On March 21, the Federal Energy Regulatory Commission (“Commission” or FERC) issued a notice of inquiry (NOI) seeking industry comments regarding the modification and application of its current rate of return on equity (ROE) policies. This NOI issuance comes on the heels of FERC’s Order Directing Briefs in Coakley, Mass. Attorney Gen. v. Bangor Hydro-Electric Co.—FERC’s response to the D.C. Circuit Court of Appeals’ remand decision in Emera Maine v. FERC—where FERC discussed possible changes to its traditional discounted cash flow (DCF) ROE methodology. Among other things, the Order Directing Briefs proposed to include alternative financial models, namely the capital-asset pricing model (CAPM), the Expected Earning model, and the Risk Premium model, in the selection of a just and reasonable ROE. Noting that this sort of policy change would have consequences for all public utilities, including natural gas and crude oil pipelines, FERC’s NOI opens up these and other issues to the industry at-large for comment.
Requests for Comments
FERC’s NOI seeks comments on over 60 specific questions, many with detailed subparts. Each of these requests falls into one of the following eight categories:
- Role and Objectives of the Commission’s Base ROE Policy – A series of broad-based questions surrounding the practical implications on utilities and ratepayers of adopting a revised ROE methodology consistent with the Order Directing Briefs. Subtopics include costs to participate, predictability to the industry, and regional/temporal ROE variability.
- ROEs for Different Commission-regulated Industries – Questions regarding whether electric, gas and oil ROE policies should be merged, or continue to contain certain differences. These questions consider historical and practical differences, notably including proxy group size issues that have plagued gas and oil ROE analyses.
- Performance of the DCF Model – Questions aimed at how the DCF model has performed historically (projections v. actuals) and under various financial circumstances.
- Proxy Groups – A significant number of inquiries into how proxy groups should be designed to take into account target company risk, comparable businesses (energy industry, non-energy industry, etc.), proxy group outliers, proxy group size, etc. Notably, this subset also considers possible interactions with FERC’s evolving MLP policies.
- Financial Model Choice – A number of requests intended to determine what financial models should be used, their comparative benefits, and how they should be applied.
- Mismatch between Market-based ROE Determinations and Book-Value Rate Base – Questions posed to assess whether a historical mismatch between market-based and book-value rate base ROE results raises any conceptual problems to be addressed.
- First Prong of ROE Determination – Questions following from the Emera Maine v. FERC decision’s finding that FERC failed to properly show the existing ROE was unjust and unreasonable. Here, FERC seeks comments on how it should assess whether an ROE is unjust and unreasonable going forward.
- Model Mechanics and Implementation – A variety of issues and sub-questions surrounding implementation of the various financial models, such as the appropriate data inputs to be used, alternative applications of each model, etc.
Conclusion and Next Steps
Given the longstanding nature of electric ROE disputes and the proxy group size issues in gas and oil proceedings, this NOI is likely to receive widespread industry attention and participation. Initial comments are due 90 days from the publication of the NOI in the Federal Register. Reply comments are due 30 days thereafter.