The Federal Energy Regulatory Commission on Oct. 17 issued a long-awaited order establishing a methodology for determining a just and reasonable return on equity, or profit, to be included in transmission rates.
The order, arising out of a consumer complaint filed in November 2013 against a group of Midcontinent transmission owners that were then collecting returns in excess of 12.38%, holds that returns should be set using a combination of two financial models: a discounted cashflow model and a capital asset pricing model.
FERC had previously included a third model—a risk premium model based on previously authorized returns—but the D.C. Circuit appellate court held in August 2022 that FERC failed to explain its use of that model.
In the Oct. 17 order, FERC set the return for these transmission owners to be 9.98%.
While the methodology established in the Oct. 17 order will be the starting point for calculating returns for transmission owners around the country, FERC left the door open to considering additional methodological changes.
FERC stated that, in future cases, it could consider modifications to its capital asset pricing model to use a blended historical and forward-looking approach (such a change would tend to lower the authorized profits).
