Category

ROE

02 April 2019

FERC Issues Wide-Ranging Call for Comments in Review of its ROE Policy

On March 21, 2019, the Federal Energy Regulatory Commission (“FERC”) initiated an Inquiry Regarding the Commission’s Policy for Determining Return on Equity (“ROE”) that was published in the Federal Register on March 28, 2019.  FERC is seeking comments on this Notice of Inquiry (“NOI”) in eight general areas, including the role its base ROE plays in investment decision-making, and whether FERC should reevaluate how it uses the discounted cash flow (“DCF”) methodology to set ROEs for jurisdictional rates.  The DCF methodology has guided cost-of-service ratemaking at FERC since the 1980s.  It is used to ascertain an investor’s required return for investing in a firm, and is applied using a proxy group of firms that face similar risks to the entity whose ROE is being determined, which defines a “zone of reasonableness” for the ROE.  The use of a proxy group is intended to satisfy the “Hope” and “Bluefield” standards (named for a pair of 20th Century U.S. Supreme Court cases) that an ROE is commensurate with returns on investments in other enterprises having corresponding risks to assure confidence in the financial integrity of the enterprise to allow it to maintain its credit and attract capital. Comments on the NOI are due on June 26, 2019 and Reply Comments are due on July 26, 2019.

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