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May 21, 2018
Brattle Economists Outline Recommendations for Reformulating FERC ROE Policy in New Whitepaper

Debate surrounding the Federal Energy Regulatory Commission’s (FERC) return on equity (ROE) policy has been vigorous since the D.C. Circuit Court of Appeals remand of Opinion 531 in Emera Me. v. FERC, 854 F.3d 9, 17 (Emera) more than a year ago. Since that time, FERC has preserved the suspense, reestablishing a quorum of commissioners, and offering glimpses into its intent in interim orders, but not yet responding to the remand directly.

Meanwhile, stakeholders have increasingly “upped the ante” with increasingly diverging ROE claims in a series of overlapping cases involving transmission owners in New England and beyond. Much of the recent discussion has focused on near-term adjustments and “tweaks” to the methodologies adopted in the prior policy. However, the commentary to date has underplayed an opportunity to address changing business risk: transmission owners are simultaneously facing 1) new pressures to invest, and 2) heterogeneous demand patterns that could impair (or potentially strand) assets in the long term. 

In a new whitepaper, Brattle economists find that the Commission has a rare opportunity to address long-term implications of the dynamic changes beginning to take shape in the transmission and pipeline industries. Such a long-term policy will need to go well beyond the narrow considerations dominating the near-term discord, and include a richer menu of tools and practices, including more sophisticated risk assessment considerations for the Commission to adopt in its cost of capital policy.

The whitepaper describes why a broader, long-term approach is warranted, and provides some guidelines for developing such a sound long-term policy. In summary, the authors call for an overhaul of the current policy, recommending an expansion of ROE criteria to include the following:

  • A wider suite of estimation methodologies and models, differentiated and weighted by company context/market conditions.
  • Adoption of more diverse proxy groups, acknowledging the increased heterogeneity of business risk.
  • Revisiting standards for including/excluding deemed outliers, with criteria varying by business risk issues.
  • Adjusted modelling fundamentals such as long-term growth assumptions, tailored more selectively to the case at hand.

The whitepaper, “Resetting FERC ROE Policy: A Window of Opportunity,” is authored by Robert Mudge, Akarsh Sheilendranath, and Frank Graves.