Commissioner Mark C. Christie Statement
May 20, 2021
Docket No. ER13-1508-001, et al.

The Order grants a Return on Equity (“ROE”) of 10.37%.  Because that ROE is consistent with the ROE formula established by Orders No. 569, 569-A, and 569-B, I concur.  However, I write separately to note the following points. 

First, while today’s order correctly applies the Commission’s ROE methodology set forth in Order No. 569 and its progeny, I believe that the Commission’s policy is flawed to the extent it replaces judgment with rote application of pre-set formulae[1] and should be reviewed in a general proceeding to consider possible changes to that methodology.  Second, I believe the Commission can, and should, issue ROE orders much more expeditiously in the future and matters of procedure, including setting strict procedural deadlines for FERC itself to follow, should be part of any such future proceeding on the ROE issue.

As indicia of why this Commission’s ROE policy needs to be revisited, I would note that as of May 14, 2021, the 30-year U.S. Treasury bond – one of the most commonly used benchmark ‘safe’ investments – was yielding 2.36%.[2]  Thus the ROE approved in this order represents a risk premium of approximately 800 basis points.  As compared to the 10-year Treasury bond, which was yielding 1.64% May 14, 2021, the ROE approved herein represents a risk premium of nearly 900 basis points.[3] 

I recognize that rates on Treasury bonds were somewhat higher on December 19, 2013, the date back to which this order imposes the 10.37% ROE.[4]  On a going-forward basis, however, as well as for most of the past eight years, the risk premium represented by a 10.37% ROE is extraordinarily generous for a regulated utility.[5] 

The goal of the utility regulator is to set a utility ROE that tracks as closely as possible the actual cost of equity capital in the marketplace and is consistent with the landmark Bluefield and Hope cases.[6]  The process should, of course, be informed by data, but it is far more art than science, and at the end of the day, common sense also has to be applied.[7]  Today’s result shows what happens with the rigid application of pre-set formulae.[8]  It also demonstrates that, while back-dating an ROE almost eight years may be the unavoidable result of this case’s litigation history, the ROE set by today’s order – which will also be used on a going-forward basis – no longer reflects the actual equity cost of capital.

I also observe that we are today putting into place an ROE with an effective date of December 19, 2013 – roughly seven-and-a-half years ago – ostensibly on the theory that these rates are required to incentivize investment in a future that began, at this point, several years in the past.  Although a certain amount of “lag” is perhaps inherent in any regulatory system, I do not accept that this degree of delay is inevitable.  Going forward, I believe we can and should do better.[9] 

The FPA provides both a mechanism for the utility to seek changes to its rates – under Section 205 – and a mechanism for the customer to seek changes to the rates – under Section 206.  As long as these mechanisms exist, no unfairness would result from shortening the time periods in which rates were under consideration.  On the contrary, tightening the time periods would increase the ability of interested parties to seek relief from – and for the Commission to respond to – changing conditions. 

In light of the outcome in this case and the time it took, I would urge the initiation of a general proceeding that will allow us to consider modifications to the current ratemaking policy for the purpose of preserving space for the sound exercise of discretion and acting on proposed rate changes much more expeditiously than we have done in the past.[10]

For these reasons, I respectfully concur.


[1] Order No. 569 was intended to address the shortcomings in the Commission’s prior ROE methodology that were identified by the D.C. Circuit in Emera Maine v. FERC, 854 F.3d 9 (D.C. Cir. 2017) (Emera Maine) (remanding Opinion No. 531).  Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., Opinion No. 569, 169 FERC ¶ 61,129 (2019), order on reh’g, Opinion No. 569-A, 171 FERC ¶ 61,154 (2020), order on reh’g, Opinion No. 569-B, 173 FERC ¶ 61,159 (2020).  In doing so, however, the Commission took a step too far.  The D.C. Circuit found that the Commission failed to articulate a “rational connection” between the Commission’s findings as to the specific transmission owners’ circumstances and its placement of the base ROE.  Emera Maine, 854 F.3d at 27.  Emera Maine did not, as appears to be the case in Orders No. 569, 569-A, and 569-B, require the Commission to cede its judgement in favor of purely formula-derived outcomes.  In fact, in Emera Maine, the court recognized the fundamental principle that “[r]atemaking . . . is not a science,” and thus “FERC must use models to inform, not rigidly to determine, [its] judgement as to the appropriate ROE for a utility.”  Emera Maine, 854 F.3d at 20 (emphasis added).

[3] Id.

[4] Id.

[5] Rates on 30-year Treasuries were slightly below 4% in December 2013; rates on 10-year Treasuries were mostly slightly below 3%.  Id.  Yields on both have trended downward steadily to the present time.  

[6] See, Fed. Pwr. Comm’n v. Hope Natural Gas Co., 320 U.S. 591, 605 (1944) (“Hope”) (“Rates which enable the company to operate successfully, to maintain its financial integrity, to attract capital, and to compensate its investors for the risks assumed certainly cannot be condemned as invalid, even though they might produce only a meager return on the so-called ‘fair value’ rate base.”); and Bluefield Waterworks & Imp. Co. v. Pub. Serv. Comm’n of W. Va., 262 U.S. 679, 692-93 (1923) (“A public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties; but it has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures.  The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties.”).

[7] See, Cities of Bethany v. FERC, 727 F.2d 1121, 1138 (D.C. Cir. 1984) (“ratemaking is less a science than it is an art.”) (citing Ala. Elec. Coop. v. FERC, 684 F.2d 20, 27 (D.C. Cir. 1982)); accord, Emera Maine, 854 F.3d at 23 (“the fact that a rate falls within the zone of reasonableness does not establish that the rate is the just and reasonable rate for the utility at issue . . . . Whether a rate, even one within the zone of reasonableness, is unlawful depends on the particular circumstances of the case.”) (emphasis in original).  The key element is actually that “the Commission must explain its reasoning.”  Id. (citing TransCanada Power Mktg., Ltd. v. FERC, 811 F.3d 1, 12 (D.C. Cir. 2015)).

[8] See, e.g., Hope, 320 U.S. at 602 (noting that “the Commission [is] not bound to the use of any single formula or combination of formulae in determining rates.  Its rate-making function . . . involves the making of pragmatic adjustments” because “[i]t is not theory but the impact of the rate order which counts.”) (cleaned up, citations omitted).

[9] I recognize that the regulatory lag in this case is not exclusively of the Commission’s own doing.  The D.C. Circuit disapproved of the Commission’s application of its then-prevailing Opinion No. 531 policy on ROE in Emera Maine, which prompted the Commission to revise that policy in Opinion No. 569 and its progeny.  

[10] I recognize that in March 2019, the Commission opened Docket No. PL19-4-000 to examine a subset of these questions and that this docket remains open.  See, Inquiry Regarding the Commission’s Policy for Determining Return on Equity, 166 FERC ¶ 61,207 (2019).  I am agnostic as to whether the Commission addresses these issues in a wholly new docket or adds them to Docket No. PL19-4-000.  I observe, however, that the Commission policies applied in this case were developed subsequent to the initiation of that existing inquiry.

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