In Opinion No. 594, the Federal Energy Regulatory Commission ("FERC") found that New England Transmission Owners' ("NETO") previously existing base return on equity ("ROE") of 11.14% was unjust and unreasonable and determined that it needed to be replaced with a base ROE of 9.57%. In this decision, the Commission employed the same ROE methodological framework that was first determined as part of the Midcontinent Independent System Operator transmission owners' Opinion No. 569 series of decisions. Given that, our in-depth summary here is focused on a number of the more interesting nuances and detailed explanations provided by the Commission, that are over and above what is said in the Opinion No. 569 decisions. Supporting paragraph references refer to Opinion No. 594.
A brief overview of the Commission's preferred application of the two-step discounted cash flow ("DCF") model and Capital Asset Pricing Model ("CAPM") is set out below.
FERC Preferred ROE Models — Key Characteristics
Two-Step DCF
Components:
Short-Term Growth Rate @ 80% Weight
Long-Term Growth Rate @ 20% Weight
Dividend Yield Adjusted by Short-Term Growth Rate
CAPM
Components:
Market Return Calc. Using One-Step DCF of S&P 500 Index
Beta sourced from Bloomberg
Risk Free Rate based on 30-Year Treasury Yield
Key Insights from Opinion No. 594
Electric Utility Proxy Group
Regarding the identification of candidate proxy group members, the Commission clarified that it generally presumes that a company not listed in Value Line's Electric Utility grouping should not be included in the proxy group. However, the Commission further clarified in this decision that it will assess evidence to determine whether an alternative non-Electric Utility classified company whose business activities are predominantly involved in the sale of electricity should be included as well. The overall goal is to establish a proxy group of companies with a business and risk profile similar to that of the subject utility. As part of the fourth complaint, the Commission accepted the inclusion of Algonquin and Emera Maine, Inc., in the proxy group, both of which were listed in the Value Line Power category at the time of the decision. Presently, Algonquin is no longer covered by Value Line, but Emera Maine is.
Natural Break Exclusion
It is beneficial to observe how the Commission implements its natural break analysis, which it employs on a case-by-case basis. Here, in respect of the DCF analysis for the first complaint, the Commission found that, following a natural break assessment, UIL Holdings Corp.'s 12.27% was justifiably excluded.
UIL Holdings Corp. reported a ROE of 12.27%, which was 130 basis points higher than the next-highest result of 10.97%. The largest gap elsewhere in the array was only 43 basis points, justifying its removal (see P 458). Similarly, Algonquin was excluded from the DCF analysis because its ROE of 17.58% exceeded the high-end threshold and was 564 basis points above the next-highest result, failing the natural break test (see P 706).
CAPM Beta
The Commission relied on Value Line betas in this decision, but it is important to highlight that only Value Line betas were available in the record of this proceeding. The Commission included a footnote in the decision explaining that it has found Bloomberg-based betas to be more appropriate to rely on when available. (see P 258, fn. 582 and P 261). This reflects an ongoing methodological preference by the Commission for more granular beta data that synchs with the end of the six-month study period.
CAPM Market Return — Selection of Short-Term EPS Growth Rate
The Commission continued to express a preference for IBES short-term EPS growth rates to compute the S&P 500 Market Return estimate. The Commission added that, based on the record in this proceeding and its subsequent experience implementing the CAPM, it found it appropriate to rely on IBES rates rather than Value Line growth rates. (see PP 283-284).
Risk Premium Method
In its prior MISO Remand Order, the Commission reversed its reliance on the Risk Premium method. Here, the Commission continued not to rely on the Risk Premium and added further rationale for doing so (which was reminiscent of its reasons for originally rejecting the method in Opinion No. 569). The reasons mentioned in Opinion No. 594 include:
- Reliance on Historical Data: It is less accurate than the DCF and CAPM methods, as it relies on the results of market-based models from past cases and not current primary data.
- Circularity Concerns: The method replicates "inertial continuation of past returns," affecting past regulatory decisions, and there was no evidence addressing circularity concerns in the record.
- Heterogeneous ROE Sources: Prior ROE determinations reflected in the method's dataset may not reflect ROE results that were determined by a market-based method, e.g., settlement agreement based ROEs.
However, the Commission continues to not foreclose use of the method if its concerns can be addressed. (see PP 320-323).
DCF Analysis — Inclusion of a Long-Term GDP Growth Rate
The Commission provided additional color on its basis for rejecting certain arguments raised by NETO and its witness, Mr. McKenzie, that long-term GDP forecasts are of little relevance to investors because they are not routinely mentioned by Value Line or security analysts. The Commission responded by saying that the lack of such information published by Value Line or IBES is not indicative of whether investors use long-term GDP forecasts. In particular, the assertions do not directly address how investors who use the DCF analytical model specifically employ it. This clarification provides useful guidance for future proceedings.
The Commission pointed back to the order when it first adopted the two-step DCF model for natural gas pipelines, and noted that the order relied heavily on information from two major investment firms about how they conducted their DCF analyses. Furthermore, the Commission stated that proponents seeking to advance an alternative, non-GDP-based long-term rate are expected to provide information on how investment houses or other investment advisory services use that alternative-based forecast in their DCF analyses. (see PP 144-149).
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Speak with an expert →Footnotes
[1] Opinion No. 594, 194 FERC ¶ 61,208.
[2] Opinion No. 569, 169 FERC ¶ 61,129 (2019), Opinion No. 569-A, 171 FERC ¶ 61,154, Opinion No. 569-B, 173 FERC ¶ 61,159 (2020), MISO Transmission Owners, et al., v. FERC, 45 F.4th 248 (D.C. Cir. 2022), MISO Order on Remand, 189 FERC ¶ 61,036 (2024), 190 FERC ¶ 61,184 (2025).
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