Electricity Consumers Seek to Lower Returns for MISO Transmission Owners and also Challenge Capital Structure and Incentive Adders
Adding to a recent spate of complaints filed at FERC seeking to reduce the return on equity ("ROE") of various transmission owners, on November 12, 2013, several groups composed of large industrial and commercial electricity consumers together filed a complaint against Midcontinent Independent System Operator ("MISO") transmission owners asking for a reduction in the MISO transmission owners' ROE. With one exception, all MISO transmission owners currently have a base ROE of 12.38%. The complaint seeks to lower the transmission owners' base ROE over 300 basis points below the current base ROE, to 9.15%.
The law is well settled that in regulated industries, ROEs must be set at levels sufficient to attract capital investment. Transmission owners have responded to the recent complaints seeking ROE reductions by expressing concerns that lower ROEs will result in lower levels of investment in transmission, contrary to FERC's policy initiatives intended to encourage and sustain transmission investment.
In two ways, the complaint against the MISO transmission owners varies from the other ROE complaints pending before FERC. First, in addition to seeking a reduction in the base ROE, the complaint also petitions FERC to examine the MISO transmission owners' capital structure. Specifically, the complaint asks FERC to cap the MISO transmission owners' debt-equity capital structure ratio at no more than 50% equity. As background, the capital structure represents how the transmission owner finances its investment, and investment through debt is cheaper for the ratepayer. The complainants ask FERC to require any MISO transmission owner with a debt-equity capital structure ratio at more than 50% equity to justify its capital structure. The complainants argue that limiting the common equity ratio would reduce the transmission owner's revenue requirement and have only minimal effect on credit standing.
The second unusual aspect of the complaint against the MISO transmission owners is that it asks FERC to revisit its earlier grant of ROE incentive adders to two MISO transmission owners, ITC Transmission ("ITC") and Michigan Electric Transmission Company ("METC"). Specifically, complainants ask FERC to eliminate the 50 basis point adder it granted to ITC for its Regional Transmission Organization ("RTO") participation. In addition, complainants ask FERC to eliminate the 100 basis point adders ITC and METC have for being independent transmission companies. FERC granted these adders as incentives to promote RTO participation and separately, to promote the formation of independent transmission companies. The complaint argues that the adders are no longer needed to promote these policy goals. According to the complainants, ITC and METC have had the adders for over a decade and have received sufficient benefit from them in that time. On the other hand, the complainants continue, customers are not receiving any benefit from the adders because there is already a strong market interest in electric utility investment.
The complaint against the MISO transmission owners was assigned Docket No. EL14-12. The answer to the complaint is due December 2, 2013.
 One MISO transmission owner currently has a base ROE of 12.2%, the result of a settlement agreement.