United States: FERC Proposes Change In ROE Methodology, Directs Briefing

On October 16, 2018, FERC proposed a new method to determine whether a utility's return on equity ("ROE") remains just and reasonable under section 206 of the Federal Power Act ("FPA"). Specifically, FERC discussed three additional methods, along with the well-known and traditionally used Discounted Cash Flow ("DCF") analysis, and proposed to average the results to come to an equitable ROE. This new method will apply to successive complaints filed against the New England Transmission Owners ("NETOs"), regarding the justness and reasonableness of their existing ROE. Briefs related to this proposal are due on December 17, 2018.

In 2011, a group of transmission customers and state officials filed a complaint at FERC under FPA section 206 asserting that the NETOs' ROE of 11.14% was unjust and unreasonable. After an Administrative Law Judge issued an initial decision on this matter, FERC issued Opinion No. 531 in 2014. In Opinion No. 531, FERC first decided to replace its usual "one-step" DCF policy with a two-step DCF analysis to determine whether an ROE is unjust and unreasonable. Second, FERC also determined that if a complainant could show that an ROE was above the point estimate produced by the DCF analysis, then that ROE would be unjust and unreasonable. Third, FERC declined to set the new ROE at the midpoint of the zone of reasonableness produced by the DCF because of "anomalous financial market conditions," which made FERC "less confident[t] that the midpoint of reasonableness...accurately reflects set[ting] a return at a rate commensurate with other enterprises of comparable risk." Lastly, FERC concluded that total ROE, which is composed of a utility's base ROE plus any transmission incentive adders, should be limited to the top end of the zone of reasonableness. Therefore, using this approach, FERC set the base ROE for NETOs at 10.57%.

NETOs and some of their customers appealed this decision to the U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") and filed three other successive complaints at FERC. NETOs argued that (1) because its existing ROE of 11.14% fell between the zone of reasonableness envisioned by FERC (7.03%-11.74%), the existing ROE could not be unjust and unreasonable, and that (2) FERC did not adequately explain how an ROE of 11.14% was unjust and unreasonable. NETOs' transmission customers argued that FERC did not sufficiently support its assertion that anomalous capital markets and alternative benchmark methodologies justified a base ROE above the midpoint of reasonableness. The D.C. Circuit quickly dismissed NETOs' first argument because "the zone of reasonableness represents a broad range of potentially just and reasonable ROEs [and] not an exact dollar figure" and "as long as the rate selected by the Commission is within the zone of reasonableness, FERC is not required to adopt as just and reasonable any particular rate level." However, the D.C. Circuit agreed with NETOs and its customers that FERC did not sufficiently support its finding that an ROE of 10.57% was just and reasonable. The D.C. Circuit stated that "FERC's finding that 10.57% was a just and reasonable ROE, standing alone, did not amount to a finding that every other rate of return was not." The D.C. Circuit reasoned that "FERC must make an explicit finding that [an] existing rate [is] unjust and unreasonable before proceeding to set a new rate." Therefore, the D.C. Circuit vacated and remanded Opinion No. 531 and its progeny.

In the instant order, FERC (1) developed a new method to determine whether an existing ROE falls within an equitable zone of reasonableness and (2) established a framework for determining a new just and reasonable ROE if it does not fall within the zone of reasonableness. To satisfy the first category and because the D.C. Circuit stated FERC did not have to rely solely on the DCF methodology, FERC proposed to rely on three models that produce zones of reasonableness: the DCF, the capital-asset pricing model analysis ("CAPM"), and the expected earnings analysis ("Expected Earnings") models. In fulfilling the second category, FERC proposed to rely solely on the risk premium ("Risk Premium") analysis.

FERC explained that the CAPM "provides a market-based approach determined by...a measure of the risk based upon the volatility of a company's stock price over time in comparison to the overall market, and the risk premium between the risk-free rate and the market's return." The Expected Earnings analysis "provides an accounting-based approach that uses investment analyst estimates of return on book value." The Risk Premium approach, unlike the DCF, the CAPM, and Expected Earnings, does not produce a range of lawful ROEs; instead, it produces a single numerical point and is "based on the premium investors require above the return they expect to earn on a bond investment to reflect the greater risk of a stock investment." While FERC said that none of the preferred approaches can conclusively determine or estimate the expected return for a utility, FERC will "average the results of the three methods that produce zones of reasonableness" and that average will "produce a composite zone of reasonableness that most accurately captures the cost of equity that informs the ROE."

FERC directed NETOs, its transmission customers, state officials, and others who intervened in the proceeding to submit briefs to inform FERC of how to apply its four approaches to the successive complaints filed against NETOs at FERC. Briefs are due December 17, 2018.

A copy of FERC's October 16 order is available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions