FERC Cites Record Evidence to Support Chart
On Jan. 7, 2019, FERC granted a joint motion for expedited disclosure of certain data and analyses underlying two figures in Coakley v. Bangor Hydro-Elec. Co., 165 FERC ¶61,030 (2018) (Briefing Order). The movants, Connecticut Public Utilities Regulatory Authority, Eastern Massachusetts Consumer Owned Systems, Massachusetts Municipal Wholesale Electric Co., and New Hampshire Electric Cooperative Inc. (collectively, Customers) requested that FERC identify and, where not already in the record in the proceedings, release the sources, data sets, and analyses underlying Figure 2 (“ROE Results from ROE Models”) and Figure 3 (“Regulated Utilities PE Chart”) in the Briefing Order. FERC attached an appendix identifying the record exhibits that it relied upon to develop Figure 2, but could not provide the information for Figure 3, as that was developed by an advisory firm.
In 2017, the U.S. Court of Appeals for the District of Columbia Circuit vacated and remanded Coakley v. Bangor Hydro-Elec. Co., 147 FERC ¶61,234 (2014) (Opinion No. 531), which found that the New England Transmission Owners’ (NETOs) existing return on equity (ROE) was unjust and unreasonable and adopted a replacement ROE.
In response, FERC issued the Briefing Order on Oct. 16, 2018, directing the participants in various related proceedings to submit briefs regarding the Commission’s proposed framework for determining whether an existing ROE is unjust and unreasonable under the first prong of Federal Power Act (FPA) section 206, and a revised methodology for determining just and reasonable ROEs.
Figure 2 of the Briefing Order shows “the ROE results from the four models over the four test periods at issue in this proceeding.”
Figure 3 is a chart produced by Evercore ISI, “a major investment banking advisory firm,” and dated Nov. 15, 2017. The Briefing Order introduced Figure 3 by stating that, from Oct. 1, 2012 through Dec. 1, 2017, “the Dow Jones Utility Average increased from about 450 to 762.59, an increase of almost 70 percent. However, utility earnings did not increase by nearly the same amount, as demonstrated in Figure 3 below, which shows the substantial increase in utilities’ price to earnings (PE) ratio during the same period.”
Motion for Disclosure
In their Nov. 16, 2018 Motion for Disclosure, Customers asserted that neither Figure 2 itself nor the text of the Briefing Order identify the data on which FERC relied to create the chart, nor the location of those data within the records of the proceedings. Although FERC’s description of Figure 2 indicates that the chart is based on evidence already in the record, Customers argued, the record includes multiple analyses advanced by multiple witnesses that vary significantly from witness to witness. Customers also argued that it is not possible to deduce what specific record evidence serves as the source for Figure 2. Therefore, they concluded, FERC must disclose which analyses are reflected in Figure 2 in order to afford Customers with the opportunity to respond to the evidence relied upon by the Commission.
As for Figure 3, Customers asserted that the Briefing Order relies on it to support the view that utility stock prices have behaved in a manner inconsistent with the theory underlying an element of FERC’s proposed methodology. They said that the Evercore ISI report is not record evidence and does not appear to be a publicly available document. Accordingly, Customers argued, disclosure of the data underlying Figure 3 is required to afford parties the opportunity to review and comment.
In their motion, Customers asserted that FERC “relies on Figure 2 and Figure 3 to support its conclusion that the [discounted cash flow (DCF)] alone has ceased to be sufficient to estimate investors’ expectations for a return on equity.” As a result, they argued, “identification of the specific data sources the Commission deems credible in the [Briefing Order] and, where those sources are neither part of the record in these cases nor publicly available, disclosure of those sources is necessary to allow parties to evaluate and respond to the Commission’s proposed methodology.” Therefore, they urged FERC to expeditiously disclose the data underling the figures.
In response, FERC said it discussed the data underlying the ROE data points for NETO Period 1 in Figure 2. “As explained in the Briefing Order, the data for the NETO Period 1 data points are derived from Opinion No. 531. Specifically: the DCF ROE for NETO Period 1 in Figure 2 represents the 9.39 percent midpoint of the DCF analysis in Opinion No. 531; the 11.15 percent Expected Earnings ROE for NETO Period 1 represents the midpoint of the Expected Earnings analysis that the Commission cited in Opinion No. 531, as adjusted by the high-end outlier test set forth in the Briefing Order; the 10.35 percent [capital asset pricing model (CAPM)] ROE for NETO Period 1 represents the midpoint of the CAPM analysis that the Commission cited in Opinion No. 531; and the 10.75 percent Risk Premium ROE for NETO Period 1 represents the midpoint of the 10.7 to 10.8 percent range of the Risk Premium analysis that the Commission cited in Opinion No. 531.”
Accordingly, in the appendix to its order, Appendix A, FERC “identifies only the record exhibits that the Commission relied upon to develop the data points for NETO Periods 2, 3, and 4 in Figure 2, and any adjustments that were made to the information contained in those exhibits. As indicated in Appendix A, those adjustments were limited to excluding companies from the proxy group that the relevant exhibit had included or adding companies to the proxy group that the relevant exhibit had excluded.”
However, FERC explained that it “does not have access to the data or analyses that were used to produce [Figure 3] and therefore cannot provide that information.” FERC said the Briefing Order relied on Figure 3 “only for the limited purpose of showing that there had been a substantial increase in utilities’ price to earnings ratio during the period October 2012 to December 2017. This was part of the Briefing Order’s explanation of why, during that period, utility stock prices appeared to have performed in a manner inconsistent with the underlying premise of the DCF model that an investment in common stock is worth the value of the infinite stream of dividends discounted at a market rate commensurate with the investment’s risk.”
FERC insisted that it did not rely on Figure 3 for any final determination on the use of the DCF model to determine utility ROEs, and that it did not reach any final conclusions or make any final determinations with respect to the proposed new ROE methodology in the Briefing Order. “The Commission also did not reach any final conclusions or make any final determinations in the Briefing Order with respect to the use of the DCF in determining the ROE or whether the DCF alone has ceased to be sufficient to estimate investors’ expectations for a return on equity. The language of the Briefing Order indicates in multiple places that the Commission did not rely on Figure 2 and Figure 3 to make any final determinations, but instead that those figures were some of the evidence indicating that sole reliance on the DCF methodology may no longer be appropriate. Accordingly, Customers are not being denied any ‘opportunity to rebut’ or to provide ‘adversarial comment’ on evidence that the Commission has relied on to reach a decision because the Commission has not reached any final decision.”
FERC pointed out that participants may use the procedures established in the Briefing Order to present evidence concerning the issues raised, “including whether stock prices during the periods at issue in these proceedings have performed in a manner inconsistent with the theory underlying the DCF methodology, as illustrated by Figure 3 in the Briefing Order, and whether various financial models may move in different directions over time, as illustrated by Figure 2 in the Briefing Order.”
For More Information
See ¶505-05: Right of Participants to Present Evidence for summaries of orders discussing the right to present evidence necessary to assure true and full disclosure of the facts.
Coakley v. Bangor Hydro-Electric Co., Order Granting Joint Motion for Disclosure, 166 FERC ¶61,013 (2019) [Docket No. EL11-66-001, et al.].