On October 17, 2024, FERC issued an Order on Remand regarding the August 9, 2022, United States Court of Appeals for the District of Columbia Circuit decision to vacate and remand the Opinion Nos. 569 series of decisions. In Opinion Nos. 569, FERC relied on the three models of (a) Discounted Cash Flow (b) Capital Asset Pricing Model and (c) Risk Premium method. The Court vacated the orders because it found that the Commission failed to adequately support its decision to adopt the Risk Premium method in Opinion No. 569-A after forcefully rejecting it in Opinion No. 569.
In the Order on Remand, the Commission removed the Risk Premium method from its ROE methodology. While the Commission did not foreclose the adoption of the method in the future, if the concerns discussed in the order are addressed, this is expected to a high bar to achieve. Additionally, in a more unexpected move, the Commission explained that in respect of the Capital Asset Pricing Model it could consider the use of a blended historically experienced market risk premium and a forward-looking market risk premium (the Opinion Nos. 569 methodology relied solely on a forward-looking estimate). The stated intent of this approach is to help mitigate volatility concerns in the Commission’s ROE methodology after moving from a three model approach to a two model approach. The use of a blended market risk premium is expected to put downward pressure on the overall ROEs.
Notwithstanding the removal of the Risk Premium method, the impact to MISO transmission owners and ratepayers is relatively minimal with the MISO-wide base ROE declining from 10.02% to 9.98%. For clarity, please note the MISO ROE is based on financial data from 2015. The Order on Remand can be found at https://ferc.gov/media/e-4-el14-12-016
For more information or to comment on this article, please contact:
Breandan Mac Mathuna, Principal
GDS Associates, Inc. - Marietta, GA
(770) 799-2391 or
breandan.macmathuna@gdsassociates.com