In recent years utilities argue that even though interest rates have declined substantially since the beginning of the recession in 2008, the Federal Energy Regulatory Commission (FERC) should not reduce the current ROE allowances for transmission investment included in the regulated rates that public utilities charge for transmission services.
ELCON believes that FERC should continue to scrutinize public utilities’ transmission rates to ensure that all elements, including ROE allowances, remain just and reasonable in light of changing economic conditions and factors, as the Federal Power Act (FPA) requires. The FPA allows public utilities to earn a return sufficient to attract capital from investors; it does not require the continued payment of ROE allowances that are unduly high given changed economic conditions, simply because at some point in the past, FERC found such an ROE just and reasonable under then-prevailing circumstances. FERC also should not abandon the Discounted Cash Flow (“DCF”) methodology it now uses to determine ROE allowances just because it no longer produces the same ROE awards that it did prior to 2008. Economic conditions throughout the Nation (if not the world) have fundamentally changed since that time. In the past five years, electric consumers have suffered through decreased employment, shrinking paychecks, home foreclosures, and myriad other economic losses. Industrial consumers also have faced extraordinary economic challenges, including decreased demand and aggressive foreign competition.
Investors survey the variety of investments available to them, their relative risk and their associated potential returns. Because very low-risk interest-bearing investments are part of that array, investors will look at the associated interest rates for such investments and rank other investment options accordingly. Hence, if interest rates are low, then other investments will be more attractive at lower rates of return than if interest rates were higher. Many of today’s high ROEs exist precisely because the Commission took account of past interest rates by applying its longstanding policy linking final updated ROEs to yields on 10-year treasuries. If interest rates and ROEs are linked when interest rates rise, then they are linked when interest rates fall.
Electric utility access to capital is enhanced as regulated utilities are given the opportunity to recover their costs and earn a “fair and reasonable” return on their investment. As a result, investors are generally willing to accept a lower return on equity for utility stocks than in some other sectors, e.g., tech stocks or start-ups.
Electric utilities claim that investors seek ROE stability in rates. This is not necessarily true. Investors seeking an investment with a stable return over the life of a long-lived asset such as transmission facilities usually invest in bonds, which by definition carry a stable return. Investors in stock, even the stocks of regulated companies, must accept the possibility that returns may vary over time. Utilities were not heard arguing for recovery of past rather than current capital costs when ROEs were rising. Its call for “stability” is therefore nothing more than a call to make rate regulation a one-way street.
Electric utilities claim that transmission investments are “extremely risky” and cite this as a reason for retaining high ROE awards even in the face of reduced interest rates. But rating agencies, investment analysts, investors, and some transmission owners themselves plainly do not share that view; setting aside positions taken before FERC, one will search in vain for a real-world investment document that characterizes rate base, cost-plus transmission as anything other than an exceptionally safe investment. Few businesses are as risk-free as that of selling access to essential facilities at cost-plus prices, typically through non-bypassable formula rates that, in effect, collect the allowed revenue requirement as an unavoidable tax.
Electric utilities often claim that without adequate returns to support investment in needed transmission, projects evaluated in Order No. 1000 planning processes may not be undertaken because limited capital will be invested elsewhere, likely resulting in delay or absence of projects required to address congestion, to implement public policy objectives, and to bring benefits to customers. ELCON believes that this veiled threat to forgo investing in needed transmission facilities cannot be reconciled with the assertions of the utility industry that they should have exclusive rights to build new transmission facilities in their service areas so that they can satisfy their own public utility obligations to provide reliable service.
For all of these reasons, ELCON urges FERC to continue to review the ROE allowances of Commission-regulated public utilities using the DCF methodology to ensure that they remain just and reasonable in light of current economic conditions, and to reduce them as necessary to meet the relevant legal standards.
Joint Letter to FERC by ELCON et al., Opposing Petition of WIRES for Statement of Policy and EEI Report on Transmission ROEs, July 2013
Comments of ELCON et al. FERC Docket No. RM06-4-000 (“Promoting Transmission Investment Through Pricing Reform”), January 2006