171 FERC ¶ 61,155

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

Docket No. PL19-4-000

Inquiry Regarding the Commission’s Policy for Determining Return on Equity

(Issued May 21, 2020)

AGENCY: Federal Energy Regulatory Commission.

ACTION: Policy Statement on Determining Return on Equity for Natural Gas and Oil 

Pipelines

SUMMARY: On March 21, 2019, the Federal Energy Regulatory Commission issued a 

notice of inquiry seeking information and stakeholder views regarding whether, and if so 

how, it should modify its policies concerning the determination of the return on equity 

(ROE) to be used in designing jurisdictional public utility rates and whether any changes 

to the Commission’s policies concerning public utility ROEs should be applied to 

interstate natural gas and oil pipelines. Concurrently with this Policy Statement, the 

Commission is issuing Opinion No. 569-A adopting changes to its policies concerning 

public utility ROEs. The Commission finds that, with certain exceptions to account for

the statutory, operational, organizational and competitive differences among the 

industries, the policy changes adopted in Opinion No. 569-A should be applied to natural 

gas and oil pipelines. Accordingly, the Commission revises its policy and will determine 

natural gas and oil pipeline ROEs by averaging the results of the Discounted Cash Flow 

model and the Capital Asset Pricing Model, but will not use the Risk Premium model. In 

addition, the Commission clarifies its policies governing the formation of proxy groups 
Docket No. PL19-4-000 ii

and the treatment of outliers in proceedings addressing natural gas and oil pipeline ROEs. 

Finally, the Commission encourages oil pipelines to file revised FERC Form No. 6, page 

700s for 2019 reflecting the revised ROE policy.

DATE: This Policy Statement will become effective [date of publication in the Federal 

Register].

FOR FURTHER INFORMATION CONTACT:

Evan Steiner (Legal Information)

Office of the General Counsel

888 First Street, NE

Washington, DC 20426

(202) 502-8792

Evan.Steiner@ferc.gov

Monil Patel (Technical Information)

Office of Energy Market Regulation

888 First Street, NE

Washington, DC 20426

(202) 502-8296

Monil.Patel@ferc.gov

Seong-Kook Berry (Technical Information)

Office of Energy Market Regulation

888 First Street, NE

Washington, DC 20426

(202) 502-6544

Seong-Kook.Berry@ferc.gov

SUPPLEMENTARY INFORMATION:
171 FERC ¶ 61,155

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

Before Commissioners: Neil Chatterjee, Chairman;

 Richard Glick, Bernard L. McNamee,

 and James P. Danly.

Inquiry Regarding the Commission’s Policy for 

Determining Return on Equity

Docket No. PL19-4-000

POLICY STATEMENT ON DETERMINING RETURN ON EQUITY FOR NATURAL 

GAS AND OIL PIPELINES

(Issued May 21, 2020)

On March 21, 2019, the Commission issued a Notice of Inquiry (NOI) seeking 

information and stakeholder views to help the Commission explore whether, and if so 

how, it should modify its policies concerning the determination of the return on equity 

(ROE) to be used in designing jurisdictional rates charged by public utilities.1

 The 

Commission also sought comment on whether any changes to its policies concerning 

public utility ROEs should be applied to interstate natural gas and oil pipelines.

2

 On 

November 21, 2019, the Commission issued Opinion No. 5693 establishing a revised 

methodology for determining just and reasonable base ROEs for public utilities under the 

1 Inquiry Regarding the Commission’s Policy for Determining Return on Equity, 

166 FERC ¶ 61,207, at P 1 (2019).

2 Id.

3 Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator,

Inc., Opinion No. 569, 169 FERC ¶ 61,129 (2019).
Docket No. PL19-4-000 - 2 -

Federal Power Act (FPA). Concurrently with the issuance of this Policy Statement, the 

Commission is issuing Opinion No. 569-A adopting changes to the base ROE 

methodology established in Opinion No. 569.4

As explained below, we revise our policy for analyzing interstate natural gas and 

oil pipeline ROEs to adopt the methodology established for public utilities in Opinion 

Nos. 569 and 569-A, with certain exceptions to account for the statutory, operational, 

organizational and competitive differences among the industries. Specifically, we will 

determine just and reasonable natural gas and oil pipeline ROEs by averaging the results 

of Discounted Cash Flow model (DCF) and Capital Asset Pricing Model (CAPM) 

analyses, according equal weight to both models. In contrast to our methodology for 

public utilities, we retain the existing two-thirds/one-third weighting for the short-term

and long-term growth projections in the DCF and will not use the risk premium model 

discussed in Opinion No. 569 and modified in Opinion No. 569-A (Risk Premium). In 

addition, we clarify our policies governing the formation of proxy groups and the 

treatment of outliers in natural gas and oil pipeline proceedings. Finally, as discussed 

below, we encourage oil pipelines to file updated FERC Form No. 6, page 700 data for 

2019 to reflect the revised ROE policy established herein.

4 Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, 

Inc., Opinion No. 569-A, 171 FERC ¶ 61,154 (2020).
Docket No. PL19-4-000 - 3 -

I. Background

A. Natural Gas and Oil Pipeline ROE Policy

The Supreme Court has stated that “the return to the equity owner should be 

commensurate with the return on investments in other enterprises having corresponding 

risks. That return, moreover, should be sufficient to assure confidence in the financial 

integrity of the enterprise, so as to maintain its credit and to attract capital.”5

 

Since the 1980s, the Commission has determined natural gas and oil pipeline 

ROEs using the DCF model.

6

 The DCF model is based on the premise that “a stock’s 

price is equal to the present value of the infinite stream of expected dividends discounted 

at a market rate commensurate with the stock’s risk.”7

 The Commission uses the DCF

model to estimate the return necessary for the pipeline to attract capital based upon the 

range of returns that the market provides investors in a proxy group of publicly traded 

entities with similar risk profiles. The Commission estimates the required rate of return 

for each member of the proxy group using the following formula:

kk = DD/PP(1 + .5gg) + gg

5 Fed. Power Comm’n v. Hope Nat. Gas Co., 320 U.S. 591, 603 (1944) (citing 

Missouri ex rel. Sw. Bell Tel. Co. v. Pub. Serv. Comm’n of Mo., 262 U.S. 276, 291 (1923) 

(Brandeis, J., concurring)).

6 Composition of Proxy Groups for Determining Gas and Oil Pipeline Return on 

Equity, 123 FERC ¶ 61,048, at P 3 (2008) (2008 Policy Statement).

7 Canadian Ass’n of Petroleum Producers v. FERC, 254 F.3d 289, 293 (D.C. Cir. 

2001) (CAPP v. FERC).
Docket No. PL19-4-000 - 4 -

where k is the discount rate (or investors’ required return), D is the current dividend, P is 

the price of stock at the relevant time, and g is the expected growth rate in dividends 

based upon the weighted averaging of short-term and long-term growth estimates

(referred to as the two-step procedure). The Commission multiplies the dividend yield 

(dividends divided by stock price or D/P) by the expression (1+.5g) to account for the 

fact that dividends are paid on a quarterly basis. For purposes of the (1+.5g) adjustment, 

the Commission uses only the short-term growth projection.8

In the two-step DCF model, the Commission computes the expected growth rate 

(g) by giving two-thirds weight to a short-term growth projection and one-third weight to 

a long-term growth projection.9 For the short-term growth projection, the Commission 

uses security analysts’ five-year forecasts for each company in the proxy group, as 

published by the Institutional Brokers Estimated System (IBES).10 The long-term growth 

projection is based on forecasts, drawn from three different sources,11 of long-term 

growth of the economy as a whole as reflected in the Gross Domestic Product (GDP).

12

8 Seaway Crude Pipeline Co. LLC, Opinion No. 546, 154 FERC ¶ 61,070, at 

PP 198-200 (2016).

9 2008 Policy Statement, 123 FERC ¶ 61,048 at P 6.

10 Id.

11 The three sources used by the Commission are Global Insight: Long-Term 

Macro Forecast – Baseline (U.S. Economy 30-Year Focus); Energy Information Agency, 

Annual Energy Outlook; and the Social Security Administration.

12 2008 Policy Statement, 123 FERC ¶ 61,048 at P 6 (citing Nw. Pipeline Co., 

Opinion No. 396-B, 79 FERC ¶ 61,309, at 62,383 (1997); Williston Basin Interstate 
Docket No. PL19-4-000 - 5 -

For proxy group members that are master limited partnerships (MLPs), the Commission 

adjusts the long-term growth projection to equal 50% of GDP.13

Because most natural gas and oil pipelines are wholly owned subsidiaries and their 

common stocks are not publicly traded, the Commission must use a proxy group of 

publicly traded firms with corresponding risks to set a range of reasonable returns.14 The 

firms in the proxy group must be comparable to the pipeline whose ROE is being 

determined, or, in other words, the proxy group must be “risk-appropriate.”15 The range 

of the proxy group’s returns produces the zone of reasonableness in which the pipeline’s 

ROE may be set based on specific risks. Absent unusual circumstances showing that the 

pipeline faces anomalously high or low risks, the Commission sets the pipeline’s cost-ofservice nominal ROE at the median of the zone of reasonableness.16

Pipeline Co., 79 FERC ¶ 61,311, at 62,389 (1997), aff’d, Williston Basin Interstate 

Pipeline Co. v. FERC, 165 F.3d 54, 57 (D.C. Cir. 1999)).

13 Id. P 96.

14 Petal Gas Storage, L.L.C. v. FERC, 496 F.3d 695, 697 (D.C. Cir. 2007) 

(explaining that the purpose of a DCF proxy group is to “provide market-determined 

stock and dividend figures from public companies comparable to a target company for 

which those figures are unavailable. Market-determined stock figures reflect a 

company’s risk level and when combined with dividend values, permit calculation of the 

‘risk-adjusted expected rate of return sufficient to attract investors.’” (quoting CAPP v. 

FERC, 254 F.3d at 293)).

15 Id. at 699; see also Portland Nat. Gas Transmission Sys., Opinion No. 524, 

142 FERC ¶ 61,197, at P 302 (2013), reh’g denied, Opinion No. 524-A, 150 FERC ¶ 

61,107 (2015).

16 El Paso Nat. Gas Co., Opinion No. 528, 145 FERC ¶ 61,040, at P 592 (2013), 

order on reh’g, Opinion No. 528-A, 154 FERC ¶ 61,120 (2016), order on compliance & 

reh’g, Opinion No. 528-B, 163 FERC ¶ 61,079 (2018) (citing Transcontinental Gas Pipe 
Docket No. PL19-4-000 - 6 -

B. Other Financial Models

In the NOI, the Commission sought comment on other financial models the 

Commission has considered when determining ROE for public utilities, including the 

CAPM, Risk Premium model, and an expected earnings analysis (Expected Earnings).

17

1. CAPM

Investors use CAPM analysis as a measure of the cost of equity relative to risk.18

The CAPM is based on the theory that the market-required rate of return for a security is 

equal to the “risk-free rate” plus a risk premium associated with that security. The 

CAPM estimates cost of equity by adding the risk-free rate to the “market-risk premium” 

multiplied by “beta.” The formula for the CAPM is as follows:

RR = rrff + ββaa�rrmm − rrff�

rrff = risk free rate (such as yield on 30-year U.S. Treasury bonds)

rrmm= expected market return

ββaa= beta, which measures the volatility of the security compared to the rest of the 

market. 

The risk-free rate is represented by a proxy, typically the yield on 30-year U.S. Treasury 

bonds. The market-risk premium is calculated by subtracting the risk-free rate from the 

Line Corp., Opinion No. 414-A, 84 FERC ¶ 61,084 (1998), reh’g denied, Opinion 

No. 414-B, 85 FERC ¶ 61,323 (1998), aff’d, CAPP v. FERC, 254 F.3d 289).

17 NOI, 166 FERC ¶ 61,207 at PP 35, 38.

18 Opinion No. 569, 169 FERC ¶ 61,129 at P 229.
Docket No. PL19-4-000 - 7 -

“expected return,” which, in a forward-looking CAPM analysis, is based on a DCF 

analysis of a large segment of the market, such as the dividend paying companies in the 

S&P 500.

19 Betas measure the volatility of a particular stock relative to the market and 

are published by several commercial sources.20 An entity may also seek to apply a size 

premium adjustment to the CAPM zone of reasonableness to account for the difference in 

size between itself and the dividend paying companies in the S&P 500.21

2. Risk Premium

Risk premium methodologies are “based on the simple idea that since investors in 

stocks take greater risk than investors in bonds, the former expect to earn a return on a 

stock investment that reflects a ‘premium’ over and above the return they expect to earn 

on a bond investment.”22 This difference reflects the greater risk of a stock investment.23

The risk premium return is calculated as follows:

RR = II + RR

19 Id.

20 NOI, 166 FERC ¶ 61,207 at P 14.

21 See Opinion No. 569, 169 FERC ¶ 61,129 at P 298; see also Coakley v. Bangor 

Hydro-Elec. Co., Opinion No. 531-B, 150 FERC ¶ 61,165, at P 117 (2015) (citing Roger 

A. Morin, New Regulatory Finance, 187 (Public Utilities Reports, Inc. 2006) (Morin)

(finding that use of a size premium adjustment is “a generally accepted approach to 

CAPM analyses”)).

22 Opinion No. 569, 169 FERC ¶ 61,129 at P 304 (quoting Coakley v. Bangor 

Hydro-Elec. Co., Opinion No. 531, 147 FERC ¶ 61,234, at P 147 (2014)). 

23 Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, 

Inc., 165 FERC ¶ 61,118, at P 36 (2018) (MISO Briefing Order).
Docket No. PL19-4-000 - 8 -

where I represents current applicable bond yield and RP represents the risk premium, 

which consists of the difference between (a) applicable annual common equity premiums 

and (b) applicable bond yields.

Although there are multiple approaches to determining an entity’s equity risk 

premium (RP), the Risk Premium model addressed in Opinion Nos. 569 and 569-A

“examin[es] the risk premiums implied in the returns on equity allowed by regulatory 

commissions for utilities over some past period relative to the contemporaneous level of 

the long-term U.S. Treasury bond yield.”24 This approach develops the equity risk 

premium using Commission-allowed ROEs for public utilities minus the long-term bond 

yield.

3. Expected Earnings

A comparable earnings analysis is a method of calculating the earnings an investor 

expects to receive on the book value of a particular stock.25 The analysis can be either 

backward-looking using the company’s historical earnings on book value, as reflected on 

the company’s accounting statements, or forward-looking using estimates of earnings on 

book value, as reflected in analysts’ earnings forecasts for the company. The latter 

approach is often referred to as an “Expected Earnings analysis.” The Expected Earnings

analysis provides an accounting-based approach that uses investment analyst estimates of 

return (net earnings) on book value (the equity portion of a company’s overall capital, 

24 Opinion No. 569, 169 FERC ¶ 61,129 at P 305.

25 Id. P 172.
Docket No. PL19-4-000 - 9 -

excluding long-term debt).26 Algebraically, Expected Earnings can be expressed as 

follows:

R = E/B

E = Earnings during Current Year

B = Book Value at the End of the Prior Year

C. Public Utility ROE Proceedings Following Emera Maine v. FERC

1. Briefing Orders and Trailblazer

Following the decision of the United States Court of Appeals for the District of 

Columbia Circuit (D.C. Circuit) in Emera Maine v. FERC,

27 the Commission issued two

briefing orders28 in the fall of 2018 proposing a new methodology for analyzing public

utility ROEs under FPA section 206.

29 The Commission preliminarily found that “in 

light of current investor behavior and capital market conditions, relying on the DCF 

methodology alone will not produce a just and reasonable ROE.”30 The Commission 

26 Opinion No. 569, 169 FERC ¶ 61,129 at P 172.

27 854 F.3d 9 (D.C. Cir. 2017).

28 MISO Briefing Order, 165 FERC ¶ 61,118; Coakley v. Bangor Hydro-Elec. Co., 

165 FERC ¶ 61,030 (2018) (Coakley Briefing Order, and together with MISO Briefing 

Order, Briefing Orders).

29 16 USC 824e (2018).

30 Coakley Briefing Order, 165 FERC ¶ 61,030 at P 32; MISO Briefing Order, 

165 FERC ¶ 61,118 at P 34.
Docket No. PL19-4-000 - 10 -

found that investors appear to base their decisions on numerous financial models31 and

may give greater weight to models other than the DCF in estimating the expected returns 

from a utility investment.32 As such, the Commission proposed to determine ROE for 

public utilities by averaging the results of DCF, CAPM, Expected Earnings, and Risk 

Premium analyses, giving equal weight to each analysis. The Commission established 

paper hearings and directed the parties in those proceedings to file briefs in response.

On February 21, 2019, while the paper hearings were pending, the Commission 

found in Trailblazer Pipeline Company LLC that “investor reliance upon multiple 

methodologies presumably applies to investments in natural gas pipelines” as well as 

public utilities.33 The Commission therefore permitted parties in that natural gas pipeline 

cost-of-service rate proceeding to address the four alternative financial models at 

hearing.34

31 Coakley Briefing Order, 165 FERC ¶ 61,030 at P 40; MISO Briefing Order, 

165 FERC ¶ 61,118 at P 42.

32 Coakley Briefing Order, 165 FERC ¶ 61,030 at P 35; MISO Briefing Order, 

165 FERC ¶ 61,118 at P 37.

33 166 FERC ¶ 61,141, at P 48 (2019).

34 Thereafter, participants in natural gas pipeline rate proceedings in Docket 

Nos. RP19-352-000, RP19-1353-000, RP19-1523-000, and RP20-131-000 filed 

testimony applying the alternative models.
Docket No. PL19-4-000 - 11 -

2. Opinion No. 569

On November 21, 2019, the Commission issued Opinion No. 569 adopting the 

proposal from the Briefing Orders, with several revisions.

35 The Commission explained 

that it would use the DCF model and CAPM in its ROE analyses under FPA section 

20636 and give equal weight to both models.

37 However, contrary to the proposal in the 

Briefing Orders, the Commission declined to use either the Expected Earnings analysis or 

Risk Premium model.

38 The Commission also made findings as to the DCF model and 

the CAPM and adopted specific low and high-end outlier tests.

3. Opinion No. 569-A

In Opinion No. 569-A, the Commission modified the methodology established in 

Opinion No. 569 in several respects. First, as to the DCF model, the Commission 

reduced the weighting of the long-term growth projection from one-third to 20% and 

modified the high-end outlier test adopted in Opinion No. 569.

39 Second, as to the 

CAPM, the Commission clarified that it will modify the high-end outlier test adopted in 

Opinion No. 56940 and that it will consider, based on evidence provided in future 

35 Opinion No. 569, 169 FERC ¶ 61,129 at P 18.

36 Id. PP 1, 18.

37 Id. PP 276, 425.

38 Id. PP 18, 31, 200, 340.

39 Opinion No. 569-A, 171 FERC ¶ 61,154 at PP 57, 154.

40 Id. P 154.
Docket No. PL19-4-000 - 12 -

proceedings, use of Value Line data, instead of IBES data, as the source of the short-term 

growth projection in the DCF component of the CAPM.

41 Third, the Commission

adopted a modified version of the Risk Premium model.42 The Commission explained 

that it would afford equal weighting to the DCF, CAPM, and Risk Premium analyses and 

denied requests for rehearing of its decision to exclude Expected Earnings.

43

D. NOI

In the NOI, the Commission requested comment on whether uniform application 

of the Commission’s base ROE policy across the electric, natural gas pipeline, and oil 

pipeline industries is appropriate and advisable44 and whether the Commission, if it 

departed from its sole use of a two-step DCF methodology for public utilities, should also 

use its new method or methods to determine natural gas and oil pipeline ROEs.45 The 

Commission also sought comment on its guidelines for proxy group formation, including 

proxy group screening criteria and appropriate high and low-end outlier tests.46 

41 Id. P 78.

42 Id. PP 104-114.

43 Id. P 141.

44 NOI, 166 FERC ¶ 61,207 at P 29.

45 Id. P 32.

46 Id. P 34.
Docket No. PL19-4-000 - 13 -

Numerous entities and individuals submitted comments in response to the NOI. 

Below, we discuss the comments that are relevant to the revised policy for natural gas 

and oil pipeline ROE methodologies that we adopt herein.

II. Discussion

Upon review of the comments and based on the Commission’s findings in Opinion 

Nos. 569 and 569-A, we revise our policy for determining natural gas and oil pipeline 

ROEs. Under this revised policy, we will (1) determine ROE by averaging the results of 

DCF and CAPM analyses while retaining the existing two-thirds/one-third weighting of 

the short and long-term growth projections in the DCF; (2) give equal weight to the DCF 

and CAPM analyses; (3) consider using Value Line data as the source of the short-term 

growth projection in the CAPM; (4) consider proposals to include Canadian companies in 

pipeline proxy groups while continuing to apply our proxy group criteria flexibly until 

sufficient proxy group members are obtained; (5) exclude Risk Premium and Expected 

Earnings analyses; and (6) continue to address outliers in pipeline proxy groups on a 

case-by-case basis and refrain from applying specific outlier tests. 

We are not persuaded to adopt any additional policy changes at this time and will 

address all other issues concerning the determination of natural gas and oil pipeline ROEs 

as they arise in future proceedings.
Docket No. PL19-4-000 - 14 -

A. Revised Policy for Determining Natural Gas and Oil Pipeline ROEs

1. Use of the DCF and CAPM

a. Background

In the Briefing Orders, the Commission preliminarily found that since it began 

relying primarily on the DCF model to determine ROE in the 1980s, investors have 

increasingly used a diverse set of data sources and models to inform their investment

decisions.47 Because investors consider more than one financial model when making 

investment decisions, the Commission reasoned that relying on multiple models makes it 

more likely that the Commission’s decision will accurately reflect how investors are 

making their investment decisions.

48 The Commission later determined in Trailblazer

that investor reliance on multiple methodologies presumably applies to investments in 

natural gas pipelines as well as public utilities.49

The Commission departed from sole reliance on the DCF model for public utilities 

in Opinion No. 569, finding that investors have varying preferences as to which of the 

various methods for determining cost of equity they may use to inform their investment 

decisions and that the DCF and CAPM are among the primary methods that investors use 

47 Coakley Briefing Order, 165 FERC ¶ 61,030 at P 40; MISO Briefing Order, 

165 FERC ¶ 61,118 at P 42.

48 See Coakley Briefing Order, 165 FERC ¶ 61,030 at PP 36, 44; MISO Briefing 

Order, 165 FERC ¶ 61,118 at PP 38, 46.

49 Trailblazer, 166 FERC ¶ 61,141 at P 48.
Docket No. PL19-4-000 - 15 -

for this purpose.

50 Thus, the Commission concluded that expanding its methodology for 

determining public utility ROEs to use the CAPM in addition to the DCF model will 

make it more likely that its decisions will accurately reflect how investors make their 

investment decisions and produce cost-of-equity estimates that more accurately reflect 

what ROE a utility must offer to attract capital.51 The Commission further explained that 

using the CAPM will also mitigate the model risk that the DCF model may perform 

poorly in certain circumstances.52

b. NOI Comments

Commenters are divided on whether the Commission should expand its 

methodology for determining natural gas and oil pipeline ROEs to consider multiple 

models. Commenters representing natural gas and oil pipeline shipper interests53 urge the 

Commission to continue relying solely on the DCF model to determine pipeline ROEs.54 

50 Opinion No. 569, 169 FERC ¶ 61,129 at PP 34, 171.

51 Id. PP 31, 34, 452.

52 Id. PP 39, 171.

53 These commenters include: Airlines for America; Liquids Shippers Group; 

Natural Gas Supply Association (NGSA); American Public Gas Association (APGA); 

Process Gas Consumers Group and American Forest & Paper Association 

(PGC/AF&PA); and the Canadian Association of Petroleum Producers (CAPP).

54 Airlines for America Initial Comments at 5-7; Liquids Shippers Group Initial 

Comments at 12-17, 22-25; NGSA Initial Comments at 3-6, 25, 27; APGA Comments at 

3; PGC/AF&PA Joint Comments at 1-2, 6-8; see also CAPP Initial Comments at 27-28 

(lauding the DCF as superior and stating that investors most likely view the CAPM as a 

supplementary model).
Docket No. PL19-4-000 - 16 -

These commenters contend that the DCF model is a standardized approach that promotes 

predictability for pipelines and shippers and assert that there is no reason to consider 

additional models.

55 

In contrast, natural gas and oil pipelines and trade associations56 argue that it 

would be reasonable to consider other models in addition to the DCF, subject to 

modifications in recognition of the unique risks and regulatory framework applicable to 

the natural gas and oil pipeline industries.57 Generally, these entities contend that the 

Commission’s findings that investors rely upon multiple financial models in making 

investment decisions also apply to investors in pipelines.58

c. Commission Determination

Based on the Commission’s findings in Opinion No. 569, we revise our 

methodology for determining natural gas and oil pipeline ROEs to rely on multiple 

financial models, rather than relying solely on the DCF model. Specifically, we will 

55 Airlines for America Initial Comments at 1-2, 5-7; Liquids Shippers Group 

Initial Comments at 12-17; NGSA Initial Comments at 3-4, 10, 25; PGC/AF&PA Joint 

Comments at 6-8.

56 These commenters include: Association of Oil Pipe Lines (AOPL); Interstate 

Natural Gas Association of America (INGAA); Magellan Midstream Partners, L.P., 

Plains Pipeline L.P.; SFPP, L.P. and Calnev Pipe Line LLC; and Tallgrass Energy, LP.

57 AOPL Initial Comments at 3, 8-9, 11-12; INGAA Initial Comments at 40-41; 

Magellan Initial Comments at 8-13; Plains Comments at 3-4; SFPP-Calnev Comments at 

3-4; Tallgrass Initial Comments at 1, 11.

58 E.g., AOPL Initial Comments at 4, 11; Tallgrass Initial Comments at 2.
Docket No. PL19-4-000 - 17 -

determine pipeline ROEs using the DCF model and CAPM, but in contrast to our 

methodology for public utilities, we will not use the Risk Premium model.

As an initial matter, we note that the D.C. Circuit has repeatedly observed that the 

Commission is not required to rely upon the DCF model alone or even at all.59 As such, 

the Commission may “change its past practices,” such as relying exclusively on the DCF

model, “with advances in knowledge in its given field or as its relevant experience and 

expertise expands,” provided that it supplies “a reasoned analysis indicating that prior 

policies and standards are being deliberately changed, not casually ignored.”60

In Hope, the Supreme Court held that “the return to the equity owner should be 

commensurate with returns on investments in other enterprises having corresponding 

risks. That return, moreover, should be sufficient to assure confidence in the financial 

integrity of the enterprise, so as to maintain its credit and to attract capital.”61 Thus, a 

key consideration in determining just and reasonable utility ROEs is determining what 

59 E.g., Tenn. Gas Pipeline Co. v. FERC, 926 F.2d 1206, 1211 (D.C. Cir. 1991) 

(explaining that the Commission is free to reject the DCF, provided that it adequately 

explains its reasons for doing so); NEPCO Mun. Rate Comm. v. FERC, 668 F.2d 1327, 

1345 (D.C. Cir. 1981) (“FERC is not bound ‘to the service of any single formula or 

combination of formulas.’” (quoting FPC v. Nat. Gas Pipeline Co. of Am., 315 U.S. 575, 

586 (1942))).

60 Opinion No. 569, 169 FERC ¶ 61,129 at P 32 (quoting Nuclear Energy Inst., 

Inc. v. EPA, 373 F.3d 1251, 1296 (D.C. Cir. 2004) (per curiam)) (internal citations and 

quotation marks omitted).

61 Hope, 320 U.S. at 603; see also CAPP v. FERC, 254 F.3d at 293 (“In order to 

attract capital, a utility must offer a risk-adjusted expected rate of return sufficient to 

attract investors.”).
Docket No. PL19-4-000 - 18 -

ROE an entity must offer in order to attract capital, i.e., induce investors to invest in the 

entity in light of its risk profile.62 As the Commission stated in Opinion No. 414-B,63

“the cost of common equity to a regulated enterprise depends upon what the market 

expects not upon precisely what is going to happen.”64 Thus, in determining what ROE 

to award a utility, we must look to how investors analyze and compare their investment 

opportunities.

We find that the rationale set forth in the Briefing Orders and Opinion No. 569 for 

relying on CAPM in addition to the DCF applies equally to natural gas and oil pipelines. 

In those proceedings, the Commission found that investors employ various methods for 

determining cost of equity and that the DCF and CAPM are among the primary methods 

investors use for this purpose.65 In addition, the Commission found in Opinion No. 569 

that both record evidence and academic literature66 indicated that CAPM is widely used 

62 See Bluefield Waterworks & Improvement Co. v. Pub. Serv. Comm’n of W. Va., 

262 U.S. 679, 692-93 (1923) (discussing factors an investor considers in making 

investment decisions). 

63 Transcontinental Gas Pipe Line Corp., Opinion No. 414-B, 85 FERC ¶ 61,323 

(1998). 

64 Opinion No. 414-B, 85 FERC at 62,268; see also Kern River Gas Transmission 

Co., Opinion No. 486-B, 126 FERC ¶ 61,034, at P 120 (2009), order on reh’g and 

compliance, Opinion No. 486-C, 129 FERC ¶ 61,240 (2009).

65 Opinion No. 569, 169 FERC ¶ 61,129 at PP 34, 236; Coakley Briefing Order, 

165 FERC ¶ 61,030 at P 35; MISO Briefing Order, 165 FERC ¶ 61,118 at P 37.

66 See, e.g., Jonathan B. Berk and Jules H. van Binsbergen, Assessing Asset 

Pricing Models Using Revealed Preference, 119(1) Journal of Financial Economics 1, 2 

(2016) (“We find that the CAPM is the closest model to the model that investors use to 

make their capital allocation decisions . . . investors appear to be using the CAPM to 
Docket No. PL19-4-000 - 19 -

by investors.

67 These findings apply to investors generally, and we do not see, nor do the 

NOI comments identify, any basis for distinguishing between investors in public utilities 

and investors in natural gas and oil pipelines in this context. We therefore find that

investors in pipelines, like investors in public utilities, consider multiple models for 

measuring cost of equity, including the DCF model and CAPM, in making investment 

decisions.68 

Accordingly, under the rationale set forth in Opinion No. 569, we will expand our 

methodology for determining natural gas and oil pipeline ROEs and will consider the 

CAPM in addition to the DCF model.

69 We conclude that as with public utilities, 

make their investment decisions.”); Brad M. Barber, et al., Which Factors Matter to 

Investors? Evidence from Mutual Fund Flows, 29(10) The Review of Financial Studies 

2600, 2639 (2016) (“[W]hen we ran a horse race between six asset-pricing models, the 

CAPM is able to best explain variation in flows across mutual funds.”); id. at 2624 

(“[T]he CAPM does the best job of predicting fund-flow relations.”); see also John R. 

Graham and Campbell R. Harvey, The Theory and Practice of Corporate Finance: 

Evidence from the Field, 60(2) Journal of Financial Economics 187, 201 (2001) 

(explaining that “the CAPM is by far the most popular method of estimating the cost of 

equity capital.”).

67 Opinion No. 569, 169 FERC ¶ 61,129 at P 236. 

68 See Trailblazer, 166 FERC ¶ 61,141 at P 48 (citing Coakley Briefing Order, 

165 FERC ¶ 61,030 at PP 34-36). We note that with the exception of commenters 

supporting sole reliance on the DCF model, commenters generally do not oppose use of 

the CAPM for natural gas and oil pipelines. See CAPP Initial Comments at 28; INGAA 

Initial Comments at 41 (supporting use of DCF, CAPM, and Expected Earnings); AOPL 

Initial Comments at 8-9 (endorsing use of the proposed four-model methodology, which 

includes CAPM, as a reasonable approach for oil pipelines); Plains Comments at 4 

(same); SFPP-Calnev Comments at 4 (same).

69 Opinion No. 569, 169 FERC ¶ 61,129 at P 236.
Docket No. PL19-4-000 - 20 -

expanding the methodology we use to determine ROE for natural gas and oil pipelines to 

include the CAPM in addition to the DCF model will better reflect how investors in those 

industries measure cost of equity while tending to reduce the model risk associated with 

relying on the DCF model alone. This should result in our ROE analyses producing costof-equity estimates for natural gas and oil pipelines that more accurately reflect what 

ROE a pipeline must offer in order to attract capital.

2. DCF

We decline to adopt any changes to the two-step DCF model that we apply to 

natural gas and oil pipelines under our existing policy. We will therefore continue to 

base the long-term growth projection on forecasts of long-term growth of GDP, adjust the 

long-term growth projection of MLPs to equal 50% of GDP consistent with the 2008 

Policy Statement,70 and use only the short-term growth projection for purposes of the 

(1+.5g) adjustment to dividend yield. As discussed below, in contrast to our revised base

ROE methodology for public utilities as adopted in Opinion No. 569-A, we will retain the

existing two-thirds/one-third weighting for the short and long-term growth projections.

70 The Commission adopted the 50% long-term growth rate adjustment for MLPs 

in the 2008 Policy Statement in part because MLPs have limited investment opportunities 

and face pressure to maintain a high payout ratio. See 2008 Policy Statement, 123 FERC 

¶ 61,048 at PP 95-96. Commenters state that MLPs no longer face the same pressure to 

maintain a high payout ratio and often now generate growth internally through retained 

earnings, which will cause their growth rates to increase. See, e.g., INGAA Initial 

Comments at 58-59. While the Commission continues to favor the 50% long-term 

growth adjustment for MLPs, parties may present empirical evidence for an alternative 

adjustment in cost-of-service rate proceedings. Natural gas and oil pipelines that are 

MLPs may not use alternative adjustments to support their annual forms.
Docket No. PL19-4-000 - 21 -

a. NOI Comments

Commenters that address the weighting of the growth projections in the DCF 

model are divided on whether the Commission should retain the existing weighting, with 

AOPL and NGSA not proposing any adjustments71 and CAPP and INGAA proposing 

alternative weighting schemes. CAPP contends that the Commission should accord the 

growth projections equal weighting.72 INGAA, on the other hand, proposes to increase 

the weighting of the short-term projection to four-fifths and reduce the weighting of the 

long-term projection to one-fifth.73

b. Commission Determination

The D.C. Circuit has recognized that the Commission has discretion regarding its 

growth projection weighting choices.74 Although the Commission is reducing the 

weighting of the long-term growth projection in public utility proceedings to one-fifth, 

we find that distinctions between public utilities and natural gas and oil pipelines support

exercising this discretion to continue affording one-third weighting to the long-term 

growth projections in our analyses of pipeline ROEs.

71 AOPL Initial Comments at 41; NGSA Initial Comments at 32-33; see also

Magellan Initial Comments at 23-24 (supporting two-thirds/one-third weighting should 

Commission retain existing two-step DCF).

72 CAPP Initial Comments at 40.

73 INGAA Initial Comments at 55.

74 See CAPP v. FERC, 254 F.3d at 297 (holding that the Commission did not 

abuse its discretion in reducing the weighting of the long-term growth projection from 

one-half to one-third).
Docket No. PL19-4-000 - 22 -

The Commission adopted the existing two-thirds/one-third weighting scheme in 

Opinion No. 414-A.

75 As explained in Opinion No. 569-A, reducing the weighting of the 

long-term growth projection in DCF analyses of public utilities is appropriate because the

short-term growth projections of public utilities have declined relative to GDP since the 

issuance of Opinion No. 414-A.

76 As a result, investors may reasonably consider current 

public utility short-term growth projections to be more sustainable than when the 

Commission adopted the existing weighting policy in 1998. It is therefore reasonable to 

afford greater weight to the short-term growth projection and lesser weight to the longterm growth projection in determining cost of equity for public utilities.77

This reasoning does not apply with equal force to natural gas and oil pipelines. 

Although the short-term growth projections of natural gas and oil pipelines are lower than 

in 1998, they have not declined to the same extent as those of public utilities.78 As such, 

75 Opinion No. 414-A, 84 FERC ¶ 61,084 (1998). 

76 In Opinion No. 414-A, the short-term growth projections of the proxy group 

members averaged 11.33%, almost twice the long-term GDP growth projection of 5.45%. 

See id. at app. A. As explained in Opinion No. 569-A, the average short-term growth 

projections for the proxy group in one of the public utility proceedings addressed therein 

had declined to 5.03%, as compared to a long-term GDP growth projection in that 

proceeding of 4.39%. Opinion No. 569-A, 171 FERC ¶ 61,154 at P 57.

77 Opinion No. 569-A, 171 FERC ¶ 61,154 at PP 57-58.

78 For example, using data from February 2020, the short-term growth projections 

of a hypothetical natural gas pipeline proxy group consisting of Enbridge Inc., TC 

Energy, National Fuel Gas Company, Kinder Morgan Inc., and Williams Companies, 

Inc., average 5.92% relative to a GDP growth projection of 4.22%. By comparison, in 

one of the public utility proceedings addressed in Opinion No. 569-A, the short-term 
Docket No. PL19-4-000 - 23 -

investors could reasonably view pipelines’ short-term growth projections as less 

sustainable than the projections of public utilities. Moreover, the shale gas revolution has 

caused the natural gas and oil pipeline industries to become more dynamic and less 

mature, which could undermine the reliability of pipelines’ short-term growth 

projections.

For these reasons, we exercise our discretion to maintain our existing weighting 

scheme and will continue to accord two-thirds weighting to the short-term growth 

projection and one-third weighting to the long-term growth projection in natural gas and 

oil pipeline proceedings.

3. CAPM

We now turn to how we will apply the CAPM to natural gas and oil pipelines. As 

discussed below, with regard to the calculation of the market risk premium and the use of 

Value Line adjusted betas in pipeline proceedings, we adopt the policy established in 

Opinion No. 569.

a. Calculation of Market Risk Premium

As described above, the CAPM market risk premium is calculated by subtracting 

the risk-free rate, which is typically represented by a proxy such as the yield on 30-year 

U.S. Treasury bonds, from the expected market return. The expected market return can 

be estimated either using a backward-looking approach based upon realized market 

returns during a historical period, a forward-looking approach applying the DCF model to 

growth projections of the proxy group averaged 5.03% relative to a projected growth in 

GDP of 4.39%. Id. P 57.
Docket No. PL19-4-000 - 24 -

a representative market index, such as the S&P 500, or a survey of academic and 

investment professionals.79

i. Background

In Opinion No. 569, the Commission adopted the use of the 30-year U.S. Treasury 

average historical bond yield over a six-month period as the risk-free rate.80 The 

Commission explained that the six-month period should correspond as closely as possible 

to the six-month financial study period used to produce the DCF study in the applicable 

proceeding.81 For the expected market return, the Commission adopted a forwardlooking approach based upon a one-step DCF analysis of the dividend paying members 

of the S&P 500.82 The Commission rejected proposals to use a two-step DCF analysis 

for this purpose, finding that the rationale for incorporating a long-term growth projection 

in conducting a two-step DCF analysis of a specific group of utilities does not apply 

when conducting a DCF study of the companies in the S&P 500 because (i) the S&P 500 

is regularly updated to ensure that it only includes companies with high market 

79 Opinion No. 569, 169 FERC ¶ 61,129 at P 239 (citing Morin at 155-162).

80 Id. P 237.

81 Id. PP 237-238.

82 Id. P 260. Because the rationale for including a long-term growth estimate in 

the DCF analysis of a specific utility does not apply to the DCF analysis of a broad, 

representative market index with a wide variety of companies that is regularly updated, 

the Commission held that the DCF analysis of the dividend paying members of the S&P 

500 should be a one-step DCF analysis that uses only short-term growth projections. Id. 

PP 261-266.
Docket No. PL19-4-000 - 25 -

capitalization and remains representative of the industries in the economy of the United 

States and (ii) the dividend paying members of the S&P 500 constitute a large portfolio 

of stocks and therefore include companies at all stages of growth.83 Furthermore, the 

Commission found that S&P 500 companies with growth rates that are negative or in 

excess of 20% should be excluded from the CAPM analysis84 and approved the use of a 

size premium adjustment in the CAPM analysis

ii. NOI Comments

INGAA, CAPP, and NGSA address how the Commission should determine the 

CAPM market risk premium in pipeline proceedings. Regarding the risk-free rate,

INGAA states that although the Commission could use either the 20-year or 30-year U.S. 

Treasury bond rate, it supports using the 20-year rate.87 As to the expected market return, 

INGAA supports using a one-step DCF analysis of dividend paying companies in the 

83 Id. PP 263-265.

84 Id. PP 267-268.

85 Id. PP 296-303.

86 Opinion No. 569-A, 171 FERC ¶ 61,154 at PP 75-77, 85.

87 INGAA Initial Comments at 61. INGAA states that unlike 30-year bonds, 

which were not issued for a period of time, 20-year bond yields are available back to 

1926 and will therefore allow the use of a full historical data set covering a longer period. 

Id.
Docket No. PL19-4-000 - 26 -

S&P 500.88 CAPP and NGSA, by contrast, support using a two-step DCF analysis that 

uses both short-term and long-term growth rates.89

iii. Commission Determination

We adopt the policy established in Opinion No. 569. Thus, in determining the 

CAPM market risk premium for natural gas and oil pipelines, we will (1) use, as the riskfree rate, the 30-year U.S. Treasury average historical bond yield over a six-month period 

corresponding as closely as possible to the six-month financial study period used to 

produce the DCF study in the applicable proceeding, (2) estimate the expected market 

return using a forward-looking approach based on a one-step DCF analysis of all 

dividend paying companies in the S&P 500,

90 and (3) exclude S&P 500 companies with 

growth rates that are negative or in excess of 20%.

First, as the Commission recognized in Opinion No. 531-B, 30-year U.S. Treasury 

bond yields are a generally accepted proxy for the risk-free rate in a CAPM analysis.91 

We are not persuaded to adopt INGAA’s proposal to use the 20-year U.S. Treasury bond 

yield for this purpose. The Commission determined in Opinion No. 569 that factors 

supporting the use of the 30-year U.S. Treasury average historical bond yield over a six88 Id. (citing Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. 

Operator, Inc., Opinion No. 551, 156 FERC ¶ 61,234, at PP 166-168 (2016)).

89 CAPP Initial Comments at 41; NGSA Initial Comments at 33.

90 The appropriate data source for the short-term growth projection in the DCF 

component of the CAPM is addressed infra.

91 Opinion No. 531-B, 150 FERC ¶ 61,165 at P 114 (citing Morin at 151-152).
Docket No. PL19-4-000 - 27 -

month period outweigh factors supporting the use of the 20-year U.S. Treasury yield,

including any potential benefit that may come from using a data set covering a longer 

period.

92 We affirm that conclusion here.

Second, we will determine the expected market return using a one-step DCF 

analysis of the dividend paying members of the S&P 500. As explained in Opinion 

No. 569, using a DCF analysis of the dividend paying members of the S&P 500 is a wellrecognized method of estimating the expected market return for purposes of the CAPM,93

and we find that this method is likewise reasonable for purposes of applying the CAPM 

to natural gas and oil pipelines. We also find that the reasons set forth in Opinion 

No. 569 for using a one-step DCF analysis, instead of a two-step analysis, in estimating 

the expected market return are equally valid in the context of natural gas and oil

pipelines.

94 Accordingly, for the reasons stated in Opinion No. 569,95 we will use a onestep DCF analysis of the dividend paying companies in the S&P 500 as the expected 

market return in applying the CAPM under our revised ROE methodology for natural gas 

and oil pipelines.

Third, consistent with Opinion No. 569, we will screen from the CAPM analysis 

of natural gas and oil pipelines S&P 500 companies with growth rates that are negative or 

92 Opinion No. 569, 169 FERC ¶ 61,129 at P 237.

93 Id. P 260.

94 Id. PP 262-266.

95 See id. PP 260-276.
Docket No. PL19-4-000 - 28 -

in excess of 20%. The Commission has explained that such low or high growth rates are 

highly unsustainable and unrepresentative of the growth rates of public utilities.96 We 

find that these growth rates are likewise not representative of sustainable growth rates for 

companies in pipeline proxy groups. We will therefore apply this growth rate screen as 

part of the CAPM analysis in natural gas and oil pipeline proceedings. 

b. Betas and Size Premium

i. Background

The Commission found in Opinion Nos. 569 and 569-A that Value Line adjusted 

betas are reasonable for use in the CAPM analysis for public utilities.

97 The Commission 

explained that there was substantial evidence that investors rely on Value Line betas and 

observed that Dr. Morin supports the use of adjusted betas in the CAPM. 

Moreover, the Commission also accepted the use of a size premium adjustment

derived using Duff & Phelps raw betas based on a regression of the monthly returns on 

the stock index that are in excess of a 30-year U.S. Treasury yield over the period of 1926 

through the most recent period.

98 The Commission affirmed that the use of such an

adjustment was “a generally accepted approach to CAPM analyses” and determined that 

application of size premium adjustments based on the New York Stock Exchange 

96 Id. P 268.

97 Id. P 297; Opinion No. 569-A, 171 FERC ¶ 61,154 at PP 75-76.

98 Opinion No. 569, 169 FERC ¶ 61,129 at PP 279, 296.
Docket No. PL19-4-000 - 29 -

(NYSE) to dividend paying members of the S&P 500 is acceptable.99 The Commission 

acknowledged that there is imperfect correspondence between the size premia being 

developed with different betas, but concluded that the size premium adjustments improve 

the accuracy of CAPM results and cause the CAPM to better correspond to the cost-ofcapital estimates used by investors.100 The Commission also found that sufficient 

academic literature exists to indicate that many investors rely on size premia.

101

ii. NOI Comments

A variety of commenters, including AOPL, INGAA, Magellan, CAPP, and 

NGSA, support use of Value Line adjusted betas in applying the CAPM.

102 INGAA adds 

that although Value Line betas, which are based on five years of historical data, may be 

appropriate in most cases, it is possible that using betas based on five years of data may 

not reflect more recent events that have substantially changed the risk characteristics of 

99 Id. P 296 (quoting Opinion No. 531-B, 150 FERC ¶ 61,165 at P 117).

100 Id. P 298.

101 Id. PP 299-300.

102 AOPL Initial Comments at 42; INGAA Initial Comments at 62; Magellan 

Initial Comments at 27; CAPP Initial Comments at 42; NGSA Comments at 34; see also

Maryland Office of People’s Counsel (Maryland OPC) Initial Comments at 21-22 

(“Value Line is the most detailed and most trusted investment source currently available 

in the industry. The Value Line beta is calculated over a long-term time period that 

dampens volatility and, as such, is the most representative source now available in the 

marketplace.”).
Docket No. PL19-4-000 - 30 -

the natural gas pipeline industry. INGAA therefore states that in such circumstances, the 

Commission should consider beta estimates calculated over shorter periods.

103

iii. Commission Determination

We adopt the reasoning in Opinion Nos. 569 and 569-A and find reasonable the 

use of Value Line adjusted betas in the CAPM analysis as applied to natural gas and oil 

pipelines. As the Commission has explained, there is substantial evidence indicating that 

investors rely on Value Line betas in making their investment decisions, and this finding 

presumably applies equally to investors in natural gas and oil pipelines. Although we 

recognize that the distinct risks facing interstate natural gas and oil pipelines may in some 

cases bear upon whether an alternative beta source would be more appropriate, we will 

address such issues as they arise in specific proceedings.

Likewise, we find reasonable the use of the size premium adjustment based on the 

NYSE, as discussed in Opinion Nos. 531-B104 and 569.105 The use of such adjustments is 

“a generally accepted approach to CAPM analyses” that improves the accuracy of the 

CAPM results and causes such results to better correspond to the cost-of-capital estimates 

that investors use in making investment decisions.106 As such, we find that use of these 

103 INGAA Initial Comments at 62.

104 Opinion No. 531-B, 150 FERC ¶ 61,165 at P 117.

105 Opinion No. 569, 169 FERC ¶ 61,129 at P 296. 

106 Id. PP 296-297 (quoting Opinion No. 531-B, 150 FERC ¶ 61,165 at P 117).
Docket No. PL19-4-000 - 31 -

adjustments will improve the accuracy of cost-of-equity estimates for natural gas and oil 

pipelines under our revised ROE methodology.

4. Weighting of Models

a. Background

In Opinion No. 569, the Commission held that it would give equal weight to the 

DCF model and CAPM in analyzing ROE for public utilities.107 The Commission found 

that the evidence indicated that neither model was conclusively superior to the other and 

reasoned that giving each model equal weight will reduce the model risk associated with 

any particular model more than giving one model greater weight than the other.108 After 

expanding its public utility base ROE methodology in Opinion No. 569-A to include the 

Risk Premium model, the Commission held that it would accord equal weight to all three 

models.109 

b. NOI Comments

Commenters propose various approaches to weighting the models used to 

determine ROE. CAPP states that the Commission should give the DCF model at least

50% weighting while giving the remaining weight to any other models the Commission 

decides to use.

110 The Maryland OPC states that if the Commission uses multiple 

107 Id. PP 425, 427.

108 Id. P 426.

109 Opinion No. 569-A, 171 FERC ¶ 61,154 at P 141.

110 CAPP Initial Comments at 30.
Docket No. PL19-4-000 - 32 -

models, it should accord the DCF model the majority of the weighting while giving the 

other models a minority weighting.111 INGAA and Tallgrass oppose equal weighting and 

assert that the Commission should adopt a flexible weighting approach that allows it to 

exclude or give appropriate weight to any model in light of prevailing financial 

conditions and the facts and circumstances of each case.

112 The New York State Public 

Service Commission (NYPSC) submits that the Commission should give two-thirds 

weighting to the DCF model and one-third weighting to the CAPM.113

c. Commission Determination

We adopt the rationale of Opinion Nos. 569 and 569-A and will give equal weight 

to the DCF model and CAPM in determining natural gas and oil pipeline ROEs. As 

stated in Opinion No. 569, we find that neither the DCF model nor the CAPM is 

conclusively superior and that giving both models equal weight will mitigate the risks 

associated with the potential errors or flaws in any one model. The comments proposing 

alternative weighting schemes do not refute these concerns and are therefore 

unpersuasive.

111 Maryland OPC Initial Comments at 12.

112 INGAA Initial Comments at 8-9; Tallgrass Initial Comments at 12.

113 NYPSC Initial Comments at 18.
Docket No. PL19-4-000 - 33 -

5. Data Sources

a. Background

The Commission has historically preferred IBES data as the source of the shortterm growth projection in the DCF model.

114 By contrast, because less precision was 

required of the CAPM when the Commission used it only to corroborate the results of the 

DCF analysis, the Commission allowed parties to average IBES and Value Line growth 

projections in the DCF component of the CAPM.115

In Opinion 569, the Commission affirmed that it would use IBES projections as 

the sole source of the short-term growth projections in the DCF model.

116 The 

Commission also required the sole use of IBES projections for the DCF component of the 

CAPM, explaining that because it would be weighting the CAPM equally with the DCF

model in setting just and reasonable ROEs, the CAPM must be implemented with the 

same degree of precision as the DCF model.

117 The Commission explained that IBES

data was preferable to Value Line data because unlike Value Line projections, which 

represent the estimates of a single analyst at a single institution, IBES projections 

generally represent consensus growth estimates by a number of analysts from different

114 E.g., Nw. Pipeline Corp., 92 FERC ¶ 61,287, at 62,001-02 (2000) (quoting 

Opinion No. 396-B, 79 FERC at 62,385).

115 Opinion No. 551, 156 FERC ¶ 61,234 at P 169.

116 Opinion No. 569, 169 FERC ¶ 61,129 at P 120.

117 Id. P 276.
Docket No. PL19-4-000 - 34 -

firms.

118 In addition, the Commission noted that IBES growth projections are generally 

timelier than the Value Line projections because IBES updates its database on a daily 

basis as participating analysts revise their forecasts, whereas Value Line publishes its 

projections on a rolling quarterly basis.

119

In Opinion No 569-A, the Commission affirmed its preference for IBES data for 

the short-term growth projection in the DCF model but granted rehearing of its decision 

to require sole use of IBES data for the DCF component of the CAPM.120 

Acknowledging its concerns about Value Line data as discussed in Opinion No. 569, the 

Commission nonetheless concluded that use of these estimates will bring value to its 

revised ROE methodology. The Commission found that although Value Line estimates 

come from a single analyst, they include the input of multiple analysts because they are 

vetted through internal processes including review by a committee composed of peer 

analysts. Similarly, the Commission found that there is value in including Value Line

estimates because they are updated on a more predictable basis than IBES estimates. The 

Commission therefore concluded that IBES and Value Line growth estimates both have 

advantages and that it is appropriate to consider both data sources in determining public 

utility ROEs. In light of the Commission’s longstanding use of IBES data in the DCF

118 Id. P 125.

119 Id. P 128.

120 Opinion No. 569-A, 171 FERC ¶ 61,154 at PP 78-83.
Docket No. PL19-4-000 - 35 -

model, the Commission determined that it was appropriate to consider using Value Line 

in the newly adopted CAPM.

b. NOI Comments

Commenters are divided on the data source the Commission should use for the 

short-term growth projection in pipeline proceedings. AOPL states that the Commission 

should allow oil pipelines to use Value Line projections because they do not overlap with 

or duplicate IBES projections.

121 INGAA likewise supports use of Value Line growth 

estimates to supplement the IBES three to five-year growth projections.122 In contrast, 

Magellan, NGSA, and CAPP support the sole use of IBES growth forecasts, with CAPP 

asserting that Value Line is inferior to IBES because it reflects the estimate of a single 

analyst.123

c. Commission Determination

With regard to the short-term growth projections in our DCF and CAPM analyses 

of natural gas and oil pipelines, we adopt the policy set forth in Opinion No. 569-A. 

Therefore, in natural gas and oil pipeline proceedings we will (1) continue to prefer use 

of IBES three to five-year growth projections as the short-term growth projection in the 

two-step DCF analysis and (2) allow participants to propose using Value Line growth 

121 AOPL Initial Comments at 38.

122 INGAA Initial Comments, Attachment A at 28-33 (Affidavit of Dr. Michael J. 

Vilbert).

123 Magellan Initial Comments at 20; NGSA Initial Comments at 29-30; CAPP 

Initial Comments at 36-37, 39.
Docket No. PL19-4-000 - 36 -

projections as the source of the short-term growth projection in the one-step DCF 

analysis embedded within the CAPM.

We reiterate our belief that both IBES and Value Line growth estimates have 

advantages and that it is appropriate to include both data sources in determining ROEs. 

As in public utility proceedings, it is beneficial to diversify the data sources used in our 

revised natural gas and oil pipeline ROE methodology because doing so may better 

reflect the data sources that investors consider and mitigate the effect of any unusual data 

in either source. Although we have not previously used Value Line growth estimates in 

determining natural gas and oil pipeline ROEs, we believe that including these estimates 

in our methodology will bring value to our analysis because they are updated on a more 

predictable basis than IBES estimates and reflect the consensus growth estimates of 

multiple analysts. By contrast, IBES projections are updated on an irregular basis as 

analysts revise their forecasts.

Consistent with our policy for public utilities, we consider using Value Line

growth estimates in our revised natural gas and oil pipeline ROE methodology in the 

CAPM while continuing our longstanding use of IBES three to five-year growth 

estimates as the source of the short-term growth projection in the DCF. As discussed in 

Opinion No. 569-A, because we are newly adopting the CAPM, we find that it is 

appropriate to consider using a new data source within the CAPM.
Docket No. PL19-4-000 - 37 -

6. Proxy Group Construction

a. Background

As discussed above, the companies included in a proxy group must be comparable 

in risk to the pipeline whose rate is being determined. To ensure that companies included 

in pipeline proxy groups are risk-appropriate, the Commission has required that each 

proxy group company satisfy three criteria: (1) the company’s stock must be publicly 

traded; (2) the company must be recognized as a natural gas or oil pipeline company and 

its stock must be recognized and tracked by an investment information service such as 

Value Line; and (3) pipeline operations must constitute a high proportion of the 

company’s business.124 In determining whether a company’s pipeline operations 

constitute a high proportion of its business, the Commission has historically applied a 

50% standard requiring that the pipeline business account for, on average, at least 50% of 

the company’s assets or operating income over the most recent three-year period.125 

Furthermore, in addition to the foregoing criteria, the Commission has declined to include 

Canadian companies in pipeline proxy groups.126 

124 2008 Policy Statement, 123 FERC ¶ 61,048 at P 8.

125 Opinion No. 486-B, 126 FERC ¶ 61,034 at PP 8, 59. 

126 For example, in Opinion No. 486-B, the Commission excluded TransCanada 

Corporation from the proxy group in a natural gas pipeline proceeding based in part on 

the fact that its Canadian pipeline “was subject to a significantly different regulatory 

structure that renders it less comparable to domestic pipelines regulated by the 

Commission.” Id. P 60. The Commission again affirmed the exclusion of TransCanada 

Corporation in Opinion No. 528, finding that it was “subject to the vagaries of Canadian 
Docket No. PL19-4-000 - 38 -

The Commission has explained that proxy groups “should consist of at least four, 

and preferably at least five members”127 and that pipeline proxy groups should only 

exceed five members if each additional member satisfies the 50% standard.128 At the 

same time, the Commission has also explained that although “adding more members to 

the proxy group results in greater statistical accuracy, this is true only if the additional 

members are appropriately included in the proxy group as representative firms.”129

The number of companies satisfying the Commission’s historical proxy group 

criteria in pipeline proceedings has declined in recent years, resulting in inadequately 

sized proxy groups. Consolidation in the natural gas and oil pipeline industries has 

resulted in the absorption of many natural gas and oil pipeline companies into larger, 

diversified energy companies that own a variety of energy-related assets in addition to 

interstate pipelines. In addition, major companies in the oil pipeline industry have 

recently acquired natural gas pipeline assets.130 The proliferation of these diversified 

regulation and Canadian capital markets, thereby making it difficult to establish 

comparable risk.” Opinion No. 528, 145 FERC ¶ 61,040 at P 626.

127 Opinion No. 486-B, 126 FERC ¶ 61,034 at P 104.

128 See Portland Nat. Gas Transmission Sys., Opinion No. 510, 134 FERC 

¶ 61,129, at P 215 (2011) (declining to include company that failed 50% standard because 

proxy group had more than five members).

129 Opinion No. 486-B, 126 FERC ¶ 61,034 at P 104.

130 Examples of such transactions include Enbridge Inc.’s acquisition of Spectra 

Energy Corp., TC Energy Corporation’s acquisition of Columbia Pipeline Group, Inc., 

and IFM Investors’ acquisition of Buckeye Partners LP.
Docket No. PL19-4-000 - 39 -

energy companies has reduced the number of companies satisfying the 50% standard. 

Recent acquisitions of pipeline companies by private equity firms have further reduced 

the number of eligible natural gas and oil pipeline proxy group members by converting 

those pipeline companies from publicly traded to privately held entities.

To address the problem of the shrinking natural gas and oil pipeline proxy groups, 

the Commission has relaxed the 50% standard when necessary to construct a proxy group 

of five members.131 The Commission has emphasized, however, that it will only include 

firms not satisfying the 50% standard until five proxy group members are obtained.132

b. NOI Comments

Commenters recognize the ongoing difficulties in forming pipeline proxy groups 

of sufficient size and support the Commission’s policy of relaxing the 50% standard 

when necessary to obtain five proxy group members.133 AOPL, INGAA, and Tallgrass 

131 E.g., Opinion No. 528, 145 FERC ¶ 61,040 at P 635; Opinion No. 486-B, 

126 FERC ¶ 61,034 at PP 67-75, 94-96 (including two firms not satisfying the 50% 

standard in natural gas pipeline proxy group after application of the Commission’s 

traditional criteria resulted in a proxy group of only three members); Williston Basin 

Interstate Pipeline Co., 104 FERC ¶ 61,036, at PP 35-37, 43 (2003), order on reh’g and 

compliance, 107 FERC ¶ 61,164 (2004).

132 Opinion No. 528-A, 154 FERC ¶ 61,120 at P 236 (“[W]e will relax the [50 

percent] standard only if necessary to establish a proxy group consisting of at least five 

members”); Opinion No. 510, 134 FERC ¶ 61,129 at P 167 (“[I]n order to achieve a 

proxy group of at least five firms, a diversified natural gas company not satisfying the 

historical [50 percent] standard could be included in the proxy group, but only if there is 

a convincing showing that an investor would view that firm as having comparable risk to 

a pipeline.”).

133 E.g., CAPP Initial Comments at 19; AOPL Initial Comments at 35; NGSA 

Initial Comments at 11.
Docket No. PL19-4-000 - 40 -

assert that the Commission should not apply the 50% standard as a rigid screen and 

continue to allow the inclusion of companies that do not satisfy the 50% standard but are 

nonetheless significantly involved in jurisdictional natural gas and oil pipeline 

operations.134 NGSA and PGC/AF&PA likewise support continued flexibility in the 

construction of pipeline proxy groups.

135 

Other commenters urge the Commission to adopt more drastic changes to its proxy 

group formation policies. For example, Magellan states that the Commission should 

allow the inclusion of risk-appropriate non-energy companies in natural gas and oil 

pipeline proxy groups136 while APGA recommends permitting the inclusion of natural 

gas distributors.

137 INGAA proposes several additional changes to the Commission’s 

natural gas pipeline proxy group policy,138 including allowing for the inclusion of riskcomparable Canadian companies with significant U.S. interstate natural gas pipeline 

134 See AOPL Initial Comments at 15, 17-18, 35; INGAA Initial Comments at 24, 

29-30; Tallgrass Initial Comments at 9.

135 NGSA Initial Comments at 11, 17; PGC/AF&PA Joint Comments at 9-10.

136 Magellan Initial Comments at 15; see also NextEra Transmission, LLC Initial 

Comments at 5-6. Most commenters oppose including non-energy companies in pipeline 

proxy groups. E.g., AOPL Initial Comments at 32; Tallgrass Initial Comments at 9; 

CAPP Initial Comments at 21; NGSA Initial Comments at 19; PGC/AF&PA Joint 

Comments at 10.

137 APGA Comments at 10.

138 INGAA Initial Comments at 24-25, 29-37, 40; INGAA Reply Comments at 6-

12.
Docket No. PL19-4-000 - 41 -

assets in natural gas pipeline proxy groups.139 NGSA also supports this proposal.

140 

Moreover, INGAA and Tallgrass propose using the financial metric “beta” to assist in 

determining whether potential proxy group members are comparable in risk to the 

pipeline at issue.

141

c. Commission Determination

Based on our review of our current policy and upon consideration of the 

comments to the NOI, we will maintain a flexible approach to forming natural gas and oil 

pipeline proxy groups and continue to relax the 50% standard when necessary to obtain a 

proxy group of five members. In addition, we clarify that in light of continuing 

difficulties in forming sufficiently sized natural gas and oil pipeline proxy groups, we 

will consider proposals to include otherwise-eligible Canadian entities.142 We recognize 

that difficulties in forming a proxy group of sufficient size may be enhanced under 

current market conditions, including those resulting from the COVID-19 pandemic. In 

light of these conditions, the Commission will consider adjustments to our ROE policies 

where necessary.143

139 INGAA Initial Comments at 30.

140 NGSA Initial Comments at 11.

141 INGAA Initial Comments at 24-25, 34-35; Tallgrass Initial Comments at 6-7.

142 While the Commission has preferred screens and methods for selecting 

companies that will compose a proxy group, parties may continue to propose alternative 

screens and methods in cost-of-service rate proceedings.

143 See, e.g., SFPP, L.P., Opinion No. 511, 134 FERC ¶ 61,121, at P 209 (2011) 

(departing from the Commission’s general policy to determine ROE using the most 
Docket No. PL19-4-000 - 42 -

As discussed above, the problem of the shrinking pipeline proxy groups persists 

due to, among other issues, the consolidation of pure play natural gas and oil pipelines 

into diversified energy companies and acquisitions of pipeline companies by private 

firms. These developments have reduced the number of publicly traded companies 

eligible for inclusion in a proxy group under the Commission’s historical criteria, making 

it difficult for the Commission to develop an adequate sample of representative firms to 

estimate a pipeline’s required cost of equity. As such, we will continue to apply the 50% 

standard flexibly, based on the record evidence and in accordance with the Commission’s 

past practice, when necessary to construct a proxy group of at least five members. 

In addition, we find that the NOI comments advance credible reasons why it may 

be appropriate to permit the inclusion of Canadian entities in natural gas and oil pipeline 

proxy groups. Extending proxy group eligibility to such entities could alleviate the 

shrinking proxy group problem by adding new potential proxy group members. As 

explained above, the Commission has previously excluded companies from pipeline 

proxy groups based on concerns that the fact that such entities are subject to Canadian 

regulation and Canadian capital markets makes it difficult to establish whether they are 

recent data in the record and determining nominal ROE using earlier data where the most 

recent data reflected the collapse of the stock market in late 2008 and thus was not 

representative of the pipeline’s long-term equity cost of capital), order on reh’g, Opinion 

No. 511-B, 150 FERC ¶ 61,096 (2015) remanded on other grounds sub nom. United 

Airlines, Inc. v. FERC, 827 F.3d 122 (D.C. Cir. 2016), order on remand and compliance 

filing, Opinion No. 511-C, 162 FERC ¶ 61,228, at PP 46-53 (2018); see also Trunkline

Gas Co., Opinion No. 441, 90 FERC ¶ 61,017, at 61,049 (2000) (“The Commission seeks 

to find the most representative figures on which to base rates.”).
Docket No. PL19-4-000 - 43 -

comparable in risk to Commission-regulated pipelines.144 We note, however, that 

considerations underlying those decisions may have changed since the Commission 

established that policy.145 Therefore, in future natural gas and oil pipeline proceedings, 

we will consider proposals to include in the proxy group risk-appropriate Canadian 

entities that otherwise satisfy the Commission’s proxy group eligibility requirements.

B. Excluded Financial Models

1. Risk Premium

a. Background

In Opinion No. 569, the Commission excluded the Risk Premium model from its 

revised ROE methodology for public utilities.

146 The Commission found that the Risk 

144 Opinion No. 528, 145 FERC ¶ 61,040 at P 626; Opinion No. 486-B, 126 FERC 

¶ 61,034 at P 60.

145 For instance, a 2009 rate case decision by the National Energy Board of Canada 

(NEB) may be instructive. National Energy Board of Canada, RH-1-2008 Reasons for 

Decision, Trans Québec & Maritimes Pipelines Inc., March 2009, available at 

http://www.regie-energie.qc.ca/audiences/3690-09/RepDDRGM_3690-09/B29_GM_Reasons-Decision-RH-1-2008_3690_30juin09.pdf (Trans Québec). In that 

decision, the NEB revised its ratemaking policy by adopting an after-tax weighted 

average cost-of-capital approach to determining pipeline cost of capital. Id. at 18-19. 

The NEB also accepted evidence that the Canadian and U.S. financial markets are 

integrated and, as a result, Canadian pipelines and U.S. pipelines compete for capital. Id. 

at 66-68 (finding that “Canadian and U.S. pipelines operate in what the Board views as 

an integrated North American natural gas market.”). The NEB also found that although 

the risks facing U.S. and Canadian pipelines are not identical, those risks “are not so 

different as to make them inappropriate comparators” and in fact share “many 

similarities.” Id. at 68. As such, the NEB found that U.S. pipelines “have the potential to 

act as a useful proxy” for use in determining the appropriate ROE for Canadian pipelines. 

Id. at 67.

146 Opinion No. 569, 169 FERC ¶ 61,129 at P 340.
Docket No. PL19-4-000 - 44 -

Premium model is largely redundant with the CAPM because, although they rely on 

different data sources to determine the risk premium, both models use indirect measures 

(i.e., past Commission orders in the Risk Premium model and S&P 500 data in the 

CAPM) to ascertain the risk premium that investors require over the risk-free rate of 

return.

147 The Commission also found that the Risk Premium model is likely to provide a 

less accurate current cost-of-equity estimate than the DCF model or CAPM because 

whereas those models apply a market-based method to primary data, the Risk Premium

model relies on previous ROE determinations whose resulting ROE may not necessarily 

be directly determined by a market-based method.

148

In Opinion No. 569-A, the Commission granted rehearing and adopted a modified 

Risk Premium model for use in ROE analyses under FPA section 206. Unlike the Risk 

Premium model discussed in Opinion No. 569, the modified Risk Premium model 

excludes problematic cases from the analysis, such as those where an entity joined a 

Regional Transmission Organization (RTO), and the Commission, without 

reexamination, allowed adoption of the existing RTO-wide ROE. The Commission 

explained that, as modified, the Risk Premium model adds benefits to the ROE analysis 

through model diversity and reduced volatility that outweigh the disadvantages identified 

in Opinion No. 569.149

147 Id. P 341.

148 Id. P 342.

149 Opinion No. 569-A, 171 FERC ¶ 61,154 at PP 104-114.
Docket No. PL19-4-000 - 45 -

b. NOI Comments

INGAA, AOPL, NGSA, and CAPP assert that the Risk Premium model cannot be 

applied to natural gas and oil pipelines in light of the lack of stated allowed ROEs from 

settlements or Commission decisions in pipeline proceedings. Because the Risk Premium

model relies upon Commission-allowed ROEs to estimate the equity risk premium, these 

commenters state that it would be difficult, if not impossible, to apply this model in 

pipeline cases.

150

c. Commission Determination

We will not use the Risk Premium model in our revised ROE methodology. As 

commenters observe, there is insufficient data to apply the Risk Premium models

considered in Opinion Nos. 569 and 569-A to natural gas or oil pipelines. That model

relies upon stated ROEs approved in past Commission orders, such as orders on 

settlements, to ascertain the risk premium that investors require. In recent years, 

however, natural gas and oil pipeline cost-of-service rate proceedings have frequently 

resulted in “black box” settlements instead of a fully litigated Commission decision. 

Unlike public utility proceedings, where ROE may be addressed on a standalone basis as 

a component of formula rates, settlements in pipeline proceedings typically do not 

enumerate a stated ROE.

150 INGAA Initial Comments at 41-42; AOPL Initial Comments at 12, 27-28; 

NGSA Initial Comments at 10-11, 24; CAPP Initial Comments at 11-12.
Docket No. PL19-4-000 - 46 -

Consequently, for natural gas and oil pipelines, there is insufficient data to 

estimate cost of equity using the Risk Premium models discussed in Opinion Nos. 569 

and 569-A. In light of this lack of data, we will not use these models in determining 

pipeline ROEs. While we do not adopt the Risk Premium model in our revised 

methodology here for the reasons discussed above, we do not necessarily foreclose its use 

in future proceedings if parties can demonstrate that the concerns discussed above have 

been addressed.

2. Expected Earnings

a. Background

In Opinion No. 569, the Commission excluded the Expected Earnings model from 

its revised base ROE methodology for public utilities because the record did not support 

departing from the Commission’s traditional use of market-based approaches to 

determine base ROE.151 The Commission also found that the record did not demonstrate 

that investors rely on Expected Earnings when making investment decisions.152

The Commission explained that in determining a just and reasonable ROE under 

Hope, it must analyze the returns that are earned on “investments in other enterprises 

having corresponding risks.”153 In contrast to market-based models, the accountingbased Expected Earnings model uses estimates of return on an entity’s book value to 

151 Opinion No. 569, 169 FERC ¶ 61,129 at PP 200-201.

152 Id. PP 212-218.

153 Id. P 201 (quoting Hope, 320 U.S. at 603).
Docket No. PL19-4-000 - 47 -

estimate the earnings an investor expects to receive on the book value of a particular 

stock.154 As investors cannot invest in an enterprise at book value, the Commission 

concluded that the expected return on a utility’s book value does not reflect “returns on 

investments in other enterprises” because in most circumstances book value does not 

reflect the value of any investment that is available to an investor in the market.155 The 

Commission thus found that return on book value is not indicative of what return an 

investor requires to invest in the utility’s equity or what return an investor receives on the 

equity investment.156

On rehearing, the Commission affirmed the exclusion of the Expected Earnings

model in those proceedings for the reasons stated in Opinion No. 569.

157 The

Commission found, moreover, that the Expected Earnings model does not accurately 

measure the returns that investors require to invest in public utilities because the current 

market values of utility stocks substantially exceed utilities’ book value. As a result, a 

utility’s expected earnings on its book value will inevitably exceed the return that 

investors require in order to purchase the utility’s higher-value stock.158

154 Id. P 172.

155 Id. P 201.

156 Id. PP 202, 211.

157 Opinion No. 569-A, 171 FERC ¶ 61,154 at PP 125-131.

158 Id. P 127.
Docket No. PL19-4-000 - 48 -

b. NOI Comments

Commenters that support expanding the Commission’s pipeline ROE 

methodology to consider models in addition to the DCF159 do not oppose using the 

Expected Earnings model. INGAA supports use of the Expected Earnings model to 

determine natural gas pipeline ROEs,

160 and AOPL states that the Expected Earnings

model can be applied to oil pipelines if the Commission adopts an appropriate approach 

to outliers.161 Among the commenters that oppose applying the Expected Earnings model

to natural gas and oil pipelines, NGSA criticizes the Expected Earnings model for 

ignoring capital markets162 while CAPP asserts that the Expected Earnings model appears 

to be confined to academic uses and, in any event, there is likely an insufficient number 

of pipelines to implement the Expected Earnings model.

163

c. Commission Determination

We will not use the Expected Earnings model to determine ROE for natural gas 

and oil pipelines for the reasons stated in Opinion No. 569. We conclude that the 

159 As noted above, several commenters, including Airlines for America, Liquids 

Shippers Group, NGSA, APGA, and PGC/AF&PA assert that the Commission should 

continue relying solely on the DCF model in analyzing pipeline ROEs.

160 INGAA Initial Comments at 8, 41, 63; INGAA Reply Comments at 1-2.

161 AOPL Initial Comments at 28l; see also Plains Initial Comments at 4; Magellan 

Initial Comments at 12-13, 28-29 (stating that Expected Earnings should be used only in 

conjunction with other models such as the DCF, CAPM, and Risk Premium).

162 NGSA Initial Comments at 34.

163 CAPP Initial Comments at 13, 27.
Docket No. PL19-4-000 - 49 -

findings underlying the Commission’s decision to exclude the Expected Earnings model 

from our analysis of public utility ROEs also support excluding that model from our 

analysis of natural gas and oil pipeline ROEs. 

As discussed above, the Commission must ensure that the “return to the equity 

owner” is “commensurate with returns on investments in other enterprises having 

corresponding risks.”164 As with public utilities, under the market-based approach the 

Commission performs this analysis by setting a pipeline’s ROE to equal the estimated 

return that investors would require in order to purchase stock in the pipeline at its current 

market price. However, the return on book value measured under the Expected Earnings 

model does not permit such an analysis. Like investors in utilities, investors in natural 

gas and oil pipelines cannot invest at the pipeline’s book value and must instead pay the 

prevailing market price. As such, the expected return on the pipeline’s book value does 

not reflect the value of an investment that is available to an investor in the market and 

thus does not reflect the “returns on investments in other enterprises having

corresponding risks” that we must analyze under Hope.

165 Likewise, the return on a 

pipeline’s book value does not reflect “the return to the equity owner” that we must 

consider under Hope because the return that an investor requires to invest in the 

pipeline’s equity and the return an investor receives on the equity investment are 

164 Hope, 320 U.S. at 603.

165 See Opinion No. 569, 169 FERC ¶ 61,129 at P 201.
Docket No. PL19-4-000 - 50 -

determined based on the current market price the investor must pay in order to invest in 

the pipeline’s equity.166

Accordingly, based on the record in this proceeding, we conclude that at this time 

relying on the Expected Earnings model to determine pipeline ROEs would not satisfy 

the requirements of Hope. We will therefore exclude the Expected Earnings model from 

our revised methodology for determining natural gas and oil pipeline ROEs. While we 

do not adopt the Expected Earnings model in our revised methodology here for the 

reasons discussed above, we do not necessarily foreclose its use in future proceedings if 

parties can demonstrate that the concerns discussed above have been addressed.

C. Outlier Tests

1. Background

Generally, the Commission has not applied a specific low-end or high-end outlier 

test in natural gas and oil pipeline proceedings. Rather, the Commission has used a factspecific analysis to select proxy group members. In constructing pipeline proxy groups, 

the Commission excludes anomalous and illogical proxy group returns that do not 

provide meaningful indicia of the return a pipeline requires to attract capital.

167 

Conversely, the Commission has applied specific outlier screens to public utilities. 

Prior to Opinion No. 569, the Commission excluded as low-end outliers companies 

166 See id. P 202.

167 See Opinion No. 546, 154 FERC ¶ 61,070 at P 196; 2008 Policy Statement, 

123 FERC ¶ 61,048 at P 79 (“[T]he Commission will continue to exclude an MLP from 

the proxy groups if its growth projection is illogical or anomalous.”).
Docket No. PL19-4-000 - 51 -

whose ROEs failed to exceed the average 10-year bond-yield by approximately 100 basis 

points on the ground that investors generally cannot be expected to purchase a common 

stock if debt, which has less risk than a common stock, yields essentially the same 

expected return.168 In the Briefing Orders, the Commission proposed to treat as high-end 

outliers any proxy company whose cost of equity estimated under the model in question 

is more than 150% of the median result of all of the potential proxy group members in 

that model before any high-end or low-end outlier test is applied.169 

In Opinion No. 569, the Commission adopted a revised low-end outlier test that

eliminates proxy group ROE results that are less than the yields of generic corporate Baa 

bond plus 20% of the CAPM risk premium.170 The Commission explained that it was 

necessary to include a risk premium in the low-end outlier test to account for the fact that 

declining bond yields have caused the ROE that investors would consider to yield 

“essentially the same expected return as a bond” to increase.171 The Commission 

concluded that the 20% risk premium was reasonable because it is sufficiently large to 

account for the additional risks of equities over bonds, but not so large as to 

168 Opinion No. 569, 169 FERC ¶ 61,129 at P 379 (citing Pioneer Transmission, 

LLC, 126 FERC ¶ 61,281, at P 94 (2009), reh’g denied, 130 FERC ¶ 61,044 (2010); S. 

Cal. Edison Co., 131 FERC ¶ 61,020, at PP 54-56 (2010)).

169 MISO Briefing Order, 165 FERC ¶ 61,118 at P 54; Coakley Briefing Order, 

165 FERC ¶ 61,030 at P 53.

170 Opinion No. 569, 169 FERC ¶ 61,129 at P 387.

171 Id.
Docket No. PL19-4-000 - 52 -

inappropriately exclude proxy group members whose ROE is distinguishable from 

debt.172 

In addition, Opinion No. 569 adopted the high-end outlier test proposed in the 

Briefing Orders.

173 The Commission reasoned that because the Commission will 

continue to use the midpoint as the measure of central tendency for region-wide public

utility ROEs, a high-end outlier test was necessary to eliminate proxy group members 

whose ROEs are unreasonably high.174

The Commission explained that both the low-end and high-end outlier tests would 

be subject to a natural-break analysis, which determines whether proxy group companies 

screened as outliers, or those almost screened as outliers, truly reflect non-representative 

data and should thus be removed from the proxy group.175 The Commission noted that 

the natural break analysis provides the Commission with flexibility to reach a reasonable 

result based on the particular array of ROEs presented in a particular case.176

172 Id. P 388.

173 Id. P 375.

174 Id.

175 Id. P 396. Typically, this involves examining the distance between that proxy 

group company and the next closest proxy group company and comparing that to the 

dispersion of other proxy group companies. As explained in Opinion No. 569, the natural 

break analysis may justify excluding companies whose ROEs are a few basis points 

above the low-end outlier screen if their ROEs are far lower than other companies in the 

proxy group, and a similar analysis could apply with regard to high-end outliers. Id.

176 Id. P 397.
Docket No. PL19-4-000 - 53 -

In Opinion No. 569-A, the Commission denied requests for rehearing as to the 

low-end outlier test. The Commission rejected challenges to the threshold based on 20%

of the CAPM risk premium and similarly rejected claims that the low-end outlier test is 

inconsistent with Commission precedent.177

Moreover, the Commission modified the high-end outlier test adopted in Opinion 

No. 569 to increase the exclusion threshold to 200% of the median result of all the 

potential proxy group members in the model in question before any high or low-end 

outlier test is applied. The Commission recognized that a high-end outlier test with a 

bright-line threshold could inappropriately exclude rational ROEs that are not anomalous 

for the subject utility and found that increasing the threshold to 200% will reduce the risk 

that such rational results are inappropriately excluded.178

2. NOI Comments

Most commenters agree that the outlier tests proposed in the Briefing Orders are

not appropriate for natural gas or oil pipelines.179 These commenters assert that outlier 

tests are unnecessary because the Commission sets natural gas and oil pipeline ROEs at 

the median of the proxy group results, which reduces the distortion that high-end cost of 

equity estimates may cause when the ROE is set at the midpoint of the proxy group 

177 Opinion No. 569-A, 171 FERC ¶ 61,154 at P 161.

178 Id. P 154.

179 AOPL Initial Comments at 4, 15-17; INGAA Initial Comments at 10-11, 65-

69; Plains Comments at 1-2, 5-6.
Docket No. PL19-4-000 - 54 -

results.180 CAPP, by contrast, states that the outlier tests proposed in the Briefing Orders 

would be useful in forming proxy groups.181 Similarly, although it opposes use of a highend outlier test, INGAA states that there is theoretical support for applying a low-end 

outlier test.182 However, INGAA opposes the proposed low-end outlier test’s 20%

threshold and proposes two alternative approaches.183

3. Commission Determination

We decline to adopt specific outlier tests for use in determining natural gas and oil 

pipeline ROEs. Rather, we will continue to address outliers in pipeline proxy groups on a 

case-by-case basis in accordance with our policy to remove “anomalous” or “illogical” 

cost-of-equity estimates that do not provide meaningful indicia of the returns that a 

pipeline needs to attract capital from the market.

184

We believe that rigid outlier screens are unnecessary for natural gas and oil 

pipelines for two reasons. First, as commenters observe, the Commission’s use of the 

proxy group median in setting pipeline ROEs reduces the effect that low and high-end 

180 AOPL Initial Comments at 16; INGAA Initial Comments at 67; Plains 

Comments at 5-6; NGSA Comments at 20. Magellan states that it may be unreasonable 

to apply an outlier test to oil pipelines because removing outlying results could reduce the 

number of proxy group companies to an unacceptable level. Magellan Initial Comments 

at 17-18

181 CAPP Initial Comments at 21-22.

182 INGAA Initial Comments at 69.

183 Id.

184 E.g., Opinion No. 546, 154 FERC ¶ 61,070 at P 196.
Docket No. PL19-4-000 - 55 -

outliers may exert on the ROE result. When the Commission sets an ROE at the 

midpoint, as it does for RTO-wide ROEs in the public utility context, the ROE is set at 

the average of the highest and lowest ROEs of the proxy group members.185 The low and

high-end returns are therefore direct inputs into the calculation of the midpoint the 

Commission uses to determine the ROE. In contrast, when the Commission uses the 

median to determine the ROE of a pipeline, the presence of an outlier has a much smaller 

effect.186

Second, as discussed above, the pool of entities eligible for inclusion in natural gas 

and oil pipeline proxy groups has declined in recent years and remains small. Adopting 

rigid outlier screens could further reduce the number of potential proxy group members 

and make it difficult to form pipeline proxy groups with at least four or five members.

We also clarify that we do not anticipate applying a natural break analysis in 

pipeline ROE proceedings. Unlike in the public utility context, we are concerned that a 

natural break analysis could exacerbate the difficulties in forming pipeline proxy groups 

by further reducing the number of potential proxy group members. Moreover, we believe 

that the natural break analysis is less useful in pipeline proceedings. As explained in 

Opinion No. 569, the purpose of the natural break analysis is to provide the Commission 

185 E.g., Midwest Indep. Transmission Sys. Operator, Inc., 106 FERC ¶ 61,302, at 

PP 8-10 (2004).

186 Although the decision whether to include or remove an outlier may affect 

which member of the proxy group is the median result, the outlier is not a direct part of 

the ROE calculation as it is when the Commission uses the midpoint.
Docket No. PL19-4-000 - 56 -

with flexibility to determine whether a proxy group company ROE is truly an outlier or 

contains useful information.187 Because there are so few members of pipeline proxy 

groups, the natural break analysis is less likely to identify outliers as this typically

involves examining the distance between a given proxy group result and the next closest 

result, and comparing that to the dispersion of other proxy group results.

188

We will continue to apply the general principle that “anomalous” or “illogical” 

data should be excluded from the proxy group. Using this approach, the Commission 

will retain flexibility to determine whether a given proxy group company is truly an 

outlier or whether it contains useful information in light of the particular array of ROEs 

presented by the potential proxy group companies.

189

D. Oil Pipeline Page 700s

In light of the impending five-year review of the oil pipeline index, we encourage 

oil pipelines to file updated FERC Form No. 6, page 700 data for 2019 reflecting the 

revised ROE methodology established herein. Although the Commission will address 

this issue further in the five-year review, reflecting the revised methodology in page 700 

data for 2019 may help the Commission better estimate industry-wide cost changes for 

purposes of the five-year review. Pipelines that previously filed Form No. 6 for 2019 and 

choose to submit updated page 700 data should, in a footnote on the updated page 700, 

187 Opinion No. 569, 169 FERC ¶ 61,129 at P 395.

188 Id. P 390.

189 Id. P 395.
Docket No. PL19-4-000 - 57 -

either (a) confirm that their previously filed Form No. 6 was based solely upon the DCF 

model or (b) provide the real ROE and resulting cost of service based solely upon the 

DCF model as it was applied to oil pipelines prior to this Policy Statement.

As discussed below, the Paperwork Reduction Act (PRA)190 requires each federal 

agency to seek and obtain the Office of Management and Budget’s (OMB) approval 

before undertaking a collection of information directed to ten or more persons. 

Following OMB approval of this voluntary information collection, the Commission will 

issue a notice affording pipelines two weeks to file updated page 700 data reflecting the 

revised ROE methodology.

191 Before that time, pipelines that have not filed Form No. 6 

for 2019 (e.g., pipelines that have received an extension of the Form No. 6 filing 

deadline) should file page 700 data consistent with their previously-granted extensions

and such filings should be based upon the DCF model, which was the Commission’s oil 

pipeline ROE methodology as of April 20, 2020, the date such filings were due.

192

190 44 USC 3501-21.

191 Following OMB approval of this information collection, the Commission will 

issue a notice specifying the date on which any updated page 700 should be filed.

192 Upon OMB approval, these pipelines will have the opportunity to file updated 

page 700 data reflecting the Commission’s revised oil pipeline ROE methodology.
Docket No. PL19-4-000 - 58 -

III. Information Collection Statement

The PRA requires each federal agency to seek and obtain OMB approval before 

undertaking a collection of information directed to ten or more persons.193 Upon 

approval of a collection of information, OMB will assign an OMB Control Number and 

expiration date. The refiling of page 700 of FERC Form No. 6 is being requested on a 

voluntary basis.

The Commission is submitting this voluntary information collection (the one-time 

re-filing of page 700 of FERC Form No. 6) to OMB for its review and approval under 

section 3507(d) of the PRA. The Commission solicits comments on the Commission’s 

need for this information, whether the information will have practical utility, the accuracy 

of the burden estimates, ways to enhance the quality, utility, and clarity of the 

information to be collected or retained, and any suggested methods for minimizing 

respondents’ burden, including the use of automated information techniques.

Burden Estimate:

194 The estimated additional one-time burden and cost195 for 

making a voluntary filing to update page 700 of the FERC Form No. 6 consistent with 

193 OMB’s regulations requiring approval of certain collections of information are 

at 5 CFR 1320.

194 “Burden” is the total time, effort, or financial resources expended by persons to 

generate, maintain, retain, or disclose or provide information to or for a Federal agency. 

For further explanation of what is included in the information collection burden, refer to 

5 CFR 1320.3.

195 Commission staff estimates that the industry’s skill set and cost (for wages and 

benefits) for completing and filing FERC Form No. 6 is comparable to the Commission’s 
Docket No. PL19-4-000 - 59 -

this Policy Statement is detailed in the following table. The first row includes the 

industry cost of performing cost-of-equity studies to develop an updated ROE estimate 

for the period ending December 31, 2019. The second row shows the cost of reflecting

the updated ROE estimates and revised Annual Cost of Service on page 700 of the FERC

Form No. 6.

Estimated Annual Changes to Burden due to Docket No. PL19-4196

(Figures may be rounded)

Number of 

Potential 

Respondents

(1)

Annual 

Number of 

Responses

Per

Responden

t 

(2)

Total 

Number 

of 

Response

s

(1)*(2)= 

(3)

Average 

Burden 

Hours & 

Cost ($) 

Per 

Response

(4)

Total 

Annual 

Burden 

Hours & 

Total 

Annual 

Cost ($)

(3)*(4)=

(5)

Cost per 

Respond

ent ($)

(5)÷(1)= 

(6)

Updat

ed 

ROE 

Study 244 1 244

187.5

hrs.; 

$15,000

45,750

hrs.; 

$3,660,000 $15,000

Refile 

FERC 

Form 

No. 6, 

page 

700 244 1 244

0.5 hrs.; 

$40

122 hrs.; 

$9,760 $40

Total 

Chang

es, 

Due to 

PL19-

4 244 1 244 $3,669,760 $15,040

skill set and average cost. The FERC 2019 average salary plus benefits for one FERC 

full-time equivalent (FTE) is $167,091/year or $80.00/hour.

196 We have conservatively assumed a 100% voluntary response rate. 
Docket No. PL19-4-000 - 60 -

This additional one-time burden is expected to be imposed in Year 1.

Title: FERC Form No. 6, Annual Report of Oil Pipeline Companies

Action: Revision to FERC Form No. 6, page 700.

OMB Control No.: 1902-0022.

Respondents: Oil pipelines.

Frequency of Responses: One time.

Necessity of the Information: As established in Order No. 561,197 oil pipelines may 

increase their existing transportation rates on an annual basis using an industry-wide 

index. The Commission reviews the index level every five years.198 In the five-year 

review, the Commission establishes the index level based upon a methodology that

calculates pipeline cost changes on a per barrel-mile basis based upon FERC Form No. 6, 

page 700 data.199 Depending upon the record developed in the 2020 five-year review of 

the oil pipeline index, the Commission will consider using the updated FERC Form No. 

6, page 700 data for 2019 in that proceeding.

Interested persons may obtain information on the reporting requirements by 

contacting the following: Federal Energy Regulatory Commission, 888 First Street NE, 

197 Revisions to Oil Pipeline Regulations Pursuant to the Energy Policy Act of 

1992, Order No. 561, FERC Stats. & Regs. ¶ 30,985 (1993), order on reh’g, Order 

No. 561-A, FERC Stats. & Regs. ¶ 31,000 (1994), aff’d, Ass’n of Oil Pipelines v. FERC, 

83 F.3d 1424 (D.C. Cir. 1996).

198 Id. at 30,941.

199 Five-Year Review of the Oil Pipeline Index, 153 FERC ¶ 61,312, at PP 5, 12 

(2015). 
Docket No. PL19-4-000 - 61 -

Washington, DC 20426 [Attention: Ellen Brown, Office of the Executive Director, email: DataClearance@ferc.gov and phone: (202) 502-8663].

Please send comments concerning the collection of information and the associated 

burden estimates to: Office of Information and Regulatory Affairs, Office of 

Management and Budget [Attention: Federal Energy Regulatory Commission Desk 

Officer]. Due to security concerns, comments should be sent directly to 

www.reginfo.gov/public/do/PRAMain. Comments submitted to OMB should be sent 

within 30 days of publication of this notice in the Federal Register and refer to FERC 

Form No. 6 and OMB Control No. 1902-0022.

IV. Document Availability

In addition to publishing the full text of this document in the Federal Register, the 

Commission provides all interested persons an opportunity to view and/or print the 

contents of this document via the Internet through the Commission’s Home Page 

(http://www.ferc.gov)). At this time, the Commission has suspended access to the 

Commission’s Public Reference Room, due to the proclamation declaring a National 

Emergency concerning the Novel Coronavirus Disease (COVID-19), issued by the 

President on March 13, 2020.

From the Commission’s Home Page on the Internet, this information is available 

on eLibrary. The full text of this document is available on eLibrary in PDF and 

Microsoft Word format for viewing, printing, and/or downloading. To access this 

document in eLibrary, type the docket number excluding the last three digits of this 

document in the docket number field.
Docket No. PL19-4-000 - 62 -

User assistance is available for eLibrary and the Commission’s website during 

normal business hours from the Commission’s Online Support at (202) 502-6652 (toll 

free at 1-866-208-3676) or email at ferconlinesupport@ferc.gov, or the Public Reference 

Room at (202) 502-8371, TTY (202) 502-8659. E-mail the Public Reference Room at 

public.referenceroom@ferc.gov.

V. Effective Date

This Policy Statement will become effective [date of publication in the Federal 

Register].

By the Commission.

( S E A L )

Nathaniel J. Davis, Sr.,

Deputy Secretary.