Executive Insight, Policy & Regulation, T&D, Transmission

FERC to make return on equity a priority

The issue of a stable return on equity (ROE) policy could prove to be one of the first issues addressed under the new leadership at the Federal Energy Regulatory Commission (FERC), according to FERC Commissioner John Norris.

FERC commissioners have suggested that FERC chairman nominee Ron Binz consider ROE uncertainty to be the most pressing short-term issue, Norris told TransmissionHub at the annual meeting of the Northwest & Intermountain Power Producers Coalition in Union, Wash., September 10.

“I’ve encouraged nominee Binz that this is one of the most pressing issues for FERC to deal with in the short term,” he said, noting that inaction is not an option. “One of the most important things that FERC needs to be working on, in the very near future, is resolving the uncertainty around the ROE for transmission,” he said.

Norris said he recently recommended to fellow commissioners that the agency turn its full attention to what he called a “growing stack of cases” on ROE policy, once the FERC technical conference on capacity markets, set for September 25, is behind them.

Following that conference, the commission will need a matter of several weeks to sort through the testimony and documentation that will come out of the conference before turning its attention to other matters.

“We need transmission built in this country but we can’t expect enough capital to be attracted to meet our transmission needs unless they know what their return is going to be,” he said. “How do you get people to pursue it if they don’t know at the end of that pursuit, there’s a reasonable rate of return for their investment?”

“We’ve got to have a more attractive rate for transmission than the distribution system or other investments in this regulated industry,” he said.

In an Aug. 6 initial decision involving the base ROE for New England transmission owners, a FERC administrative law judge ruled that the current 11.14 percent ROE was unjust and unreasonable, and specified a just and reasonable ROE for the locked in/refund period of 10.6 percent and for the subsequent period, 9.7 percent, (Docket No. EL11-66-001).

That is an indication of what Norris said is the challenge in setting an appropriate ROE: finding what he called “the sweet spot” — a rate of return that attracts the amount of investment needed to build the transmission that the West and the rest of the nation need.

“These don’t need venture capital rates of return, but they do need a level of return that attracts those institutional investors, that recognizes the difficulty of building transmission, and rewards it,” he said.

To reinforce confidence in the ROE calculation, FERC will also have to address the stability of those returns.

”We want to make sure that there is a signal that, if you invest in this for the long term, there’s some stability in the return on investment,” he said. “The worst thing we can do is not make a decision, and that’s where we’re at right now. I think we’ve been putting these off too long.”