FERC challenged over profit cut for transmission

OREANDA-NEWS. A Federal Energy Regulatory Commission (FERC) order that cut the profits that New England transmission owners can recover on their investments is facing challenges from all sides in federal court.

Connecticut utility regulators feel the 10.57pc base return on equity that FERC is allowing transmission owners in the region to collect is still too high. The state regulators sued the federal agency this week in the DC Circuit Court of Appeals. Also filing suit were four municipal utilities from Massachusetts, which have agreed with Connecticut that the return of equity should have been lowered to at least 9.7pc.

New England transmission owners have also challenged the order, likely trying to restore the earlier 11.14pc return on equity they were allowed to collect. FERC lowered the returns to reflect a shift in financial markets that caused yields on capital to plunge.

The brewing legal fight could set precedent over a new methodology FERC first used in New England and has started to use in other proceedings targeting transmission returns. The new methodology used a "two-step" procedure that factored in long-term growth projections to help set the return on equity, expanding on an earlier practice of reviewing short-term growth.

Another issue likely to play heavily in the legal proceedings will be FERC's decision to depart from the advice of an administrative law judge to set returns at 9.7pc, which was halfway up a "zone of reasonableness" determined by reviewing the returns of a proxy group of utilities. The agency said the "anomalous market conditions" with unusually low yields on capital justified setting rates three-quarters of the way up the zone.