Energy > AG Speaking Energy > D.C. Circuit Upholds FERC’s Use of the Median to Calculate ROEs for Single Electric Utilities
03 Jun '13

The U.S. Court of Appeals for the D.C. Circuit issued an order on May 10, 2013, upholding the Federal Energy Regulatory Commission’s (FERC) policy of using the median, rather than the midpoint, Return on Equity (ROE) of a proxy group of publicly traded companies to determine the base ROE for a single electric utility with an average risk profile.  When Southern California Edison (SoCal Edison) filed to revise its transmission tariff in 2007, FERC’s policy was to use the midpoint to determine a base ROE for electric utilities.  Before the FERC issued its order setting SoCal Edison’s ROE, it announced in Golden Spread1 that it was revising its policy to use the median to determine the base ROE for a single electric utility, although it would continue to use the midpoint when groups of utilities filed for a single ROE, as has been the case with the transmission owners in certain independent system operator regions.  FERC’s 2010 order on SoCal Edison’s rates applied the policy set out in Golden Spread and used the median to calculate SoCal Edison’s base ROE.2  SoCal Edison’s challenge to FERC’s order was the first time the issue of using the median to calculate the base ROE for an electric utility had come before the court.

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).