEI report.
“By setting complaints for hearing concurrently, without first ensuring that they meet the section 206 threshold, FERC has created a policy that is not supported by the law, is inconsistent with the intent of Congress, is not workable in practice, and undermines regulatory expectations for a stable and predictable ROE,” according to EEI’s report. “Certainty and stability are necessary for a capital-intensive sector with long-lived investment such as the electric transmission industry.”
The act’s section 206 also “explicitly and deliberately limits a utility’s refund exposure in a complaint case to a maximum of 15 months,” a limit Congress intended as a way to speed up the resolution of section 206 cases.
“By setting successive pancaked complaints regarding the same ROE for hearing, FERC contravenes this plain statutory language and the legislative intent behind … section 206 and allows complainants to evade, effectively, the 15-month statutory limit on refunds,” the EEI report says.
FERC’s practice has subsequently resulted in the burden of proof being shifted away from complainants and onto the transmission owners, which the report calls inappropriate and premature.
“The first question that FERC must answer under FPA section 206 is whether the existing rate has been shown to be unjust and unreasonable. This responsibility belongs to the complainants, not the responding utility,” the EEI report says.
Requiring complainants to meet their burden of proof before FERC sets complaints for hearing would bolster FERC’s policies for supporting development of a reliable and resilient transmission infrastructure and minimize the practice of pancaking complaints, concludes the report.
