MARLBOROUGH, Mass., May 11, 2020 /PRNewswire/ -- An important new report produced by Concentric Energy Advisors ("Concentric") proposes several fundamental changes to the Federal Energy Regulatory Commission's ("FERC" or the "Commission") methodology used to determine the composite zone of reasonableness and base return on equity ("ROE") for regulated electric transmission utilities. Concentric responds to FERC's ROE methodology as it has evolved from Opinion No. 531 for the New England Transmission Owners ("NETOs"), Opinion No. 551 for the transmission owners in the Midcontinent Independent System Operator ("MISO"), the subsequent Briefing Orders for both proceedings, the Notice of Inquiry and most recently Opinion No. 569 in the MISO proceeding. Concentric concludes that its recommendations improve both the reliability and predictability of base ROE results for all concerned parties under a variety of market circumstances.
Concentric's proposed changes are comprehensive, addressing both the determination of the zone of reasonableness and the models used to estimate ROE. Key among its findings, Concentric recommends that the Commission expand the middle range of the composite zone for purposes of section 206 filings; and give equal weight to four models—Discounted Cash Flow ("DCF"), Capital Asset Pricing Model ("CAPM"), Expected Earnings, and Bond Yield Plus Risk Premium ("Risk Premium")—in establishing the zone and determining a new base ROE for proceedings under both sections 206 and 205 of the Federal Power Act.
"Our recommended changes to the ROE methodology embrace those elements that make economic and financial sense and recognize the need for both structure and flexibility," said James Coyne, Senior Vice President at Concentric. "Practical modifications to the models proposed to the Commission better reflect available investor information, and when taken together, will promote stability and predictability of results, create confidence in the resulting ROE determinations, and better connect the determination of the range of reasonableness to the base ROE."
Concentric's report was produced at the request of the Edison Electric Institute.
Concentric Energy Advisors specializes in management consulting and financial advisory services with a focus on the North American energy and water industries. Through its subsidiaries, CE Capital Advisors, Concentric Advisors ULC, and Concentric Energy Publications, Concentric provides capital market advisory support, consulting services in Canada, and publishes The Foster Report. Stay in touch with Concentric by subscribing to the Concentric Connection.