On October 16, 2014, the Federal Energy Regulatory Commission (FERC) issued Opinion No. 531-A, an order on the paper hearing it established in Opinion No. 531 regarding the long-term growth rate to use to calculate the New England Transmission Owners’ (NETOs) base return on equity (ROE) under the two-step constant growth discounted cash flow (DCF) methodology that FERC adopted for public utilities.  In Opinion No. 531-A, FERC determined, among other things, that the NETOs’ existing base ROE of 11.14 percent is unjust and unreasonable and reduced the NETOs’ base ROE by approximately five percent to 10.57 percent, with a maximum ROE, including incentives, of 11.74 percent.  Requests for rehearing of Opinion No. 531 remain pending before FERC.

As we wrote in June 2014, in Opinion No. 531, FERC adopted the two-step DCF methodology for determining base ROE for public utilities and tentatively found that the long-term growth rate component of the ROE formula—which represents 1/3 of the overall growth rate variable in the DCF model—should be based on projected long-term growth in GDP.  However, because the parties to the ROE complaint case against the NETOs had not litigated the appropriate long-term growth rate, FERC reopened the record and established a paper hearing to enable the parties to brief that issue.

Following the paper hearing, FERC in Opinion No. 531-A found that the long-term GDP growth rate is the appropriate long-term growth rate to use in the two-step DCF methodology and that 4.39 percent is the appropriate GDP growth rate to use to calculate the NETOs’ base ROE.  The parties did not contest either of these matters.  Applying the two-step DCF methodology with a 4.39 percent long-term GDP growth rate, FERC determined that the NETOs’ existing 11.14 percent base ROE is unjust and unreasonable, that a just and reasonable base ROE for the NETOs is 10.57 percent, and that the NETOs’ maximum ROE, including incentives, cannot exceed 11.74 percent, the top of the zone of reasonableness of 7.03 to 11.74 percent.  Accordingly, FERC directed the NETOs to make refunds, with interest, for the 15-month refund period from October 1, 2011, to December 31, 2012.

Importantly, FERC in Opinion No. 531-A did not address arguments regarding whether the projected long-term GDP growth rate of 4.39 percent used for the NETOs should represent an upper or lower limit on the long-term growth component of the two-step DCF methodology, and, accordingly, it could reach a different result in other ROE cases.