Following a decision of the Federal Energy Regulatory Commission (FERC) released last week that cuts transmission owners’ return on equity (ROE) by more than 200 basis points,[1] ratepayers in the Midcontinent Independent System Operator, Inc. (MISO) footprint will save an estimated $200 million per year.

Spurred by industrial customers’ challenge to MISO’s ROE rate in 2013, FERC ultimately found in its September 28, 2016 order that MISO’s ROE of 12.38% – which had been in place since 2002 – was unjust and unreasonable, and reset it to a base rate of 10.32%.[2]  Transmission owners may also qualify for transmission incentive ROE adders, although the maximum ROE rate may not exceed 11.35%.[3]  FERC also ordered that refunds be issued on a prospective basis for the period from November 12, 2013 through February 11, 2015.[4]

FERC’s September 28 order affirms the Commission’s initial decision in this case, issued on December 22, 2015 by Judge Coffman, which found that “anomalous capital market decisions” rendered “a mechanical application of the Discounted Cash Flow (DCF) methodology” to determine ROE inapplicable.[5]  Instead, FERC found that the “just and reasonable ROE for the MISO [transmission owners] should be set at the central tendency of the upper half of the zone of reasonableness,” which sets the base rate at 10.32%.[6]

ROE rates set under section 206 of the Federal Power Act (FPA), which must be approved by FERC, must be just and reasonable.[7]  Under Supreme Court precedent in Bluefield Waterworks & Improvement Co. v. Public Service Commission of West Virginia[8] and Federal Power Commission v. Hope Natural Gas Co.,[9] this showing requires proof that the rate of return is commensurate with that in other similarly situated businesses,[10] and is “sufficient to assure confidence in the financial integrity of the enterprise so as to maintain its credit and attract capital.”[11]

Generally the ROE rate is set by applying the DCF methodology to determine the midpoint of the zone of reasonableness.[12] In this case, however, as was the case in FERC Opinion No. 531[13] involving New England Transmission Owners’ base ROE, FERC found that “unusual capital market conditions” rendered the “central tendency of the DCF zone of reasonableness” inapplicable under the test established by Hope and Bluefield.[14]  These market conditions included “historically low” bond prices during the study period in which the ROE was set, driven in part by the Federal Reserve’s Quantitative Easing measures to buy U.S. Treasury bonds and mortgage-backed securities in the wake of the 2008 financial crisis.[15]

While FERC agreed with the complainants that the rate of 12.38% was too high, FERC also accepted MISO transmission owners’ record evidence that a decrease in the ROE rate from 12.38% to 9.29% – the level that would apply with a strict application of the DCF methodology – “could undermine the ability of MISO [transmission owners] to attract capital for new investment in electric transmission.”[16]  FERC therefore approved an alternative methodology, which included examination of  risk premium analysis, the capital asset pricing model, expected earnings analysis, and state-allowed ROEs, to support its determination setting base ROE at 10.32%.[17]

Following FERC’s decision in this case, MISO transmission owners must submit compliance filings to revise their tariffs to reflect a 10.32% base ROE and issue refunds for the period of November 13, 2013 through February 11, 2015 by the end of October 2016.  Several complaints regarding calculation of ROE remain pending with FERC.


[1] Assoc. of Businesses Advocating Tariff Equity, et. al., 156 FERC ¶ 61, 234 (Sept. 28, 2016) (Order).

[2] Order at PP 3, 9.

[3] Order at P 298.

[4] Order at P 7.

[5] Order at P 9.

[6] Id.

[7] Order at P 11.

[8] 262 U.S. 679 (1923).

[9] 320 U.S. 591 (1944).

[10] Order at P 11 (citing Bluefield, 262 U.S. 679, 693 (1923)).

[11] Order at P 12 (quoting Hope, 320 U.S. 591, 603 (1944)).

[12] Order at P 9.

[13] 147 FERC ¶ 61,234 (2014).

[14] Order at P 119.

[15] Order at PP 121, 122.

[16] Order at P 128.

[17] Order at PP 135, 136.