During the past month, notable activity at the Federal Energy Regulatory Commission included a decision by an administrative law judge in a prominent case addressing the return on equity for utilities in ISO New England and commission approval of a $100 million Texas Eastern Transmission LP gas pipeline project. In addition, FERC approved the merger of Vistra Energy Corp. and Dynegy Inc. and received an application from Columbia Gas Transmission LLC for a $790 million gas pipeline project to serve producers in the Appalachian Basin.
A more detailed discussion of FERC activity that is being followed by Regulatory Research Associates, an offering of S&P Global Market Intelligence, is provided below.
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Transmission ROEs — ISO-New England
On March 27, a FERC administrative law judge determined that the current ROE of 10.57% for transmission owners in ISO-New England, or ISO-NE, is not unjust and unreasonable, thus rejecting the fourth in a series of complaints filed by a group of municipal utilities known as the Eastern Massachusetts Consumer-Owned Systems, or EMCOS, against ISO-NE's ROE over the last 7 years.
Among other things, the administrative law judge found that "the [discounted cash flow, or DCF] analyses performed by the EMCOS and the [FERC] Staff are fatally defective", due primarily to their failure to include "at least Algonquin [Power & Utilities] in their proxy group." The administrative law judge noted that "if Algonquin were included in the DCF analyses of the EMCOS and Staff, then the current 10.57% base ROE of the [New England transmission owners] would fall within the zone of reasonableness of these analyses. ... In view of the deliberate omissions of Algonquin, these analyses are deficient."
In sum, the administrative law judge determined "the failure of the EMCOS and the Staff to meet their burden of proof [that the existing ROE is unjust and unreasonable] means that the case is over, because they have produced no DCF analysis that is usable in this case for any purpose."
The fourth complaint was filed at FERC against ISO-NE in April 2016, seeking to lower the current authorized base ROE of 10.57% to 8.61%. The complaint was filed by a group of utilities calling themselves the EMCOS, which includes the Belmont Municipal Light Department, Braintree Electric Light Department, Concord Municipal Light Plant, Georgetown Municipal Light Department, Groveland Electric Light Department, Hingham Municipal Lighting Plant, Littleton Electric Light & Water Department, Middleborough Gas & Electric Department, Middleton Electric Light Department, Reading Municipal Light Department, Rowley Municipal Lighting Plant, Taunton Municipal Lighting Plant, and Wellesley Municipal Light Plant.
In September 2016, FERC set the complaint for hearing. FERC acknowledged concerns raised by the Edison Electric Institute over the "pancaking" of multiple complaint proceedings by reiterating its previous explanation that the Regulatory Fairness Act allows successive requests for rate changes so long as each is based on "new, more current data." The commission also noted that "[u]tilities are free to file for successively higher rate increases based on later common equity cost data without regard to the status of their prior requests, and a fair symmetry requires that complainants also be free to file complaints requesting further rate decreases based on later common equity cost data without regard to the status of their prior complaints." FERC explained that, in such cases, it is not "instituting a duplicative proceeding … but rather [is] initiating an entirely new proceeding, based on an entirely separate factual record, that may or may not reach the same conclusions as those reached in the earlier ROE proceeding."
FERC noted that the fourth complaint was filed nearly six months after the evidentiary hearing record for the next most recent complaint proceeding involving ISO-NE was closed, and the financial data to be considered in the new complaint was more current. FERC stated "the differences in the proxy groups produced by the two discounted cash flow analyses and the ROEs of the proxy group companies are the result of changes in, inter alia, the dividend yields and growth rates for each proxy group company. The differences in those data constitute different factual circumstances."
The first three complaints against ISO-NE's ROE also are still pending at various stages in the litigation process. The first complaint, filed in 2011, led to FERC Opinion 531 in 2014, which was remanded to the commission on April 14, 2017, by the U.S Court of Appeals for the District of Columbia Circuit. FERC action on the remand is pending. The second and third complaints, filed in 2012 and 2014, respectively, led to an administrative law judge initial decision on March 22, 2016, that is currently awaiting FERC action.
Gas pipeline projects — Texas Eastern Transmission
On April 6, FERC approved a natural gas pipeline project proposed by Texas Eastern Transmission and Brazoria Interconnector Gas Pipeline LLC that would provide up to 322,000 Dth/d of firm transportation service to Gulf Coast markets. Texas Eastern is a subsidiary of Enbridge Inc.'s Spectra Energy Partners LP.
The commission approved the $100 million Stratton Ridge expansion project that would provide service from Texas Eastern's interconnections to a delivery point on the Brazoria Interconnector Gas pipeline system in Brazoria County, Texas, and also allow Brazoria Interconnector Gas to lease pipeline capacity to Texas Eastern. The project has an expected in-service date of the first half of 2019.
FERC determined that Texas Eastern has sufficiently demonstrated that there is market demand for the project. Texas Eastern held an open season from Sept. 8 to Sept. 30, 2014, to determine market interest for transportation capacity to the Gulf Coast, and subsequently executed a precedent agreement with Toshiba Corporation for the full 322,000 Dth/d of firm transportation service on the project for a 20-year term.
Mergers and acquisitions — Vistra/Dynegy
On April 4, FERC approved the merger of Vistra Energy Corp. and Dynegy Inc. as "consistent with the public interest." The commission determined that, based on the companies' representations, the merger would not have an adverse effect on horizontal or vertical competition, although there are five wholesale markets where Dynegy, Vistra and their affiliates would have overlapping generation capacity. On April 9, Vistra announced that the companies had completed the transaction.
On Nov. 22, 2017, Dynegy and Vistra submitted a joint application to FERC seeking authorization for the proposed transaction in which Dynegy would be merged with and into Vistra. In their application, the companies asserted that the proposed transaction would not have any adverse effect on competition, rates or regulation and would not result in any cross-subsidization of a nonutility company or the encumbrance or pledge of utility assets for the benefit of an associate company.
The companies stated "there is no overlap in generation capacity subject to FERC jurisdiction as between Dynegy and Vistra, as Vistra's generation and related transmission is limited" to ERCOT. The companies further stated that when generation capacity currently owned by Vistra affiliate Brookfield Asset Management Inc. is included, there are five FERC jurisdictional markets where Dynegy generation capacity overlaps with the affiliates of Vistra: the California ISO, ISO-NE, the Midcontinent Independent System Operator Inc, the New York ISO and the PJM Interconnection. Brookfield Asset Management is the ultimate parent of Brookfield Asset Management Private Institutional Capital Adviser (Canada) LP, which owns or controls the right to vote approximately 15.5% of the outstanding voting shares of Vistra.
The companies submitted a market power analysis that asserted the overlap of the combined companies' generation assets is small or de minimis, and that post-merger market shares and changes in the Herfindahl-Hirschman Index, or HHI, are within screening thresholds FERC uses to test for horizontal market power.
The companies' analysis asserted, among other things, that their post-merger market share in CAISO would be 3%, with an increase in HHI of 4 points. In ISO-NE, the companies assert their post-merger market share would be 16.6%, with an HHI increase of less than 100 points in all time periods. In MISO, the combined companies' market share would be 3.29%, with a 1 point increase in HHI. In the NYISO, the combined companies' market share would be 4.8%, with an increase in HHI of less than 20 points in all time periods, and in PJM, the companies' market share would be 7.1%, and the increase in HHI would be less than 10 points in all time periods.
FERC agreed that "the results of Applicants' [analysis] indicate that the Proposed Transaction will result in increases in market concentration that fall within the Commission's thresholds. Additionally, Applicants' representations regarding capacity and ancillary services markets indicate that the Proposed Transaction will not adversely affect competition in those markets."
Gas pipeline projects — Columbia Gas Transmission
On March 26, TransCanada Corp.'s Columbia Gas Transmission LLC filed an application with FERC for approval to replace a natural gas pipeline system in Ohio and West Virginia to serve future growth from producers in the Appalachian Basin, increasing capacity along the pipeline by 275,000 Dth/d. The Buckeye XPress project would replace about 61 miles of pipeline with about 66 miles of new pipeline on Columbia Gas' pipeline system in Vinton, Jackson, Gallia and Lawrence counties in Ohio and Wayne County, West Virginia.
Columbia Gas estimated the total construction cost for the project to be approximately $709 million, with approximately $209 million of the cost to be supported by Buckeye XPress project shippers and approximately $500 million borne by Columbia's existing shippers. The targeted in-service date of the project is November 2020.
To demonstrate need for the project, Columbia Gas held a nonbinding open season from Jan. 13, 2017, to Feb. 16, 2017, and received bids for over one billion cubic feet per day from various parties for capacity on Columbia Gas' system. Columbia Gas stated "negotiations with potential project shipper(s) are on-going as of the date of the instant filing." Columbia Gas further stated that it will update the commission on any progress, and that it "recognizes that it will remain at risk for any unsubscribed capacity on the expanded portion of the Project.
Recent reports from RRA
Transmission ROEs
In the process of updating a report entitled FERC Electric Transmission ROEs: Trends & Controversies – 2017 Update, published on Feb. 13, 2017, RRA undertook a broad examination of FERC ROE policy and recently completed and pending transmission ROE cases at the commission. In Part I of the 2018 updated analysis, published on March 23, RRA provides an overview of FERC's ROE policies and a summary of recently concluded cases at FERC involving electric transmission ROEs. The cases examined in Part I of the report are summarized in the table below.
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In Part II of the analysis, published on March 27, RRA examines the lengthy list of pending transmission ROE cases at FERC that could produce a significant shift in the commission's transmission ROE policies and practices in the coming months. The cases examined in Part II of the report are summarized in the table below.
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FERC and tax reform
In the first action by FERC, applicable to all companies with FERC-jurisdictional rates, the commission issued a Notice of Inquiry in Docket No. RM18-12 to examine "whether, and if so how, the Commission should address changes relating to accumulated deferred income taxes [or ADIT] and bonus depreciation" as a result of the federal tax act.
For the electric utility sector, FERC issued a "show cause" order directing a group of 33 companies with stated transmission rates to propose revisions to their transmission tariffs that currently incorporate a federal tax rate of 35% or explain why they should not be required to do so.
For electric utility companies with formula transmission rates, the commission identified 15 companies that include a "fixed line item" of 35% for the federal income tax component in their formula rate. FERC issued "show cause" orders to these 15 companies requiring them to propose revisions to their transmission formula rate to reflect the change in the corporate income tax rate, or explain why they should not be required to do so.
For the natural gas pipeline sector, FERC issued a Notice of Proposed Rulemaking, or NOPR, in Docket No. RM18-11 applicable to pipelines with cost-based rates "that would allow FERC to determine which pipelines under the Natural Gas Act may be collecting unjust and unreasonable rates in light of the corporate tax reduction and changes to the Commission's income tax allowance policies…."
For a complete, searchable listing of RRA's in-depth research and analysis, please go to the S&P Global Market Intelligence Research Library.