Wednesday, November 14, 2018

EEI White Paper Calls for End to `Pancaked’ Rate Cases

By Rich Heidorn Jr.

WASHINGTON — Seeking to persuade a change in FERC policy, the Edison Electric Institute has released a white paper by former Commissioner Suedeen Kelly that proposes raising the hurdles for those challenging transmission owners’ returns on equity.

Kelly, a partner with Jenner & Block who served on the commission from 2003 to 2009, says the commission’s policy of setting ROE complaints for hearing concurrently — or “pancaking” — has increased litigation costs and created uncertainty for TOs.

The iterative filings are a result of FERC’s inability to resolve the cases before the expiration of the 15-month limit on ROE refunds. The pancaked complaints are generally filed shortly after the expiration of the refund period in the earlier, still-pending complaints. (See Playing the ROE Slot Machine.)

“Section 206 of the Federal Power Act mandates a threshold that FERC find that an existing rate is unjust and unreasonable before setting a new rate,” Kelly writes. “By setting complaints for hearing concurrently, without first ensuring that they meet the Section 206 threshold, FERC has created a policy that is not supported by the law, is inconsistent with the intent of Congress, is not workable in practice, and undermines regulatory expectations for a stable and predictable ROE.”

ferc eei roe

Kelly | © RTO Insider

The paper largely repeats arguments Kelly made unsuccessfully in a 2016 EEI protest in the fourth complaint against the New England Transmission Owners (EL16-64).

It cites the “increasing number” of Section 206 complaints FERC has received since 2011. EEI says there were between five to nine complaints filed annually in 2012-2016 and 10 complaints filed in 2017.

FERC declined a request for comment.

In Opinion 531 in June 2014, FERC unanimously adopted a two-step discounted cash flow analysis for determining electric transmission ROEs. Long used for natural gas and oil pipelines, the methodology incorporates long-term growth rates.

The commission then voted 3-1 over its first application of the new formula, tentatively setting the ROE for New England TOs at three-quarters of the top of the “zone of reasonableness,” a departure from the prior practice that used the midpoint in the range. (See FERC Splits over ROE.)

‘Seven Years and Counting’

EEI cites the New England TOs’ case to illustrate its concern over FERC’s procedures.

It resulted from a September 2011 complaint by New England state officials and others that FERC set for hearing seven months later. The administrative law judge proceedings lasted more than a year, resulting in an ALJ initial decision in August 2013.

Opinion 531, almost 11 months later, was followed by a paper hearing that resulted in Opinion 531-A in October 2014, in which the commission decided that gross domestic product is the appropriate long-term growth rate to use in the analysis. In Opinion 531-B in March 2015, the commission rejected rehearing requests, prompting a petition to the D.C. Circuit Court of Appeals, which remanded the case (Emera Maine v. FERC) back to the commission in April 2017.

The court said FERC had failed to establish that the New England TOs’ existing ROE was not just and reasonable before imposing a new one. (See Court Rejects FERC ROE Order for New England.) The case remains pending.

“In sum, the process leading to Opinion No. 531 took over two and a half years,” EEI said. “In the meantime … four subsequent complaints were filed, effectively extending the period under which the New England Transmission Owners’ ROE is subject to litigation to almost seven years (and counting).”

Higher Threshold Sought

Kelly said the commission has been too permissive in setting ROE challenges for hearing.

“Currently, FERC’s practice is to set an ROE complaint for hearing based merely on the presentation of a new discounted cash flow analysis that produces a lower number than the rate on file. This threshold is too low and invites frequent initial and pancaked complaints.”

In response to questions from RTO Insider, Kelly said, “We suggest that where an ROE remains within the zone of reasonableness, a complainant must do more to show that in the particular circumstances of that utility or group of utilities, the evidence shows that the zone of reasonableness is not a reliable indicator of the range of just and reasonable rates. To do otherwise makes the zone of reasonableness almost meaningless as a tool for both the commission and transmission owners and injects significant uncertainty into FERC’s ratemaking processes.”

EEI FERC ROE Return on Equity

Pomper at this year’s EBA Annual Meeting | © RTO Insider

Attorney David E. Pomper of Spiegel & McDiarmid, who argued the Emera case for Massachusetts, said EEI’s suggestion runs counter to the D.C. Circuit’s affirmation that FERC need not “show that an existing rate is ‘entirely outside the zone of reasonableness’ before it can exercise its Section 206 authority to change that rate.”

“I don’t think they’re going to get the D.C. Circuit to reverse on that,” Pomper said in an interview.

Symmetry

Kelly disagrees with FERC’s reasoning that it must allow the pancaked complaints because Congress intended “symmetry” between the rights of utilities to file for rate increases under FPA Section 205 and the rights of complainants to seek rate cuts under Section 206. “Congress explicitly established different procedures and different burdens of proof” under the two sections, Kelly said.

Section 205 allows a utility to seek new rates at any time, with FERC in what the D.C. Circuit has termed a “passive and reactive role” of determining whether the new rates are just and reasonable. Under Section 206, FERC may change rates on its own motion or in response to a complaint, but only after first finding the existing rate unjust and unreasonable — the requirement the D.C. Circuit said FERC failed to meet in Emera.

“FERC has stretched the intent of Congress by failing to reconcile its justification for allowing pancaked complaints with the legislative history behind the adoption of the 15-month limit on refunds explicitly included in the statute,” Kelly said. “It has also ignored the critical differences in procedures and burdens of proof between FPA Sections 205 and 206.”

Pomper disagreed with Kelly’s interpretation of Congress’ balancing of Sections 205 and 206. “The cost of capital can change rapidly,” Pomper said. While rates have been relatively stable since the inflationary 1970s, “with large federal deficits that might change,” he said.

Kelly argues that in considering whether to set ROE complaints for hearing, FERC should consider how much time has passed since the existing rate was approved and set “a pragmatic time-based threshold within which it will not entertain a new ROE complaint absent extraordinary and compelling circumstances.”

“In the MISO case, complaint No. 2 was filed [and] set for hearing before we had an outcome in complaint No. 1,” said Nina Plaushin, vice president of regulatory, federal affairs and communications for ITC Holdings, in an interview. “So how did FERC determine that that ROE was unjust and unreasonable?”

Chilling Investment?

EEI says the rise in ROE litigation is creating “unpredictability and instability” in returns for transmission assets. Asked for evidence that the uncertainty is making it difficult to raise investment capital, EEI cited only a 2015 report by Wolfe Research, which concluded — based on Opinion 531 and the commission’s rulings on unrelated matters — that “FERC is increasingly out of touch with investors.”

EEI FERC ROE Return on Equity

Historical and projected transmission investment (nominal dollars) | EEI

Pomper said there is no evidence TOs are having difficulty raising capital, citing the high level of transmission construction and legal fights over rights of first refusal to build projects. At the annual EEI Financial Conference, “you will see many, many presentations saying ‘look at how much FERC exposure we have,’” Pomper said. “If it was really a negative, you wouldn’t see them touting the investments.”

Plaushin, president of the transmission owner advocacy group WIRES, acknowledged that “it hasn’t been that challenging to get debt.”

“Are people having trouble [raising] equity?” she continued. “I think it’s a very difficult thing to prove or disprove one way or the other.”

There is no doubt, however, that FERC’s ROE determinations can have an impact on utilities’ earnings. In a report following the Emera ruling, Wolfe said an increase of 100 basis points is worth about 3% in earnings per share for Eversource Energy and Avangrid and about 1% for Alliant Energy and Ameren.

Discovery Delays

EEI’s paper contends FERC’s discovery proceedings are causing delays, saying ROE is “a single issue that should not require extensive discovery or lengthy and protracted full trial-type hearings to resolve. FERC has utilized specially designed and narrowly tailored procedures in other, more complex contexts.”

Kelly said FERC should consider shortened discovery and testimony procedures rather than treating ROE hearings like a full rate case. “In a full rate case, the prudence and amount of various cost inputs are determined individually and can require extensive discovery and testimony. Most utilities now have formula rates that predetermine prudence and flow through costs without further review, absent a challenge,” Kelly said.

Pomper responded: “It’s precisely because you’ve got formula rates, where there are only a few stated elements left to be determined by the commission, that we’re now focusing on ROE. It used to be when utilities had stated rates that you’d have few [Section] 206 proceedings because lots of things were changing. Even if cost of capital was going down, other costs were going up.”

As for the length of the proceedings, Pomper says, “I wish it could go faster … but it’s not out of line with how FERC decides all kinds of cases.”

Wrong Problem

Pomper said EEI is “addressing the wrong problem,” saying the real issue is the “range-based” methods used to set ROEs for RTO-wide rates in ISO-NE and MISO, which consider the highest and lowest rates among a utility’s “proxy group.”

“It’s essentially random. It’s completely bogus math and statistics,” Pomper said.

Using the median in all cases would make results “stabler from case to case. You wouldn’t have the reason to come in with a new complaint,” Pomper said. “Fix the method and the procedure would follow.”

Former FERC Chairman Jim Hoecker, now counsel to WIRES, said the group was seeking stability and predictability when it filed its 2013 petition for a policy statement, which led to Opinion 531.

“I know that [then-Chair] Cheryl [LaFleur] struggled really hard in 531 to try and achieve that,” he said in an interview. “But as in all things at the commission, it’s a matter of compromise.”

Plaushin praised Opinion 531 for providing justification for awarding higher ROEs on transmission than states approve for less risky distribution projects. “I don’t want to be negative about the commission because … they made a genuine attempt to work this out,” she said. “Unfortunately, it wasn’t effective the way they wanted it to be and so now [because of the remand] we need a new solution.

“Why we’ve had a delay this long in responding to the remand, I don’t know. It’s been a while.”

FERC EEI ROE

Plaushin | © RTO Insider

Plaushin said although many ROE cases involving individual utilities have been resolved through settlements, that is not practical for the regional ROE cases in MISO and ISO-NE.

“When you’re talking about regional cases with so many utilities involved, it’s very difficult to do a settlement, especially when in some of those cases there are state regulators who are the ones who would have to settle. And, of course, why would they settle for a number that’s higher than what they granted in their own state [for distribution assets]?”

As to those who suggest eliminating pancaked complaints by extending the refund period beyond 15 months, Plaushin said, “I think that we need to be intellectually honest about” what the revised limit should be. “Four complaints — is [that] too long to extend the refund period?

“Obviously the solution to all this is to get these cases adjudicated quicker,” she added. “That would solve a lot of problems for everyone.”

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