United States: The Nickel Report: FERC October 2018 Open Meeting Highlights

On October 18, 2018, the Federal Energy Regulatory Commission (Commission) held its October 2018 open meeting. Commissioner Chatterjee again assumed the gavel on behalf of Chairman McIntrye, who was absent for the second consecutive open meeting. McIntyre subsequently announced that he would step down from the chairmanship due to continuing health issues.

Highlights of the meeting follow:

Emera Maine Return-on-Equity (ROE) Remand Proceeding: Commissioners Chatterjee and LaFleur highlighted an order issued shortly before the meeting addressing the D.C. Circuit's April 2017 rejection and remand of Opinion No. 531 in Emera Maine v. FERC. That order proposed a new approach for determining whether utility ROEs were just and reasonable and for establishing a new ROE when an existing one is unjust and unreasonable. The Commission also initiated a paper hearing in which interested parties may submit briefs regarding the new ROE proposals. The order expressly addresses only four contested proceedings involving New England transmission owning utilities (the NETOs), including the one that was the subject of the Emera Maine But it is very likely that the Commission's ultimate determinations will have precedential effects on utilities in other regions (as did Opinion No. 531).

  • Opinion No. 531 modified the Commission's use of the Discounted Cash Flow (DCF) model for setting the Commission-allowed ROE. The Commission moved from a "one-step" to a "two-step" methodology (e., from considering only short-term utility growth projections to considering both short- and long-term projections). It also departed from past practice by setting the NETOs' ROE at the midpoint of the upper half of the zone of reasonableness, rather than the midpoint of the entire zone.
  • Subsequent to Opinion No. 531, three additional complaints were filed regarding the NETOs' ROE, were fully litigated before FERC ALJs, and remain pending before the Commissions.
  • The Emera Maine decision vacated and remanded Order No. 531. It held that the Commission had failed to show either that the NETOs' existing ROE was unjust and unreasonable or that the ROE that Opinion No. 531 set for them was just and reasonable. Emera Maine did not address the three other pending ROE complaints.
  • The Commission is now proposing to give equal weight to multiple financial indices when setting ROEs, instead of relying primarily on DCF. It believes that this approach will ensure that future ROE decisions are based on substantial evidence and are more closely aligned with how investors make their own decisions.
  • Specifically, the Commission would rely on three indices to determine whether an existing ROE continued to be just and reasonable: the DCF, CAPM, and Expected Earnings models and four financial models (the three mentioned above plus the Risk Premium model) when setting new ROEs.
  • Using the proposed new approach would result in a higher ROE for the NETOs.
  • Commissioner Chatterjee indicated that he had hoped to address the Emera Maine remand issues earlier, but that striking the appropriate balance took time. He also indicated that he believed that more can be done to encourage investment in the grid.
  • Commissioner LaFleur stated that she supported the order as it provides needed transparency and clarity. She indicated that the proposed new approach for determining whether an existing ROE remains just and reasonable could help to address growing concerns regarding "pancaked" rate complaints, e., new ROE complaints being filed while existing ROE complaints were still pending (as has occurred in New England). She also indicated that the reliance on four financial models would help mitigate concerns about relying solely on Institutional Brokers Estimate System (IBES) growth rates that are considered under the DCF analysis.

Supply Chain Risk Management Reliability Standards: The Commission issued Order No. 850 adopting new reliability standards addressing cybersecurity risks associated with the global supply chain for Bulk Electric System ("BES") Cyber Systems. NERC proposed those standards in September 2017 in compliance with Commission Order No. 829. The reliability standards focus on the following four security objectives: (1) software integrity and authenticity; (2) vendor remote access protections; (3) information system planning; and (4) vendor risk management and procurement controls. They require affected entities to develop and implement a plan that includes security controls for supply chain management for industrial control systems, hardware, software, and services. The new standards will become effective on the first day of the first calendar quarter that is 18 months following the effective date of Order No. 850 (which will be 60 days after publication in the Federal Register). The Commission also directed NERC to develop modifications to include Electronic Access Control and Monitoring Systems ("EACMS") associated with medium and high impact BES cyber systems within the scope of the supply chain risk management standards. NERC and others had opposed this expansion but were overruled by the Commission. NERC has 24 months to develop and file EACMS rules. By contrast, FERC decided not to require NERC to develop additional rules that would apply to Physical Access Control Systems or Protected Cyber Assets at this time. Instead, NERC must study the cybersecurity supply chain risks presented by PACS and PCAs and report back to the Commission as part of a broader supply chain risk study.

Transmission Rate Incentives and Transcos: The Commission ruled on a complaint that ROE adders previously granted to three subsidiaries of ITC Holdings Corporation were no longer just and reasonable because the subsidiaries no longer were independent stand-alone transmission companies (i.e., Transco adders). The Commission's order determined that a recent merger had reduced, but not eliminated, the ITC companies' independence from market participants. Accordingly, the adder was reduced from 50 to 25 basis points. Commissioner LaFleur concurred in the decision, indicating that, while she had concerns regarding the ITC companies' independence, Commission precedent justified the determination. Commission Glick dissented, arguing that the ITC companies were not sufficiently independent to justify any ROE adder. He also contended that there was little evidence that independent transmission companies are more likely to invest in transmission than other energy companies and thus questioned the underlying rationale for the Transco adder.

  • All three participating Commissioners expressed interest in revisiting Order No. 679 which was issued in 2006. It established the Commission's core transmission rate incentive policies which have not changed since the Commission issued a policy statement to provide additional guidance in 2012.
  • Commissioner LaFleur stated that it was appropriate for the Commission to take a fresh look at its incentive policies to ensure that they continue to align with the goals set forth in Section 219 of the Federal Power Act. In particular, she indicated that the Commission should consider the value of the Transco business model in promoting transmission development and possible changes to the Transco adder.
  • Commissioner Glick also argued that the time had come to initiate a new generic proceeding to revisit the Commission's transmission incentive policies in their entirety. He professed support for incentivizing needed transmission development and efficient transmission operations. But at the same time he expressed skepticism that the Commission's current approach was achieving these goals and concern that it was not serving consumers well. He supported Commissioner LaFleur's call for FERC to initiate a new generic proceeding in which he believed the Commission should "thoroughly examine its use of ROE incentives, including the Transco adder, to ensure that they are incentivizing actions and investments that will produce meaningful benefits for consumers."

Winter 2018/2019 Energy Market Assessment: Staff presented the Winter 2018/2019 Energy Market Assessment. Commissioner Chatterjee asked the reasons for natural gas storage being well below the five-year average. Commission staff indicated that this was because of strong pulls from storage during the previous winter and gas demand for electric generation during the summer. Commissioner LaFleur highlighted a slide in the report demonstrating the renewable and gas power plants coming online and the coal plants closing as illustrating the tremendous transformation in the resource mix. In discussing natural gas pipeline constraints in Boston, New York City, and California, Commissioner LaFleur noted that she is concerned about the tendency to draw broad conclusions regarding the resilience of the natural gas pipeline system from specific situations that are quite idiosyncratic in particular parts of the country. Commissioner Glick also highlighted natural gas demand response as a potential way to address regional issues in the absence of expanded pipeline capacity. The Commission held a technical conference on Winter 2018/2019 preparedness later in the day.

Other: Finally, Commissioner Glick noted that the Intergovernmental Panel on Climate Change had recently released a report regarding the potential impacts of greenhouse gas emissions. Commissioner Glick stated that it is important that the Commission recognize that many of its decisions have a real impact on U.S. emissions, and as a result FERC cannot ignore the consequences for climate change in its decision making processes. He has made the same argument in several recent FERC pipeline certification proceedings.

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