Docket Nos. ER25-2312-000, ER25-2312-001, ER25-2312-002 | Errata
I dissent in part from today’s order addressing a suite of rate and incentive proposals by Midcontinent Grid Solutions Iowa, LLC (MGS Iowa). While I support most of the Commission’s holdings, I disagree with the Commission’s approval of MGS Iowa’s request to use a hypothetical capital structure of 60% equity and 40% debt and would instead reject that proposal, consistent with the Commission’s recent decision in Valley Link Transmission Maryland, LLC.[1]
Commission ratemaking conventions and precedent require an operating company to use its actual capital structure if it: (1) issues its own debt without guarantees; (2) has its own credit rating; and (3) has a capital structure in the range approved by the Commission (up to 60% equity). If an operating company does not meet any one of these criteria but has a parent company with a capital structure in the range approved by the Commission, it must use its parent company’s capital structure for ratemaking purposes. Further, if the operating utility’s parent company’s capital structure is not in the range approved by the Commission, the Commission employs a hypothetical capital structure for use in determining transmission revenue requirements and associated rates.[2]
The use of hypothetical capital structures can help set a starting point for small or nonincumbent utilities whose capital structures may be volatile during the construction period with infusions of debt and equity. The Commission has correctly allowed the use of hypothetical capital structures to facilitate transmission investment, including by nonincumbent transmission developers participating in competitive bidding processes under Order No. 1000.
However, a utility’s capital structure directly and significantly impacts its Commission-jurisdictional rates, which the Commission must ensure are just and reasonable. As the Commission has recognized, “[i]n reviewing a proposed capital structure, the Commission seeks to achieve a balance between its obligation to protect consumers with its obligation to ensure that a regulated entity has a reasonable opportunity to attract capital and earn a fair return on its investment.”[3] Hypothetical capital structures can materially impact the amount of Allowance for Funds Used During Construction, which is added to the actual project costs, both of which are ultimately included in rate base when a project is used and useful. The capital structure used in ratemaking affects the size of the overall revenue requirement by impacting the return on rate base, depreciation, and even income tax allowance for the life of the project. These components then flow into the resulting rates. The relationship between the assumed capital structure and rates therefore presents a direct impact to ratepayers: the higher the assumed equity component of an applicant’s capital structure (without changing the corresponding return on equity), the greater the potential rate impact for customers. It is incumbent on the Commission to ensure that rate incentives with clear customer cost impacts are supported by the record before us.
The question before the Commission in any individual case is whether the applicant has adequately justified its proposed hypothetical capital structure. MGS Iowa has not met that burden. Here, MGS Iowa advocates for its proposal using generalized arguments about the benefits of having a hypothetical capital structure,[4] but provides no evidence or arguments justifying its specific capital structure beyond reference to prior Commission orders that had approved 60% equity/40% debt capital structures for other companies. However, the Commission’s general policy allowing the use of hypothetical capital structures does not automatically justify MGS Iowa’s specific proposal here, even if it is in range of potentially just and reasonable capital structures, nor does the Commission’s previous approval of such a high equity share necessarily mean it is just and reasonable for MGS Iowa.[5] Therefore, the mere reference to past precedent is not sufficient to justify the significant cost impacts of such an imbalanced capital structure.
I am similarly not persuaded by the order’s conclusion that approval of MGS Iowa’s specific capital structure is warranted because it furthers the goal of nonincumbent transmission developer participation in Order No. 1000 competitive bidding processes. That goal, at best, supports allowing nonincumbent developers to use hypothetical capital structures as a general matter but should not relieve an individual applicant of its obligation to justify its specific capital structure.
I recognize that the Commission has, primarily in cases arising under FPA section 219, previously approved the use of a 60% equity/40% debt hypothetical capital structure with minimal support, though the Commission has also applied greater scrutiny in other cases, including the recent Valley Link decision.[6] Given this conflicting precedent and the potentially significant rate impacts from the use of a 60% equity/40% debt hypothetical capital structure, I would clarify the Commission’s expectations going forward, rather than simply falling back on the Commission’s prior approvals that did not meaningfully scrutinize such requests. For instance, applicants requesting a hypothetical capital structure could request to use the average capital structure of a proxy group of other similarly situated utilities, as the Commission required in Opinion No. 502.[7] Alternatively, an applicant within the service territory of another utility, whose transmission rate base comprises the bulk of zonal rates, could propose to use that other utility’s capital structure. An applicant also could propose to use the average capital structure of the utilities in its region.
The Commission has an ongoing obligation to ensure that the transmission rates it oversees are just and reasonable, and the Commission should not perpetuate an error simply because it has approved a similar structure in the past for other entities. Accordingly, I would reject MGS Iowa’s proposed capital structure and establish a paper hearing to determine the appropriate hypothetical capital structure.
For these reasons, I respectfully dissent.
[1] 191 FERC ¶ 61,113, at PP 143-144 (2025) (Valley Link).
[2] See, e.g., Iowa Coal. for Affordable Transmission v. ITC Midwest, LLC, 181 FERC ¶ 61,100, at PP 3-5 (2022).
[3] Constellation Mystic Power, LLC, 165 FERC ¶ 61,267, at P 49 (2018), order on reh’g, 172 FERC ¶ 61,044, at P 121 n.246 (2020).
[4] MGS Iowa, in its transmittal letter (pages 12-13) and the testimony of Heather Cushman (pages 8-9), states that the hypothetical capital structure mitigates volatility during the construction period, providing stability and predictability that will address financing risks.
[5] See, e.g., Emera Maine v. FERC, 854 F.3d 9, 23 (D.C. Cir. 2017) (“the fact that a rate falls within the zone of reasonableness does not establish that the rate is the just and reasonable rate for the utility at issue”).
[6] See also N.Y. Indep. Sys. Operator, Inc., 151 FERC ¶ 61,004, at P 84 (2015).
[7] BP Pipelines (Alaska) Inc., Opinion No. 502, 123 FERC ¶ 61,287, at PP 175-178 (2008).