FERC has long used the median to determine the ROE for natural gas pipelines, which was intended to avoid extreme outliers that could skew the results of a proxy group. By contrast, its decision to use the midpoint for groups of electric utilities (and, until 2008, all electric utilities) was premised on assessing a diverse range of risks and business profiles. In Golden Spread, FERC decided that using the median takes into account all of the companies in the proxy group, not just those with the highest and lowest ROEs, and that this averaged approach was more appropriate for determining the ROE for a single company facing an average amount of risk.
It is unclear whether the D.C. Circuit’s decision will have broader implications. FERC has used the median as a basis for calculating the ROEs of individual electric utilities for more than five years. It is possible that the court’s order could encourage complaints asking FERC to reconsider previously granted ROEs, or will bolster the arguments of complainants that are already seeking lower ROEs based on FERC’s changing, and increasingly conservative, approach to incentive rate treatments. However, as the court observes, there is no guarantee that the use of the median will produce a lower ROE than the use of the midpoint, although the median approach does remove some of the incentive for companies to argue for the inclusion of high-risk, high-ROE outliers in proxy groups.
1 Golden Spread Elec. Coop., Inc., 123 FERC ¶ 61,047 (2008).
2 S. Cal. Edison Co., 131 FERC ¶ 61,020 (2010).