New England States, Advocates Denounce TOs’ Request for Higher ROE

New England states, consumer advocates and large-scale energy users expressed unified opposition to the ISO-NE transmission owners’ request for a substantial increase to their base return on equity in comments submitted to FERC on May 21 (ER26-2389).

The TOs seek to increase their base ROE to 11.39% from the 9.57% rate set by the FERC in a long-awaited order in March. Prior to Opinion 594, the companies had been collecting a 10.57% interim rate amid a prolonged series of legal challenges (EL11-66, et al.). (See FERC Cuts ‘Ping-ponging’ ROE for New England Transmission Owners.)

In the initial filing, the TOs argued that they followed the methodology outlined by FERC in Opinion 594 “with exacting precision,” while updating the data inputs to reflect current conditions.

But multiple commenters disputed this characterization. The Acadia Center wrote that the TOs instead inflated the rate “through several unsupportable deviations from accepted practices.”

The advocacy group argued that the TOs’ proposal “rests on the unstated and unexamined premise” that their cost of equity equals the expected returns of a proxy group of 26 electric utility companies.

They wrote that the TOs have a significantly lower risk profile than this proxy group of companies. While FERC formula rates and regional cost recovery limit risks for transmission investment, diversified utilities can face elevated risks related to nonregulated subsidiaries and state-level investments.

In testimony included in Acadia’s protest, Philip Hanser, principal emeritus at the Brattle Group, wrote that “the single most consequential input” is the TOs’ assumption of an 8.91% market risk premium, which dramatically exceeds the risk premium rates relied upon by institutional investors.

Simply lowering the market risk premium to levels in line with the assumptions used by large investment companies would lower the resulting ROE from 11.39% to about 9.2%, he wrote.

“The [market risk premium] is not one of many issues with the testimony; it is the issue, and resolving it alone closes most of the gap,” he argued.

Acadia concluded that a more faithful application of the Opinion 594 methodology “produces a midpoint composite ROE in the range of approximately 7.5 to 9.0%, below the 9.57% ROE approved by the commission.”

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