Court backs FERC on calculation of rate of return on equity
Originally published May 16, 2013
A federal appeals court has upheld the Federal Energy Regulatory Commission’s use of a median, rather than midpoint, of a range of reasonable rates of return on equity for transmission projects. In a May 10 ruling in Southern California Edison v. FERC, the U.S. Court of Appeals for the District of Columbia Circuit said the commission "provided principled reasons for using the median" to establish SoCal Edison’s base rate of return on equity.
The court noted that this was the first legal challenge to FERC’s use of the median even though the commission announced in a 2008 case that it that it would use the median as the measure of the return on equity for a single electric utility of average risk.
Southern California Edison had requested a base return of 11.5 percent for three transmission projects, citing a midpoint of 12 percent for a proxy group of transmission projects. (With incentives granted by FERC, the rates of return for the three projects ranged from 12.75 to 13.25 percent.) Using a different proxy group, the commission found that the zone of reasonableness ranged from 7.97 percent to 13.67 percent, and set the company’s base return at the median, 10.55 percent.
The court remanded another aspect of the case back to FERC—its updating of Edison’s projected borrowing costs. The commission’s 2010 decision to use more recent Treasury rates as a proxy for the utility’s borrowing costs resulted in a further reduction of the base return to 9.54 percent. However, the court agreed with Edison that FERC erred in not considering evidence presented by the utility to the effect that the 2008 economic collapse made use of the Treasury rates inappropriate.
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