On November 21, 2019, FERC issued Opinion No. 569, establishing a new methodology for setting the return on equity ("ROE") that electric utilities are entitled to earn on electric transmission investments. FERC's order is the result of Emera Maine v. FERC, 854 F.3d 9 (D.C. Cir. 2017), in which the U.S. Court of Appeals for the D.C. Circuit vacated and remanded FERC's Opinion No. 531 (and, in so doing, rejected FERC's prior ROE methodology) after finding that FERC had violated Section 206 of the FPA. Opinion No. 569 also resolves complaints against transmission owners in the MISO region, and will impact a number of other high-profile cases, including a long series of complaints against New England transmission owners. Ultimately, Opinion No. 569 may reduce uncertainty with respect to utilities' transmission ROEs, but first it will open a new phase in what has become a nearly decade-long battle.

In Opinion No. 569, FERC addressed the shortcomings identified by the D.C. Circuit in Emera Maine. FPA Section 206 requires that FERC make two separate findings before it can change the rate a utility charges, including its ROE, or the rules, regulations, practices, or contracts that affect such rates. First, FERC must find that the existing ROE is unjust and unreasonable. Second, FERC must set the utility's new ROE at a level FERC finds to be just and reasonable in light of current market conditions. The D.C. Circuit held in Emera Maine that FERC effectively had failed to take this first step in Opinion No. 531, and had inadequately explained certain other decisions it took in this second step, which are central to the methodology FERC had laid out in that order.

To satisfy the Emera Maine standard, Opinion No. 569 establishes both (i) a new framework for determining whether an existing base ROE is unjust and unreasonable under the first prong FPA Section 206; and (ii) a new methodology for determining a new just and reasonable base ROE under the second prong of FPA Section 206. With respect to the first prong, FERC's new methodology adopts ranges of presumptively just and reasonable ROEs based on the risk profile of a utility or group of utilities, whether of below-average, average, or above-average risk. These ranges ensure that if a utility of average risk has an existing ROE that is closer to a new ROE for average risk utilities than one for below- or above-average risk utilities, FERC can find that the existing ROE falling within the newly calculated range continues to be just and reasonable—absent evidence to rebut this presumption. According to FERC, the use of these ranges will "provide additional certainty and predictability to parties," allowing complainants and utilities alike to assess the merits of a case and avoid the time and expense of litigation.

FERC also modified in Opinion No. 569 its methodology for determining a new just and reasonable ROE under the second prong of FPA Section 206. FERC now will rely on the two-step discounted cash flow ("DCF") analysis adopted in Opinion No. 531 and the capital-asset pricing model ("CAPM") in calculating ROEs, but the Commission specifically disclaimed reliance on the Expected Earnings and Risk Premium analyses. The DCF and CAPM analyses each will produce an ROE zone of reasonableness, which then will be weighted equally and averaged to create a composite zone of reasonableness.

If FERC finds that an existing ROE has become unjust and unreasonable, it will then set the utility's new ROE at one of several points within this zone of reasonableness. For utilities of average risk, the new ROE generally will be the point of central tendency of the zone of reasonableness, while the ROE of utilities of below- or above-average risk will be the point of central tendency of the lower or upper half of the zone of reasonableness, respectively. If a utility has any incentive ROE adders, its overall ROE (i.e., the base ROE plus incentive adders) will be capped at the upper end of the composite zone of reasonableness. Finally, FERC made a variety of findings that will impact the inputs utilities, their customers, and FERC staff use to calculate ROE values using the DCF and CAPM models.

After nearly a decade of litigation, it remains unclear whether FERC's Opinion No. 569 will open the next phase or the final phase in battles between utilities and their customers. Parties could request rehearing, and, like Opinion No. 531 before it, Opinion No. 569 could be the subject of a new round of judicial review. What is certain, however, is that more than a year and a half after Emera Maine, FERC has spoken and charted a new course on utility's transmission ROEs.