Commissioner Richard Glick Statement
November 19, 2020
Docket No. EL14-12-015
Order: E-3
For more than a decade now, the Commission has struggled with the fact that its long-standing ROE methodology produces cost-of-equity estimates well below the ROEs it permitted public utilities to collect in the years before the Great Recession. Today’s order is the latest step in that saga. Although the order is hardly a perfect outcome, I largely concur in the determination as I agree that the end result—a 10.02% ROE—is just and reasonable.
I write separately to make three points. First, the experience of the last decade has made it hard to believe that the Commission’s history of fiddling with its ROE models is a purely technocratic exercise in financial modeling rather than a concern about the output of those models—i.e., the ROE itself. That is understandable; ROE policy will always be as much art as science. But we owe it to all interested parties to be open and transparent about the factors actually guiding our ROE decisions. If the Commission has concerns about the ROE produced by the various models on which it relies, we ought to come right out and say so rather than papering those concerns over with hundreds of pages’ worth of discussion about dividend yields, growth rates, proxy groups, and the like.
Second, some of the fiddling in Opinion No. 569-A[1] was indefensible on its face. In particular, the Commission’s results-oriented about-face on the Risk Premium model, announced in Opinion No. 569-A and affirmed in today’s order, represents an unreasoned departure from the well-explained rejection of that model in Opinion No 569.[2] Although the Commission’s ROE policy is badly in need of stability, that stability cannot come at the cost of reasoned decisionmaking. Accordingly, while I believe that the end result of today’s order is just and reasonable, I continue to have serious misgivings about the decision to rely on the Risk Premium model in future proceedings.
Finally, the one constant throughout this proceeding has been the Commission’s confounding refusal to grant certain refunds of rates that the Commission itself found to be unjust and unreasonable. The Federal Power Act (FPA) gives us the authority to refund those unjust and unreasonable rates, and the Commission’s refusal to do so is arbitrary and capricious. I also dissent from the portion of today’s order that affirms that refusal to order refunds.
The Commission Must Stop the Endless Fiddling with Its ROE Methodology
In my dissent from the underlying order, I went through the last decade of the Commission’s ROE policy in some detail. That history bears repeating here as it helps to explain why I support the end result in this proceeding—an ROE of 10.02%—even though I do not support certain of the decisions reached in Opinion No. 569-A and affirmed in today’s order. ROE is an area where stability is paramount and, in an effort to bring stability to what has been a particularly turbulent aspect of the Commission’s authority, I can support an outcome that is just and reasonable even if it might not be the most just and reasonable.[3]
Between 2011 and 2015, various entities representing customers’ interests filed a series of complaints under section 206 of the FPA [4] arguing that the base ROE available to transmission owners in ISO New England, Inc. and the Midcontinent Independent System Operator, Inc. (MISO) was unjust and unreasonable. In Opinion No. 531, the Commission addressed the first of those complaints, with its most significant findings being that “anomalous capital market conditions” required the Commission to consider a variety of financial models and that those models supported an elevated ROE.[5] The Commission subsequently applied that approach to a similar complaint involving the MISO Transmission Owners.[6] Shortly thereafter, however, the D.C. Circuit vacated Opinion No. 531, sending it back to the Commission and the Commission back to the drawing board.[7] Following that remand, the Commission proposed to expressly rely on the four financial models considered in Opinion No. 531.[8] A year later, in Opinion No. 569, the Commission narrowed it to two models, while making a number of changes to how it implemented those models.[9] Then, in Opinion No. 569-A, the Commission went back up to three models, with another round of tweaks to those models.[10]
With the exception of the Commission’s finding that anomalous market conditions supported an elevated ROE, which provided a window into its real concern, the Commission’s various orders in this saga have suggested that each new iteration of its ROE methodology is an entirely technical affair that turns on the Commission’s evaluation of discrete issues with the various financial models on which it relies to set ROE. In so doing, the Commission has added new models,[11] removed some of those models,[12] tweaked some of those models,[13] introduced new inputs,[14] modified existing inputs,[15] introduced new screens,[16] modified existing screens,[17] and even altered how the Commission places the ROE within the zone of reasonableness.[18] But, with each new twist, it becomes harder to buy that the Commission is genuinely reassessing the mechanics of each model rather than disagreeing with the ROE numbers that those models produce.[19]
Opinion No. 569-A was the culmination of all that. Not long after completing a year-long process to re-evaluate our approach to setting ROEs following the D.C. Circuit’s decision in Emera Maine, the Commission again charted a major change of course, adding back the Risk Premium model and elevating the final ROE. In so doing, the Commission again portrayed its change of heart as a technical matter based on its reassessment of a handful of discrete issues related to its financial models rather than what I believe it was: A determination that the old number was too low and we needed to establish a higher one.
To be fair, I am sympathetic to the impulse to consider subjective factors. The Commission’s approach to setting a just and reasonable ROE will often implicate broader policy considerations, equity, and other factors that cannot be captured in, for example, a discussion of dividend yields or the appropriate sources of growth rate calculations. But while ROE policy will always be as much art as science, that is no excuse to pretend that art is science. If broader considerations, including policy goals, are preventing the Commission from settling on or consistently applying an ROE methodology, then we must acknowledge those considerations and give the interested entities the chance to weigh in on them just as they do for the intricacies of dividend yields, growth rates, and the like.
All approaches to setting ROEs have their shortcomings, but the worst outcome by far is to continually fiddle with those approaches, undermining the certainty and predictability that help transmission owners make long-term investments. If the Commission is going to purport to rely entirely on financial models to evaluate and set ROEs, it has to take those models at face value without second-guessing them when it does not like the results. Otherwise, we’re going to end up promoting full employment for energy lawyers rather than a stable investment climate for transmission owners.
In addition, today’s order illustrates the problems with disguising subjective policy considerations as technical determinations. In a number of instances, Opinion No. 569-A reversed determinations made in Opinion No. 569 using rationales that remain far less convincing than those that supported the opposite outcome in Opinion No. 569. Shifting from such strong arguments to such suspect ones opens the Commission up to considerable risk on judicial review, creating even more of the uncertainty we ought to be trying to minimize.
Take the Risk Premium model. Although Opinion No. 569 declined to utilize the Risk Premium model based on a long list of shortcomings, Opinion No. 569-A reversed course, adding it back into consideration in addition to the discounted cash flow (DCF) analysis and CAPM, which the Commission had settled upon in Opinion No. 569. Today’s order affirms that result.
The record before us does not support that reversal. As an initial matter, and as explained in Opinion No. 569, the Risk Premium model does essentially the same thing as the CAPM by attempting to calculate the “premium that investors require over the risk-free rate of return.”[20] Opinion No. 569 rightly pointed out that nothing in the record supports having two thirds of the Commission’s ROE methodology composed of such analytically redundant approaches.[21] Both Opinion No. 569-A and today’s order respond by arguing that the two models are “sufficiently distinct” since they use different inputs, such as corporate bonds and U.S Treasury bonds.[22] But that response ignores the point made in Opinion No. 569 that the problem with relying on both models is that they replicate the same basic analytical approach—comparing the relative risk of two different investments—irrespective of their differing inputs.[23]
The problem of over-weighting that approach is exacerbated because, as Opinion No. 569 explained, the Risk Premium model is, in most respects, just an inferior version of the CAPM. In particular, the Risk Premium model eschews more reliable market-based cost-of-equity estimates[24] and introduces significant circularity concerns by relying on past judgments.[25] As the Commission explained in Opinion No. 569, “[w]hile all models, including the DCF, feature some circularity, such circularity is particularly direct and acute with the Risk Premium model because it directly relies on past Commission ROE decisions.”[26] The Commission responds to those circularity concerns by contending that they are “mitigate[d]” by the fact that the Commission will average the results of the Risk Premium model with the DCF and the CAPM, which do not present the same concerns.[27] But observing that the Commission will also use models without significant circularity concerns is not a reasoned response to the argument that you should not use circular models in the first place. You wouldn’t eat a rotten apple just because, at the same time, you’re also going to eat two fresh ones.
In addition, the Commission convincingly explained in Opinion No. 569 how “the record contains insufficient evidence to conclude that investors rely on risk premium analyses utilizing historic Commission ROE determinations or settlement approvals to determine the cost of capital and make investment decisions.”[28] The Commission noted that, while allowed ROEs are certainly important to investors’ decisionmaking, that does not suggest that investors perform anything remotely close to the analysis contemplated by the Risk Premium model—i.e., a backward-looking comparison between riskless assets and allowed ROEs—when making their investment decisions.[29] In reversing course, Opinion No. 569-A observed that investors in regulated utilities expect to earn a return above a risk-free asset (which is obviously true) and that “investors . . . observe regulatory ROEs and how changes in authorized ROE levels could affect utility earnings” (which is equally obvious).[30] It should go without saying that investors pay attention to ROEs earned by public utilities and expect them to be higher than debt backed by the U.S. government. But those self-evident statements do not provide any reason—much less substantial evidence—to believe that investors perform a Risk Premium analysis comparing past differences between risk-free assets and Commission-allowed ROEs when evaluating whether to invest in Commission-regulated public utilities.[31]
And, finally, the Risk Premium model does not at all fit with the Commission’s new approach for evaluating whether an existing ROE is just and reasonable. Opinion No. 569 established a framework for evaluating whether an existing ROE is just and reasonable based on ranges of presumptively just and reasonable results derived from the financial models used by the Commission.[32] Unlike every other financial model used, or even seriously considered by the Commission in this proceeding, the Risk Premium model produces a single point estimate of the just and reasonable ROE, not a zone of reasonableness.[33]
Recognizing this “serious concern,” but nevertheless determined to fit a square peg into a round hole, Opinion No. 569-A attempted to “impute” the average width of the zone of reasonableness created by the DCF and CAPM methodologies to the Risk Premium model.[34] For example, if the DCF and CAPM produce an average zone of 200 basis points, the Commission resolved to just assume that the Risk Premium model does too. Neither Opinion No. 569-A nor today’s order, however, has identified a single piece of evidence suggesting that such imputation is appropriate or that any investors or financial experts would even contemplate an approach similar to the Commission’s method. Presumably that is because the record lacks any evidence supporting such an odd repurposing of the Risk Premium model.[35] The Commission’s approach to using the Risk Premium model in evaluating whether an existing ROE is just and reasonable is the equivalent of making someone a “custom” suit based on their siblings’ measurements: Maybe it will fit, but there is no reason to believe that it will and, in any case, it misses the point of the exercise.
In many ways, the Commission’s justification for its novel “imputation” approach to using the Risk Premium model epitomizes my concerns about pretending that our ROE decisions are purely technical determinations about the best way to deploy certain financial models. There is simply no record to support the Commission’s use of the Risk Premium model and certainly not the mangled version of that model that the Commission relies upon to fit it within our new approach under section 206 of the FPA. If the actual concern is that the ROE figures produced by the DCF and CAPM are too low, we—and all interested parties—would be better served by stating that fact frankly and litigating that issue, rather than twisting the Risk Premium model so that it can be used to support a particular result.
In addition, today’s order adopts a series of equally unreasoned modifications to Opinion No. 569’s framework for conducting the first step of the section 206 inquiry. As noted, Opinion No. 569 established a practice of dividing the zone of reasonableness into ranges of presumptively just and reasonable ROEs within the broader zone of reasonableness.[36] In particular, the Commission created risk-adjusted “quartiles” within the zone of reasonableness centered on the three points that the Commission uses as the starting point for setting ROEs for utilities of different risk profiles[37]—the midpoint of the entire zone of reasonableness for average-risk utilities, the midpoint of the lower half of the zone of reasonableness for below-average risk utilities, and the midpoint of the upper half of the zone of reasonableness for above-average risk utilities.[38]
The Commission justified the end points of each quartile by explaining that “[l]ogic dictates that the end points of those ranges should not be closer to the starting points for the ranges of utilities with different risk profiles than they are to their own starting point.”[39] In other words, it would not make sense to presume that an existing ROE is just and reasonable if it was closer to the starting point used to set the ROE for a utility of a different risk profile than the starting point for a utility of the same risk profile. The Commission’s quartile-based approach made sense given the emphasis that the Commission has historically placed on relative risk profiles when placing ROEs within the zone of reasonableness[40] and it ensured that the ranges of presumptively just and reasonable results were not just arbitrary sub-sections of the zone of reasonableness.
Opinion No. 569-A abandoned that well-reasoned approach and arbitrarily divided the entire zone of reasonableness into thirds, with each third providing a presumptively just and reasonable range of ROEs for certain utilities. The Commission suggested[41] that the maneuver was necessary to comply with the D.C. Circuit’s statement in Emera Maine that “the zone of reasonableness creates a broad range of potentially lawful ROEs.”[42] Emera Maine requires nothing of the sort. Read in context, the quoted language stands only for the proposition that the Commission cannot prove that an existing rate is unjust and unreasonable simply by showing that its ROE methodology would produce a different number using current data.[43] The court certainly did not suggest that every point within the zone of reasonableness must be presumptively just and reasonable for some utility, as Opinion No. 569-A suggested. The Commission’s reading of Emera Maine effectively replaces the word “potentially” with “presumptively”—a major revision that is unsupported by anything in the court’s opinion.
In today’s order, the Commission adds a slightly different spin: That because the Commission applies various screens when assembling a proxy group, using a quartile approach would ignore the same admonition in Emera Maine that the FPA contemplates a broad range of just and reasonable results because it would not consider the highest and lowest numbers within the zone of reasonableness to be presumptively just and reasonable for any utility.[44] That argument fails for the same reasons discussed above. The Commission has always used various screens when selecting a proxy group and, even so, neither Emera Maine nor any other court or Commission precedent has endorsed the proposition that every point within the zone of reasonableness established by the Commission’s financial models must be presumptively just and reasonable.
In any case, the quartile-based approach in Opinion No. 569 easily complied with Emera Maine’s observation regarding a broad range of potentially lawful ROEs. Because the quartile-based ranges contemplated in Opinion No. 569 were only presumptive findings, a public utility could still argue that an ROE outside those ranges was nevertheless just and reasonable based on other considerations.[45] That fact makes every ROE within the zone of reasonableness at least “potentially” just and reasonable.
The problems with the Commission’s new approach go even deeper. Recognizing that the decision to divide the zone of reasonableness into thirds obliterates the rationale for the ranges outlined in Opinion No. 569,[46] Opinion No. 569-A announced, without any explanation, that it will change the starting points it uses when setting the ROE for below- and above-average risk utilities to the midpoint of the lower third of the zone of reasonableness and the midpoint of the upper third of the zone of reasonableness, respectively.[47] Now the tail is truly wagging the dog. As noted, Opinion No. 569 justified the ranges of presumptively just and reasonable ROEs based on the Commission’s longstanding approach to handling companies’ relative risk profiles, namely the use of the upper and lower midpoints for utilities of above- and below-average risk, respectively.[48] Opinion No. 569-A uprooted that longstanding approach, selecting entirely new starting points for placing ROEs within the zone of reasonableness in order to support its new ranges of presumptively just and reasonable results. That gets it entirely backwards; the ranges of presumptively just and reasonable results should reflect how we set ROEs, not the other way around. In any case, at no point in Opinion No. 569-A or today’s order does the Commission explain why the new starting points themselves are an appropriate place to begin the process of placing the ROE for an above- or below-average risk utility within the zone of reasonableness.[49] That makes the Commission’s new policy of setting an ROE for an above- or below-average risk utility at the measure of central tendency within the upper or lower third of the zone of reasonableness an unreasoned departure from past practice.[50]
Suffice it to say, the Commission has never justified Opinion No. 569-A’s change of course with respect to either the Risk Premium model or its approach to step one of the section 206 inquiry. Nevertheless, while I believe that Opinion No. 569 was a superior approach to setting ROEs, I also recognize that the roughly 10% ROE established in today’s order falls within a range of just and reasonable ROEs and I support the ultimate outcome in today’s order on that basis.[51]
The Commission Should Order Refunds for Unjust and Unreasonable Rates Paid by Consumers
I also continue to disagree with the Commission’s refusal to order refunds for the 15-month refund period established pursuant to the second of the two complaints now before us.[52] Throughout that period, customers within MISO paid an unjust and unreasonable ROE. Nevertheless, the Commission has consistently refused to order refunds on the specious basis that the FPA requires it to act as if the 10.02% ROE affirmed in today’s order was in effect throughout that second fifteen-month period. In reality, however, customers paid a 12.38% ROE—a difference that could potentially be worth tens, or even hundreds, of millions of dollars. Nothing in the FPA requires us to pretend that customers paid lower rates than they actually did.
The relevant facts are straightforward. On November 12, 2013, multiple parties filed a complaint (First Complaint) alleging that the MISO Transmission Owners’ 12.38% ROE was unjust and unreasonable.[53] The Commission set the matter for hearing and established a refund effective date of November 12, 2013 (the date the First Complaint was filed),[54] meaning that the 15-month refund period for the First Complaint lasted until February 12, 2015.[55] On February 12, 2015, a different set of parties filed another complaint (Second Complaint) against the MISO Transmission Owners’ ROE. The Commission again set the matter for hearing and established a refund effective date of February 12, 2015,[56] meaning that the 15-month refund period for the Second Complaint lasted until May 12, 2016. Both proceedings were fully litigated and produced initial decisions by Administrative Law Judges.[57] And, in both cases, the Commission did not get around to issuing orders on the initial decisions until well after the refund periods expired, meaning that customers paid rates that reflected a 12.38% ROE throughout both refund periods.[58]
Today’s order affirms the conclusion that the 12.38% ROE was unjust and unreasonable and that the new just and reasonable ROE should be 10.02%. That is sufficient to order refunds for the refund periods established pursuant to both the First and Second Complaints. To see why, let’s start with the text of section 206(b) of the FPA, which provides that
At the conclusion of any proceeding under this section [i.e., section 206], the Commission may order refunds of any amounts paid, for the period subsequent to the refund effective date through a date fifteen months after such refund effective date, in excess of those which would have been paid under the just and reasonable rate, charge, classification, rule, regulation, practice, or contract which the Commission orders to be thereafter observed and in force.[59]
That text is unambiguous. It provides that if an unjust and unreasonable rate was charged during a refund period, the Commission can order refunds for the difference between that rate and the just and reasonable rate set by subsequent Commission order. Both conditions are satisfied here: Customers paid 12.38% through the Second Complaint refund period and the Commission has determined that they should have paid 10.02%. That is sufficient to order refunds pursuant to section 206(b).[60]
Throughout this proceeding, the Commission has suggested that it can grant refunds only when it sets a new rate pursuant to the complaint associated with a particular refund effective date.[61] Nothing in the text of section 206(b) supports that limitation. As explained above, all section 206(b) requires is that the Commission determine that customers paid an unjust and unreasonable rate and that it also determine the just and reasonable rate that they should have paid. Moreover, the statutory text allows the Commission to order refunds “[a]t the conclusion of any proceeding under this section”—i.e., section 206.[62] Congress surely understood that not every section 206 proceeding would be resolved against the public utility and, had it so desired, it could have limited the Commission’s refund authority to only those instances in which the Commission grants a particular complaint. Congress’s decision not to impose any such conditions reinforces the conclusion that the Commission should look only to the factors identified by Congress when deciding whether to require refunds, namely whether customers paid an unjust and unreasonable rate and whether the Commission set a new just and reasonable rate.[63]
Instead of following the plain text of section 206(b), the Commission sought to wring an implicit limitation on the Commission’s refund authority from Congress’s use of the phrase “thereafter observed and in force.”[64] The idea, as I understand it, is that “thereafter observed and in force” is supposed to reflect Congress’s understanding that the Commission would be setting a new rate in each complaint proceeding prior to ordering any refunds.[65] Thus, the argument appears to go, the Commission cannot order refunds unless it sets a new rate in the complaint proceeding corresponding to each individual refund period.
That would be a remarkably convoluted way of limiting the Commission’s refund authority under section 206. It postulates that, instead of explicitly limiting the Commission’s refund authority, Congress snuck an implicit limitation on that authority at the end of the sentence that describes how the Commission should calculate refunds. Such a bizarre and overly complex interpretation is not a reasonable way to read an otherwise straightforward statute.[66]
That is particularly true when there is a far more obvious interpretation at hand. The better reading of the “thereafter observed and in force” language in section 206(b) is that it refers back to the use of the same phrase in section 206(a)—the provision that provides the Commission with the authority to set a new just and reasonable rate.[67] Under that interpretation, the “thereafter observed and in force” language clarifies that the ceiling on the Commission’s refund authority under section 206(b) is the difference between the rate in effect during the refund period and the just and reasonable rate that the Commission established pursuant to subsection 206(a).[68] In other words, that phrase tells the Commission how to calculate refunds, not when it may order them. I see no reason to abandon a straightforward reading of the statute that protects customers from paying unjust and unreasonable rates, in favor of a convoluted one that does not.[69]
The Commission’s next argument is even more of a head scratcher. It contends that it cannot order refunds because the rate in effect during the second refund period was the 10.02% ROE established in the First Complaint proceeding.[70] But that rate was not in effect. Instead, customers paid the 12.38% ROE.
To skirt that rather obvious conclusion, the Commission responds with what might charitably be called a regulatory fiction. It argues that Opinion No. 569 made the new just and reasonable ROE set in the First Complaint proceeding effective as of the beginning of the First Complaint refund period. As a result, the Commission argues, we must pretend that the 10.02% ROE was in effect throughout the refund period for the Second Complaint.
That approach has two problems. First, it is demonstrably false. As noted, the ROE that the MISO Transmission Owners collected during the refund period for the Second Complaint was 12.38%, no ifs, ands, or buts. Second, the Commission’s interpretation is flatly prohibited by the FPA. Under the filed rate doctrine, the MISO Transmission Owners were prohibited from collecting any ROE other than 12.38% during the refund period for the Second Complaint.[71] Section 206 is not a general abrogation of the filed rate doctrine. Instead, it is forward looking and gives the Commission the ability to set a new just and reasonable rate as of the date on which the Commission makes the findings required by section 206.[72] The only exception to that forward-looking nature is for the refund period, during which time the Commission is permitted to act as if the new rate were in effect when ordering refunds.[73] The refund period for the Second Complaint, however, fell after the conclusion of the refund period for the First Complaint and before the date on which the Commission issued Opinion No. 551. That means that the Commission lacked the authority to make the 10.02% ROE set in the First Complaint proceeding effective during the refund period for the Second Complaint. Suffice it to say, it is arbitrary and capricious for the Commission to deny refunds by assuming that it did that which it was legally prohibited from doing.
In Opinion No. 569-A, the Commission also argued that ordering refunds for the Second Complaint would represent an end-run around the 15-month limitation on refunds established in section 206(b).[74] That argument appears to have both a legal dimension and a policy dimension. Beginning with the former, the Commission seems to take the position that ordering refunds in the Second Complaint period would effectively extend the refund period established for the First Complaint, contrary to congressional intent. As an initial matter, suppositions about congressional policy or intent cannot overcame clear and unambiguous text.[75] Because the text of section 206(b) unambiguously does not preclude pancaked complaints, the Commission’s suspicions about what Congress would have wanted are irrelevant.
Moreover, the Commission has repeatedly held that the FPA permits successive or “pancaked” complaints, which are “entirely new proceeding[s]” and not “duplicative proceeding[s] intended solely to expand the amount of refund protection beyond 15 months,”[76] provided that they raise new facts or arguments.[77] The Commission has already concluded that the Second Complaint met that standard.[78] Accordingly, rather than effectively extending the refund period for the First Complaint, ordering refunds pursuant to the Second Complaint would simply reflect the fact that the MISO Transmission Owners collected an unjust and unreasonable ROE during a period when all parties were on notice that the Commission might order refunds of such excessive rates.[79]
From the perspective of public policy, I recognize that permitting pancaked complaints with multiple refund periods may be sub-optimal. After all, pancaked complaints can create significant uncertainty and, as noted, ROE is an area where certainty is especially important as transmission owners decide whether and how to invest in transmission infrastructure. But the desirability of pancaked complaints is something for Congress to consider, not a reason for us to twist the text of the FPA. So long as the FPA and the Commission’s precedents permit pancaked complaints, then the Commission should not let its antipathy toward such complaints prevent customers from receiving the refunds to which they are entitled.
For these reasons, I respectfully concur in part and dissent in part.
[1] Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., Opinion No. 569-A, 171 FERC ¶ 61,154 (2020).
[2] Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., Opinion No. 569, 169 FERC ¶ 61,129 (2019), order on rh’g, Opinion No. 569-A, 171 FERC ¶ 61,154.
[3] Cf. Petal Gas Storage, L.L.C. v. FERC, 496 F.3d 695, 703 (D.C. Cir. 2007) (“FERC is not required to choose the best solution, only a reasonable one.”).
[4] 16 U.S.C. § 824e.
[5] Coakley, Mass. Attorney Gen. v. Bangor Hydro-Elec. Co., Opinion No. 531, 147 FERC ¶ 61,234, at PP 41, 152 (2014).
[6] Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., Opinion No. 551, 156 FERC ¶ 61,234 (2016).
[7] Emera Me. v. FERC, 854 F.3d 9 (D.C. Cir. 2017) (Emera Maine).
[8] Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., 165 FERC ¶ 61,118 (2018) (Briefing Order).
[9] Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., Opinion No. 569, 169 FERC ¶ 61,129 (2019), order on rh’g, Opinion No. 569-A, 171 FERC ¶ 61,154 (2020).
[10] Opinion No. 569-A, 171 FERC ¶ 61,154. Although the complaints against the RTO-wide ROEs in MISO and ISO New England garnered the most attention, the last 10 years have also seen a host of other complaints against individual transmission owners’ ROEs, which have also been affected by the Commission’s back-and-forth over these complaints.
[11] See, e.g., Opinion No. 551, 156 FERC ¶ 61,234 at P 9 (relying on four alternative models to place the ROE within the zone of reasonableness).
[12] See, e.g., Opinion No. 569, 169 FERC ¶ 61,129 at PP 200, 340 (declining to rely on the Expected Earnings or Risk Premium methodologies). Indeed, at this point, the Commission has considered, but not relied on the Risk Premium model to set the specific ROE, Opinion No. 551, 156 FERC ¶ 61,234 at P 191, proposed relying on the Risk Premium model, Briefing Order, 165 FERC ¶ 61,118 at PP 18-19, declined to rely on the Risk Premium model, Opinion No. 569, 169 FERC ¶ 61,129 at P 340, and then reversed course and decided to rely on the Risk Premium model, Opinion No. 569-A, 171 FERC ¶ 61,154 at P 104.
[13] See, e.g., Opinion No. 569-A, 171 FERC ¶ 61,154 at P 107 (modifying the Risk Premium model to produce a zone of reasonableness rather than a single point estimate).
[14] Compare Opinion No. 569, 169 FERC ¶ 61,129 at P 274 (rejecting the use of Value Line short-term growth rates in the capital asset pricing model (CAPM)) with Opinion No. 569-A, 171 FERC ¶ 61,154 at P 78 (“clarify[ing]” that the Commission “will consider the use of Value Line short-term growth rates for the CAPM”).
[15] See, e.g., Opinion No. 569-A, 171 FERC ¶ 61,154 at P 57 (reducing the weighting of the long-term growth rate in the two-step discounted cash flow model (DCF) from one-third to one-fifth).
[16] Briefing Order, 165 FERC ¶ 61,118 at P 54 (proposing a high-end outlier screen that would apply to “any proxy company whose cost of equity estimated with a given model is more than 150 percent of the median result of all of the potential proxy group members in that model”); Opinion No. 569, 169 FERC ¶ 61,129 at P 375 (adopting the proposed high-end outlier screen).
[17] See, e.g., Opinion No. 569-A, 171 FERC ¶ 61,154 at P 154 (increasing the threshold for the high-end outlier screen from 150% of the median of the zone of reasonableness to 200% of the median of the zone of reasonableness).
[18] See, e.g., id. P 193 (changing the start points for setting ROEs for above- and below-average ROEs); Opinion No. 551, 156 FERC ¶ 61,234 at P 275 (setting the MISO-wide ROE at the midpoint of the upper half of the zone of reasonableness).
[19] At the same time that it issued Opinion No. 569-A, the Commission added even more complexity to its ROE methodology by issuing a policy statement regarding oil and natural gas pipelines that largely adhered to the approach outlined in Opinion No. 569, rather than Opinion No. 569-A. In particular, that policy statement did not use the Risk Premium model, adjust the weighting of long- and short-term growth rates for the two-step DCF model, or adopt a particular high-end outlier screen. See Pol’y Statement on Determining Return on Equity for Nat. Gas and Oil Pipelines, 171 FERC ¶ 61,155 at PP 2, 87 (2020). The Commission, it seems, just cannot settle on an analytically consistent approach to this important issue.
[20] Opinion No. 569, 169 FERC ¶ 61,129 at P 341.
[21] Id.
[22] Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., Opinion No. 569-B, 173 FERC ¶ 61,159, at P 114 (2020); Opinion No. 569-A, 171 FERC ¶ 61,154 at P 105.
[23] Opinion No. 569, 169 FERC ¶ 61,129 at P 341 (“We find that using the Risk Premium model in conjunction with the CAPM model would confer too much weight towards risk premium methodologies. The Commission has long used and, over time, refined the DCF model and we find that it would be inappropriate for variations of the risk premium model to receive twice its weight.”).
[24] Id. P 342 (“[T]he Risk Premium model is likely to provide a less accurate current cost of equity estimate than the DCF model or CAPM because it relies on previous ROE determinations, whose resulting ROE may not necessarily be directly determined by a market-based method, whereas the DCF and CAPM methods apply a market-based method to primary data.”). In addition, as the Commission noted, many of the ROEs included in the Risk Premium analyses in the record were never determined to be just and reasonable. For example, many of the ROEs were set through uncontested settlements, which involve compromise across a host of issues, of which ROE is just one. The Commission frequently approves uncontested settlements without directly passing on whether the individual terms are just and reasonable. See id.
[25] See id. P 343.
[26] Id.
[27] Opinion No. 569-B, 173 FERC ¶ 61,159 at P 115; Opinion No. 569-A, 171 FERC ¶ 61,154 at P 106.
[28] Opinion No. 569, 169 FERC ¶ 61,129 at P 345.
[29] Id.
[30] Opinion No. 569-A, 171 FERC ¶ 61,154 at P 112. Today’s order is somehow even less convincing. It notes only that “investors observe regulatory ROEs and how changes in authorized ROE levels could affect utility earnings, and while such considerations differ from the type of analysis employed by the Risk Premium model, it is a model that considers regulatory ROEs in estimating the premium that investors require to make equity investments instead of bond investments.” See Opinion No. 569-B, 173 FERC ¶ 61,159 at P 122. The fact that investors consider the returns a company is likely to earn in no way supports the notion the investors rely on a historical comparison between those returns and certain risk-free—and generally quite dissimilar—assets when making investment decisions.
[31] Cf. Opinion No. 569-A, 171 FERC ¶ 61,154 at P 112 (recognizing that the Risk Premium analysis differs from the factors that investors consider when making decisions based on allowed ROEs).
[32] Opinion No. 569, 169 FERC ¶ 61,129 at P 57. With certain exceptions, see, e.g., infra PP 19-24, Opinion No. 569-A and Opinion No. 569-B largely uphold that framework.
[33] Opinion No. 569, 169 FERC ¶ 61,129 at P 351.
[34] Opinion No. 569-A, 171 FERC ¶ 61,154 at P 107.
[35] That becomes especially clear when compared with the Commission’s thorough and well-reasoned rejection of the Risk Premium model on this basis, among others, in Opinion No. 569. Compare id. P 107 with Opinion No. 569, 169 FERC ¶ 61,129 at P 351.
[36] That change responded to the D.C. Circuit’s holding that the FPA contemplates “a ‘broad’ range of potentially just and reasonable ROEs, ‘not an exact dollar figure.’” Emera Me., 854 F.3d at 23 (quoting Panhandle E. Pipe Line Co. v. FERC, 777 F.2d 739, 746 (D.C. Cir. 1985)).
[37] Opinion No. 569, 169 FERC ¶ 61,129 at P 57.
[38] Id. The midpoint is the measure of central tendency that the Commission uses when setting the ROE for a diverse range of utilities. Id. PP 398, 409. By contrast, the Commission uses the median as the measure of central tendency when setting the ROE for a single utility. Id. P 398.
[39] Id. P 63.
[40] See id. P 62 (“We also find that the circumstance most relevant to determining that range is the utility’s risk profile.”); see also FPC v. Hope Nat. Gas Co., 320 U.S. 591, 603 (1944) (“[T]he return to the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks.”); Petal Gas Storage, 496 F.3d at 699-700 (explaining the emphasis that the Commission and courts have placed on the role of risk in setting ROEs).
[41] Opinion No. 569-A, 171 FERC ¶ 61,154 at P 190.
[42] Emera Maine, 854 F.3d at 26 (emphasis added).
[43] Id. (“But, as we have explained, the zone of reasonableness creates a broad range of potentially lawful ROEs rather than a single just and reasonable ROE, meaning that FERC’s finding that 10.57 percent was a just and reasonable ROE, standing alone, did not amount to a finding that every other rate of return was not.” (internal quotations and citation omitted)).
[44] Opinion No. 569-B, 173 FERC ¶ 61,159 at P 62 (citing Emera Maine, 854 F.3d at 26).
[45] Opinion No. 569, 169 FERC ¶ 61,129 at PP 60-64, 68 (discussing how the Commission would apply the new framework, including what other factors it would consider).
[46] See supra P 20 & notes 40-40.
[47] Opinion No. 569-A, 171 FERC ¶ 61,154 at P 194.
[48] Opinion No. 569, 169 FERC ¶ 61,129 at PP 62-64.
[49] That failure is particularly glaring because the new starting points for that analysis will now be closer to either the top or bottom of the zone of reasonableness than the midpoint. Nothing in Opinion No. 569-A—or today’s order—explains why those starting points should be biased towards the most extreme costs of equity in the zone of reasonableness.
[50] Baltimore Gas & Elec. Co. v. FERC, 954 F.3d 279, 286 (D.C. Cir. 2020) (“When an agency seeks to change policy, we assess its actions under the rigorous standards of FCC v. Fox Television Stations, Inc., by requiring the agency to ‘display awareness that it is changing position,’ show ‘the new policy is permissible under the statute,’ and ‘show that there are good reasons for the new policy.’” (quoting Fox Television, 556 U.S. 502, 515-16, (2009))).
[51] See Hope, 320 U.S. at 602 (“Under the statutory standard of ‘just and reasonable’ it is the result reached not the method employed which is controlling.”).
[52] See Opinion No. 569-A, 171 FERC ¶ 61,154 (Glick, Comm’r, concurring in part and dissenting in part at PP 23-33); Opinion No. 569, 169 FERC ¶ 61,129 (Glick, Comm’r, dissenting in part).
[53] Opinion No. 569, 169 FERC ¶ 61,129 at P 3. The authorized base ROE for the ATCLLC zone was 12.20%, but I will follow the underlying order’s practice of referring to the MISO-wide ROE as 12.38%. Id. P 3 & n.11.
[54] Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., 149 FERC ¶ 61,049, at P 188 (2014), order on reh’g, 156 FERC ¶ 61,060 (2016).
[55] Pursuant to the Regulatory Fairness Act, Pub. L. No. 100-473, § 2, 102 Stat. 2299 (1988) (codified at 16 U.S.C. § 824e(b)), as part of any proceeding under section 206 of the FPA, the Commission shall establish a refund effective date and, at the conclusion of that proceeding, it may order refunds for the difference between an unjust and unreasonable rate in effect during the period up to 15 months following the refund effective date and the new just and reasonable rate fixed by the Commission.
[56] Ark. Elec. Coop. Corp. v. ALLETE, Inc., 151 FERC ¶ 61,219, at P 1 (2015), order on reh’g, 156 FERC ¶ 61,061 (2016) (Second Complaint Rehearing Order).
[57] Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., 153 FERC ¶ 63,027 (2015); Ark. Elec. Coop. Corp. v. ALLETE, Inc., 155 FERC ¶ 63,030 (2016).
[58] The Commission originally issued an order on the First Complaint in September 2016. See Opinion No. 551, 156 FERC ¶ 61,234 at P 9. But, shortly thereafter, the D.C. Circuit issued its opinion in Emera Maine, 854 F.3d 9, which vacated the precedent on which Opinion No. 551 relied. Following briefing on remand, the Commission issued Opinion No. 569.
[59] 16 U.S.C. § 824e(b).
[60] See, e.g., Nat’l Ass’n of Mfrs. v. Dep’t of Def., 138 S. Ct. 617, 631 (2018) (holding that where “the plain language . . . is ‘unambiguous,’ ‘our inquiry begins with the statutory text, and ends there as well.’” (quoting BedRoc Ltd., LLC v. United States, 541 U.S. 176, 183 (2004) (plurality opinion))).
[61] See, e.g., Opinion No. 569-A, 171 FERC ¶ 61,154 at PP 260-62; see also Opinion No. 569-B, 173 FERC ¶ 61,159 at PP 171-73 (suggesting that the rate in effect during the refund period for the Second Complaint was the rate set by the First Complaint).
[62] 16 U.S.C. § 824e(b) (emphasis added).
[63] In today’s order, the Commission attempts to resuscitate its reliance on San Diego Gas & Electric Co. v. Sellers of Energy and Ancillary Services, 127 FERC ¶ 61,191 (2009)—a case that it mentioned briefly in Opinion No. 569 and then abandoned altogether in Opinion No. 569-A. See Opinion No. 569-B, 173 FERC ¶ 61,159 at P 175; Opinion No. 569, 169 FERC ¶ 61,129 at P 572. But as I explained in my partial dissent from Order No. 569, that precedent did not involve pancaked complaints and, accordingly, does not shed any light on the specific question before us. Opinion No. 569, 169 FERC ¶ 61,129 (Glick, Comm’r, dissenting in part at n.11). Instead, the only thing that the Commission’s continued reliance on San Diego Gas & Electric Co. reveals is the complete absence of any precedent that actually supports the abdication of its refund authority.
[64] Opinion No. 569-A, 171 FERC ¶ 61,154 at P 262.
[65] Id.
[66] Cf. City of Anaheim v. FERC, 558 F.3d 521, 525 (D.C. Cir. 2009) (“declin[ing] FERC’s invitation to mangle” section 206).
[67] See 16 U.S.C. § 824e(a) (requiring the Commission to establish a new just and reasonable rate to be “thereafter observed and in force” whenever it finds that an existing rate is unjust and unreasonable or unduly discriminatory or preferential).
[68] That interpretation makes even more sense when you consider that section 206(b) was added more than 50 years after section 206(a), which was part of the original FPA, and so it would have been necessary to clarify how the amendment worked in conjunction with the pre-existing language. See supra note 55.
[69] Cf., e.g., California ex rel. Lockyer v. FERC, 383 F.3d 1006, 1017 (9th Cir. 2004) (rejecting “an interpretation [that] comports neither with the statutory text nor with the Act’s ‘primary purpose’ of protecting consumers”); City of Chicago v. FPC, 458 F.2d 731, 751 (D.C. Cir. 1971) (“[T]he primary purpose of the Natural Gas Act is to protect consumers.” (citing, inter alia, City of Detroit v. FPC, 230 F.2d 810, 815 (D.C. Cir. 1955)); S. Rep. No. 100-491, at 5-6 (1988) (“The Committee intends the Commission to exercise its refund authority under section 206 in a manner that furthers the long-term objective of achieving the lowest cost for consumers consistent with the maintenance of safe and reliable service.”).
[70] See Opinion No. 569-A, 171 FERC ¶ 61,154 at P 260; Opinion No. 569-B, 173 FERC ¶ 61,159 at PP 172-73.
[71] Towns of Concord, Norwood, & Wellesley v. FERC, 955 F.2d 67, 71 (D.C. Cir. 1992) (explaining that the filed rate “doctrine generally ‘forbids a regulated entity to charge rates for its services other than those properly filed with the appropriate federal regulatory authority.’” (quoting Ark. La. Gas Co. v. Hall, 453 U.S. 571, 577 (1981))); see also Montana-Dakota Utils. Co. v. Nw. Pub. Serv. Co., 341 U.S. 246, 251 (1951) (“[T]he right to a reasonable rate is the right to the rate which the Commission files or fixes.”).
[72] See, e.g., La. Pub. Serv. Comm’n v. FERC, 772 F.3d 1297, 1299 (D.C. Cir. 2014) (explaining that section 206 provides for prospective relief only with the exception of the refund period). After all, that forward-looking effect is the result of the “thereafter observed and in force” language on which the Commission relies so heavily in seeking to disclaim any authority to order refunds pursuant to the Second Complaint. See supra P 30.
[73] Id. P 28.
[74] Opinion No. 569-A, 171 FERC ¶ 61,154 at P 260.
[75] See, e.g., Bostock v. Clayton Cty., 140 S. Ct. 1731, 1751 (2020) (explaining that “‘in the context of an unambiguous statutory text,’ whether a specific application was anticipated by Congress ‘is irrelevant.’” (quoting Pa. Dept. of Corr. v. Yeskey, 524 U.S. 206, 208 (1998))).
[76] Second Complaint Rehearing Order, 156 FERC ¶ 61,061 at P 33 (quoting S. Co. Servs., Inc., 83 FERC ¶ 61,079, 61,386 (1998)).
[77] Id. P 33 (“[T]he Commission has allowed multiple complaints regarding the same ROE, where the subsequent complaints are based on new, more current data, explaining that this is particularly critical given that what is at issue is return on equity, which, in contrast to other cost of service issues can be particularly volatile.” (internal alterations, quotations, and citations omitted)).
[78] Id. P 34.
[79] Cf. La. Pub. Serv. Comm’n v. FERC, 482 F.3d 510, 520 (D.C. Cir. 2007) (noting that the filing of a section 206 complaint put all parties on notice of the possibility that the Commission would order refunds).