Commissioner Allison Clements Dissent in Part Regarding Constellation Mystic Power, LLC

Commissioner Allison Clements Statement
February 18, 2022
Docket No.  ER18-1639-013

As an initial matter, I support the rehearing order’s continued finding that “the natural break analysis warrants the exclusion of Otter Tail’s DCF result.”[1]  In particular, I highlight the significance of the majority’s statement that proximity to the low- or high-end outlier screen is not alone “determinative as to whether to apply the natural break analysis in all cases.”[2]  I also agree that the high-end outlier test and the natural break analysis serve two distinct purposes – i.e. the high-end outlier test excludes the most extreme observations, while the natural break analysis excludes other outliers as appropriate.[3]

I dissent in part from today’s rehearing order because of my continuing concerns with the Commission’s current return on equity (ROE) policy, which I believe applies a flawed methodology that does not adequately protect consumers and does not yield just and reasonable rates.  I explained my concerns with our current ROE policy in a prior dissent,[4] so I will not repeat them here except to note that today’s rehearing order would appear to support my view that Opinion No. 569-A relaxed the high-end outlier test without justification, effectively leaving only the natural break analysis as a relevant high-end outlier screen. 

Specifically, Opinion No. 569 adopted a high-end outlier test that would exclude extreme observations by removing any proxy company whose cost of equity estimated under the two-step DCF model is more than 150 percent of the median result of all of the potential proxy group members in the model, subject to a natural-break analysis.  Opinion No. 569-A relaxed this 150 percent threshold to more than 200 percent of the median result of all of the potential proxy group members in the model, subject to a natural-break analysis. 

Today’s rehearing order notes that “the gap between Otter Tail and the next highest DCF result is 147 basis points, nearly twice as large as the next largest gap within the DCF results of 83 basis points.”[5]  As today’s rehearing order also points out, “the Otter Tail DCF result is well below the high-end outlier screen[.]”[6]  In fact, “Otter Tail’s DCF result was 435 basis points below the high-end outlier screen.”[7]  The significant basis point gap between Otter Tail’s appropriately excluded DCF result and the high-end outlier screen should raise eyebrows. 

To be clear, had the 150 percent high-end threshold established in Opinion No. 569 been applied here, Otter Tail’s DCF result would still not have been excluded by the high-end outlier test.  Otter Tail’s DCF result falls 50 basis points below the 150 percent threshold.  This fact would appear to counter the reasoning, in Opinion No. 569-A, that increasing the threshold from 150 to 200 percent was necessary to reduce the risk that rational results are inappropriately excluded.[8]

That today’s appropriately excluded Otter Tail DCF result is nonetheless a whopping 435 basis points below the 200 percent high-end outlier screen adopted in Opinion No. 569-A is just another data point demonstrating how relaxing the high-end outlier test was not justified.  For these reasons, I respectfully dissent in part.