FERC Issues Order on Remand for Transmission Return on Equity Methodology, but Leaves the Door Open for Future Challenges

How did we get here?

Section 206 of the Federal Power Act (“FPA”) empowers FERC to investigate, conduct hearings, and set public utility rates. The Commission must conduct a two-prong review to (1) determine whether the existing rate is just and reasonable and (2) if it determines the existing rate is unjust and unreasonable, it must set a just and reasonable rate if necessary.

The Commission has grappled with its ROE methodology for transmission utilities for over a decade, with several orders modifying its methodology covering both the MISO TOs and transmission owners in ISO New England (“ISO-NE”), and two D.C. Circuit opinions.

• Opinion 531: On June 19, 2014, the Commission addressed a complaint (“NETO Complaint”) filed against the New England Transmission Owners (“NETOs”).¹ The Commission replaced its one-step DCF model that focused on short-term growth projections with a two-step approach that added at long-term growth component based on gross domestic product. The Commission then established a zone of reasonableness based on the ROEs of similarly situated utilities and adopted midpoint of the upper half of the zone of reasonableness as the just and reasonable ROE.
• Opinion 551: On September 8, 2016, the Commission addressed two complaints against the MISO TOs (“MISO Complaints”).² The First Complaint was filed in 2013, and the Second Complaint was filed in 2015. In the Order, the Commission applied the two-step DCF model to establish a 10.32% ROE. This ROE, FERC explained, reflected the midpoint of the upper half of the zone of reasonableness. The Commission also ordered that the MISO TOs issue refunds from November 13, 2013 to February 11, 2015.
• Emera Maine: On April 14, 2017, the D.C. Circuit issued its Emera Maine decision, vacating Opinion No. 531.³ The Court held that the “zone of reasonableness creates a broad range of potentially lawful ROEs rather than a single just and reasonable ROE.” The D.C. Circuit vacated the FERC Order accordingly. The Commission’s determination that the NETOs’ existing ROE was unjust and unreasonable because it was not the DCF midpoint was arbitrary and capricious. Instead, FERC should have analyzed the particular circumstances of the case and justified why its new ROE was just and reasonable.
• Post-Emera Maine Briefing Orders: In the fall of 2018, the Commission issued a series of Briefing Orders to determine the appropriate methodology for the pending complaint proceedings against the NETOs and MISO TOs.⁴ The Briefing Orders sought comment and proposal on the two-step DCF methodology, an Expected Earnings model, a Risk Premium model, and a Capital Asset Pricing Model (“CAPM”).⁵
• Opinion No. 569: On November 21, 2019, the Commission determined that the ROE should be calculated by placing equal weight on the two-step DCF methodology and CAPM.⁶ The Commission adopted a quartile system where ROEs that fell within the middle two quartiles of the composite zone of reasonableness would be presumptively just and reasonable. The just and reasonable ROE was then determined by the risk of the utility for an ROE that fell outside the middle two quartiles. A below-average risk utility received an ROE that was the midpoint of the lower half, an average risk utility received an ROE that was the midpoint of the entire zone, and an above-average risk utility received an ROE that was the midpoint of the upper half. The Commission determined the MISO TO’s 12.38% ROE was presumptively unjust and unreasonable and established a 9.88% ROE, reflecting the midpoint of the composite zone of reasonableness for an average risk utility. The Commission then determined that the 9.88% ROE was just and reasonable for the MISO Complaints.
• Opinion No. 569-A: On May 21, 2020, the Commission revised, once again, its ROE methodology to include the Risk Premium model with the DCF and CAPM models.⁷ The Commission acknowledged that the Risk Premium model contained some circularity, but asserted that averaging the Risk Premium model with the CAPM and DCF models adequately mitigated the circularity. The Commission also amended its zone of reasonableness analysis by dividing the zone of reasonableness into thirds. An ROE that fell within the middle third of the composite zone of reasonableness was presumptively just and reasonable. The modification narrowed the presumptively just and reasonable range established in Opinion 569. The ROE calculation was also modified into taking the midpoints of the lower, middle, and upper thirds of the zone of reasonableness for low-, average-, and high-risk utilities respectively. The Commission determined MISO TOs were an average-risk utility, and the appropriate ROE was 10.02% under its new methodology. The Commission then determined that the 10.02% ROE from the NETO Complaint was just and reasonable when applied to the MISO Complaints.
• MISO Transmission Owners v. FERC: On August 9, 2022, the D.C. Circuit issued a decision that vacated and remanded Opinion No. 569.⁸ The Court held that FERC failed to provide a “reasoned explanation” for including the Risk Premium model in Opinion No. 569-A after initially rejecting the metric in Opinion No. 569. The Court upheld FERC’s decision to use the ROE from the NETO Complaint for both complaints against MISO TOs but declined to determine the appropriate refund until FERC set its new ROE methodology.

FERC Order on Remand

On October 17, 2024, FERC issued the Order on Remand from MISO Transmission Owners v. FERC.⁹ In the Order, FERC modified the ROE methodology, yet again, by removing the Risk Premium model and reverting to an ROE methodology that creates a composite zone of reasonableness based on the DCF and CAPM models. The Commission acknowledged that investors do not use the Risk Premium model, and the record did not contain any evidence that would resolve the circularity concerns. The Commission then addressed the 2013 and 2015 MISO Complaints.

The Commission adhered to its DCF and CAPM analysis from Opinion Nos. 569 and 569-A. The Commission used 2013 market conditions, reflecting the time when the First Complaint was filed, in its analysis. The DCF zone of reasonableness was 6.97% to 12.07%, and the CAPM zone of reasonableness was 7.80% to 13.09%. The composite zone of reasonableness was 7.39% to 12.58% with a midpoint of 9.98%. The Commission held that the 12.38% ROE was presumptively unjust and unreasonable because it did not fall within the middle third of the zone of reasonableness and set a 9.98% ROE for the average risk MISO TOs. The Commission then ordered that the MISO TOs issue refunds for the 15-month period from November 12, 2013 to February 11, 2015 in accordance with FPA Section 206 and from September 28, 2016 to October 17, 2024.

The Commission determined that the composite zone of reasonableness was 7.86% to 12% for the Second Complaint filed in 2015. The Commission held that the 9.98% ROE was presumptively just and reasonable because it fell within the middle third of the composite zone of reasonableness and did not issue a new ROE or refund for the Second Complaint.

What’s next?

The Order will inevitably face additional legal challenges on appeal. While the exact items to be appealed are yet to be determined, three items in particular will be subject to review.

First, FPA section 206 only authorizes refunds up to 15 months after the initial complaint.¹⁰ In the Order, the Commission effectively ordered refunds covering an eight-year period, from September 28, 2016 to October 17, 2024. The MISO TOs will likely challenge this refund, claiming that the eight-year refund period exceeds FERC’s statutory authority under FPA Section 206.

Second, the MISO TOs may challenge FERC’s policy to set ROEs based on average risk. The Commission established a 9.98% ROE based on the finding that MISO TOs were considered to be an average risk utility and entitled to an ROE that reflected the midpoint of the composite zone of reasonableness. If the MISO TOs can show they are instead a higher risk utility, they will be entitled to an 11.78% ROE, i.e., the midpoint of the upper third of the composite zone of reasonableness.

Third, the ISO-NE NETO proceeding remains in flux. Although that proceeding was used to revise Commission ROE policy initially, and FERC issued the Briefing Orders in both the MISO and ISO-NE proceedings in 2018, the Commission has not yet issued any guidance recently as to how that proceeding (which involves four complaints) are to proceed. We expect that the Commission will issue an order in the proceeding shortly applying the newest ROE methodology.

V&E Experience

Our team has extensive experience in ROEs and utility rate-setting generally and is available to provide more in-depth analysis of the Commission ROE proceedings and their implications for your company or the industry generally. If you are interested, please contact the Vinson & Elkins attorney with whom you usually work or the attorneys below.

¹ Coakley Mass. Attorney Gen. v. Bangor Hydro-Elec. Co., Opinion No. 531, 147 FERC ¶ 61,234 (2014).

² Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., Opinion No. 551, 156 FERC ¶ 61,234 (2016).

³ Emera Maine v. FERC, 854 F.3d 9 (D.C. Cir. 2017).

⁴ Coakley v. Bangor Hydro-Elec. Co., 165 FERC ¶ 61,030 (2018); Ass’n of Bus. Advocating for Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., 165 FERC ¶ 61,118 (2018).

⁵ 165 FERC ¶ 61,030 at PP 16, 30.

⁶ Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., Opinion No. 569, 169 FERC ¶ 61,129 at P 19 (2019).

⁷ Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., Opinion No. 569-A, 171 FERC ¶ 61,154 at P 2 (2020).

⁸ MISO Transmission Owners v. FERC, 45 F.4th 248 (D.C. Cir. 2022).

⁹ Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., Order for Remand, 189 FERC ¶ 61,036 (2024).

¹⁰ 16 U.S.C. § 824e(b).