M E M O R A N D U M - FERC ROE Order Memo

Sep 2, 2026

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Memorandum to the Transmission Committee from NEPOOL Counsel Eric Runge and Jamie Blackburn summarizes a Federal Energy Regulatory Commission order issued October 16, 2018 on New England regional transmission rates. The memo explains the shift from a two-step discounted cash flow method to a new ROE methodology giving equal weight to four financial models. It highlights the preliminary 10.41% base ROE, the composite zone of reasonableness approach, and the required December 16, 2018 briefing schedule on application to pending ROE proceedings.

LanguageEnglish

CategoryLetters

FormatDOCX

Pages6

Reading Time2 min

AccessFree to download

Transmission Committee Memo

Parties and purpose

Proposed ROE methodology change

Impact on pending ROE proceedings

Preliminary ROE and composite zone approach

Briefing deadline and next steps

M E M O R A N D U M TO: Transmission Committee FROM: Eric Runge and Jamie Blackburn, NEPOOL Counsel DATE: October 22, 2018 RE: FERC ROE Order Issued October 16, 2018 This memorandum briefly summarizes the October 16, 2018, order of the Federal Energy Regulatory Commission (the “FERC” or the “Commission”) regarding the base return on equity (“ROE”) for New England regional transmission rates (the “October 16 ROE Order”). The October 16 ROE Order proposes a new methodology for determining a just and reasonable ROE for electric transmission rates, replacing the Commission’s current practice of using a two-step discounted cash flow (“DCF”) methodology. Under the new methodology set forth in the ROE Methodology Order, the Commission will give equal weight to the results of four financial models, as described further below. The Commission’s intent is to closer align the ROE methodology with how investors make their investment decisions. Using the new proposed ROE methodology, the Commission arrived at a preliminary 10.41 percent base ROE for New England regional transmission rates. The Commission is proposing to use the new methodology to resolve the open ROE complaint proceedings regarding New England transmission rates. The October 16 Order directs the parties to the ROE proceedings to file briefs by December 16, 2018, on the new methodology and how it should apply to the facts in those proceedings. If you have any questions about this memo or its subject, please contact Eric Runge, 617-345-4735, HYPERLINK "mailto:ekrunge@daypitney.com" ekrunge@daypitney.com. The October 16 ROE Order concerns the calculation of the appropriate base ROE for regional transmission rates in New England. It was issued in response to the four ROE Proceedings. The four ROE Proceedings were each initiated under Section 206 of the Federal Power Act (FPA) and alleged that the New England Transmission Owners’ (NETOs) base ROE was too high and, therefore, was unjust and unreasonable. Following a hearing, the Commission issued an order in the first ROE Proceeding in 2014 (“Opinion No. 531”). In Opinion No. 531, the Commission adopted the two-step DCF methodology to determine the appropriate zone of reasonableness for the NETOs’ base ROE. In addition, due to “anomalous” capital market conditions, the Commission determined that the just and reasonable base ROE should be set at the midpoint of the upper half of the zone of reasonableness produced by the two-step DCF (rather than the midpoint), setting the base ROE at 10.57 percent. On appeal, the DC Circuit, on April 14, 2017, issued a decision that vacated FERC’s order and remanded the case for further FERC proceedings. In that decision, the Court concluded that the FERC failed to make the necessary finding under the FPA that the existing 11.14 percent base ROE rate was unjust and unreasonable before setting the new rate. Further, the Court concluded that setting the base ROE at the midpoint of the upper half of the zone of reasonableness was not based on reasoned decision-making and departed from past precedent without sufficient explanation. While the first ROE Proceeding was being litigated, certain other parties submitted second and third complaints, which the FERC consolidated. An Initial Decision on the second and third ROE Proceedings, based on the reasoning put forth by the Commission in the first ROE Proceeding was issued in March 2016. A hearing in the fourth ROE Proceeding took place after the DC Circuit’s remand of the orders in the first ROE Proceeding, and the Initial Decision in the fourth ROE Proceeding concluded that the base ROE had not been shown to be unjust and unreasonable. In response to these pending proceedings, the Commission issued the October 16 ROE Order, proposing a methodology for addressing the issues that were remanded to the Commission in Emera Maine and established a paper hearing process on how that methodology should apply to the ROE Proceedings. As noted

FAQs

What order is the memo summarizing?

It summarizes the FERC order issued October 16, 2018 regarding the base return on equity (ROE) for New England regional transmission rates.

How does FERC’s proposed ROE methodology change?

FERC proposes replacing the prior two-step DCF methodology with a new approach that gives equal weight to four financial models, including DCF, CAPM, Expected Earnings, and a Risk Premium analysis.

What is the next action deadline mentioned in the memo?

Parties are directed to file briefs by December 16, 2018 addressing the new methodology and how it should apply to the facts in the ROE proceedings.

Sep 2, 2026

Upload by Kyle