169 FERC ¶ 61,129 

UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

Before Commissioners: Neil Chatterjee, Chairman; 

 Richard Glick and Bernard L. McNamee. 

 

Association of Businesses Advocating Tariff Equity 

Coalition of MISO Transmission Customers 

Illinois Industrial Energy Consumers 

Indiana Industrial Energy Consumers, Inc. 

Minnesota Large Industrial Group 

Wisconsin Industrial Energy Group 

 v. 

Midcontinent Independent System Operator, Inc. 

ALLETE, Inc. 

Ameren Illinois Company 

Ameren Missouri 

Ameren Transmission Company of Illinois 

American Transmission Company LLC 

Cleco Power LLC 

Duke Energy Business Services, LLC 

Entergy Arkansas, Inc. 

Entergy Gulf States Louisiana, LLC 

Entergy Louisiana, LLC 

Entergy Mississippi, Inc. 

Entergy New Orleans, Inc. 

Entergy Texas, Inc. 

Indianapolis Power & Light Company 

International Transmission Company 

ITC Midwest LLC 

Michigan Electric Transmission Company, LLC 

MidAmerican Energy Company 

Montana-Dakota Utilities Co. 

Northern Indiana Public Service Company 

Northern States Power Company-Minnesota 

Northern States Power Company-Wisconsin 

Otter Tail Power Company 

Southern Indiana Gas & Electric Company 

Docket No. EL14-12-003 
Docket Nos. EL14-12-003 and EL15-45-000 - 2 - 

Arkansas Electric Cooperative Corporation 

Mississippi Delta Energy Agency 

Clarksdale Public Utilities Commission 

Public Service Commission of Yazoo City 

Hoosier Energy Rural Electric Cooperative, Inc. 

 v. 

ALLETE, Inc. 

Ameren Illinois Company 

Ameren Missouri 

Ameren Transmission Company of Illinois 

American Transmission Company LLC 

Cleco Power LLC 

Duke Energy Business Services, LLC 

Entergy Arkansas, Inc. 

Entergy Gulf States Louisiana, LLC 

Entergy Louisiana, LLC 

Entergy Mississippi, Inc. 

Entergy New Orleans, Inc. 

Entergy Texas, Inc. 

Indianapolis Power & Light Company 

International Transmission Company 

ITC Midwest LLC 

Michigan Electric Transmission Company, LLC 

MidAmerican Energy Company 

Montana-Dakota Utilities Co. 

Northern Indiana Public Service Company 

Northern States Power Company-Minnesota 

Northern States Power Company-Wisconsin 

Otter Tail Power Company 

Southern Indiana Gas & Electric Company 

Docket No. EL15-45-000 

 

OPINION NO. 569 

ORDER ON BRIEFS, REHEARING, AND INITIAL DECISION 

(Issued November 21, 2019) 
Docket Nos. EL14-12-003 and EL15-45-000 - 3 - 

TABLE OF CONTENTS 

Paragraph Numbers 

I. Background ..................................................................................................................... 2.

A. Opinion No. 531 et seq. ............................................................................................. 2.

B. Opinion No. 551 et seq. ............................................................................................. 3.

C. Second Complaint Against MISO TOs’ ROE ........................................................... 5.

D. Emera Maine ............................................................................................................. 7.

E. Briefing Orders ........................................................................................................ 11.

II. Overview ...................................................................................................................... 18.

III. Use of Multiple Models Generally ............................................................................. 22.

A. Background ............................................................................................................. 22.

B. CAPs ........................................................................................................................ 24.

C. MISO TOs ............................................................................................................... 26.

D. Trial Staff ................................................................................................................ 27.

E. LPSC ........................................................................................................................ 28.

F. RPGI ........................................................................................................................ 29.

G. Alliant ...................................................................................................................... 30.

H. Commission Determination .................................................................................... 31.

IV. Presumptively Just and Reasonable ROE Ranges for Determining if an Existing ROE 

is Unjust and Unreasonable under Prong One of Section 206 ......................................... 40.

A. Background ............................................................................................................. 40.

B. Commission Determination ..................................................................................... 57.

V. DCF .............................................................................................................................. 87.

A. Background ............................................................................................................. 87.

B. Dividend Yield ........................................................................................................ 90.

C. Short-Term Growth Rate ....................................................................................... 101.

D. Long-Term Growth Projection .............................................................................. 134.

E. Has DCF Performed Inconsistently with Underlying Theory ............................... 160.

VI. Expected Earnings Model ........................................................................................ 172.

A. Background ........................................................................................................... 172.

B. Parties Opposing the Use of Expected Earnings ................................................... 178.

C. Parties Supporting the use of Expected Earnings .................................................. 186.

D. Commission Determination .................................................................................. 200.

VII. CAPM ..................................................................................................................... 229.

A. Background ........................................................................................................... 229.

B. Use of CAPM Generally ....................................................................................... 236.

C. Calculation of Market Risk Premium .................................................................... 237.
Docket Nos. EL14-12-003 and EL15-45-000 - 4 - 

D. Betas and Size Premium ........................................................................................ 277.

VIII. Risk Premium Model ............................................................................................. 304.

A. Background ........................................................................................................... 304.

B. CAPs ...................................................................................................................... 309.

C. RPGI ...................................................................................................................... 319.

D. LPSC ..................................................................................................................... 327.

E. OMS ....................................................................................................................... 330.

F. Trial Staff ............................................................................................................... 332.

G. MISO TOs ............................................................................................................. 336.

H. Commission Determination .................................................................................. 340.

IX. Potential Consideration of State ROEs .................................................................... 353.

A. Briefing Order Proposal ........................................................................................ 353.

B. CAPs ...................................................................................................................... 354.

C. Alliant .................................................................................................................... 358.

D. MISO TOs ............................................................................................................. 359.

E. Commission Determination ................................................................................... 363.

X. Proxy Group Construction ......................................................................................... 365.

A. High End Outlier Test ........................................................................................... 367.

B. Low-End Outlier Test ............................................................................................ 379.

C. Natural Break Analysis ......................................................................................... 390.

XI. Use of Midpoint or Median as Measure of Central Tendency ................................. 398.

A. CAPs ...................................................................................................................... 400.

B. MISO TOs ............................................................................................................. 404.

C. Commission Determination ................................................................................... 409.

XII. Weighting of Models .............................................................................................. 415.

A. Background ........................................................................................................... 415.

B. CAPs ...................................................................................................................... 416.

C. MISO TOs ............................................................................................................. 419.

D. Trial Staff .............................................................................................................. 422.

E. RPGI ...................................................................................................................... 423.

F. Commission Determination ................................................................................... 424.

XIII. Sequencing of Calculations in Determining Composite Zone .............................. 428.

A. Background ........................................................................................................... 428.

B. CAPs ...................................................................................................................... 430.

C. MISO TOs ............................................................................................................. 434.

D. Commission Determination .................................................................................. 437.

XIV. Use of Group-Wide ROEs as Opposed to Individual Utility ROEs ..................... 440.

A. Alliant .................................................................................................................... 440.

B. OMS ...................................................................................................................... 441.

C. MISO TOs ............................................................................................................. 442.
Docket Nos. EL14-12-003 and EL15-45-000 - 5 - 

D. Commission Determination .................................................................................. 443.

XV. ROE Incentives Cap................................................................................................ 447.

A. Background ........................................................................................................... 447.

B. CAPs ...................................................................................................................... 448.

C. MISO TOs ............................................................................................................. 451.

D. Commission Determination .................................................................................. 452.

XVI. Complaint-Specific Results: First Complaint ....................................................... 459.

A. Composition of Starting Proxy Group .................................................................. 461.

B. DCF Proxy Group and Analysis ............................................................................ 508.

C. CAPM Proxy Group and Analysis ........................................................................ 513.

D. Composite Zone of Reasonableness and FPA Section 206 Findings ................... 516.

XVII. Complaint Specific Results: Second Complaint .................................................. 524.

A. Existing ROE for Purposes of Second Complaint ................................................ 524.

B. Composition of Starting Proxy Group ................................................................... 533.

C. DCF Proxy Group and Analysis ............................................................................ 536.

D. CAPM Proxy Group and Analysis ........................................................................ 555.

E. Composite Zone of Reasonableness and FPA section 206 Findings .................... 558.

XVIII. Refunds in Second Complaint Proceeding ......................................................... 559.

A. CAPs ...................................................................................................................... 560.

B. MISO TOs ............................................................................................................. 564.

C. Commission Determination ................................................................................... 566.

XIX. Conclusion ............................................................................................................. 574.

 
Docket Nos. EL14-12-003 and EL15-45-000 - 6 - 

On November 15, 2018, the Commission issued an Order Directing Briefs in the 

above-captioned proceedings.1

 The Briefing Order directed the participants in the abovecaptioned proceedings to submit briefs regarding: (1) a proposed framework for 

determining whether an existing base return on equity (ROE) is unjust and unreasonable 

under the first prong of Federal Power Act (FPA) section 206;2

 and (2) a revised 

methodology for determining just and reasonable base ROEs under the second prong of 

FPA section 206.3

 As discussed below, we will adopt the proposal in the Briefing Order, 

with certain revisions. Principally, we will not adopt the use of the expected earnings 

(Expected Earnings) and risk premium (Risk Premium) models in our ROE analyses 

under the first and second prongs of section 206, and instead will use only the discounted 

cash flow (DCF) model and capital-asset pricing model (CAPM) in our ROE analyses 

under both prongs of section 206. 

I. Background 

A. Opinion No. 531 et seq. 

In Opinion No. 531, the Commission adopted certain changes to its use of the 

DCF methodology for evaluating and setting the Commission-allowed ROE for the 

New England transmission owners (New England TOs). In particular, the Commission 

elected to replace the “one-step” DCF model, which considers only short-term growth 

projections for a public utility, with a “two-step” model that considers both short- and 

long-term growth projections.4

 The Commission also departed from its typical practice 

of setting the just and reasonable ROE of a group of utilities at the midpoint of the zone 

of reasonableness. The Commission explained that evidence of “anomalous” capital 

market conditions, including “bond yields [that were] at historic lows,” made the 

Commission “less confiden[t] that the midpoint of the zone of reasonableness . . . 

accurately reflects the [ROE] necessary to meet the Hope and Bluefield capital attraction 

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

Inc., 165 FERC ¶ 61,118 (2018) (Briefing Order). 

2

 16 U.S.C. § 824e (2018). 

3

 Briefing Order, 165 FERC ¶ 61,118 at PP 13-14. 

4 See generally, Coakley Mass. Attorney Gen. v. Bangor Hydro-Elec. Co., 

Opinion No. 531, 147 FERC ¶ 61,234, at PP 8, 32-41, order on paper hearing, Opinion 

No. 531-A, 149 FERC ¶ 61,032 (2014), order on reh’g, Opinion No. 531-B, 150 FERC 

¶ 61,165 (2015), rev’d, Emera Maine v. FERC, 854 F.3d 9 (D.C. Cir. 2017) (Emera 

Maine). 
Docket Nos. EL14-12-003 and EL15-45-000 - 7 - 

standards.”5

 The Commission therefore looked to four alternative benchmark models: 

three financial models—the Risk Premium model, CAPM, and Expected Earnings 

model6

—as well as a comparison with the ROEs approved by state public utility 

commissions.7

 In considering those models, the Commission emphasized that it was not 

departing from its long-standing reliance on the DCF model, but rather relying on those 

models only to “inform the just and reasonable placement of the ROE within the zone of 

reasonableness established . . . by the DCF methodology.”8

 Based on these alternative 

models, the Commission determined that an ROE of 10.57 percent, the midpoint of the 

upper half of the zone of reasonableness produced by the two-step DCF model, would be 

just and reasonable. Because that figure differed from the New England TOs’ existing 

11.14 percent ROE, the Commission concluded that the existing base ROE had become 

unjust and unreasonable and it therefore set New England TOs’ base ROE at 10.57 

percent, pending a paper hearing concerning the long-term growth projection to use in 

the DCF analysis. Following that hearing, in Opinion No. 531-A the Commission 

reaffirmed its conclusion that 10.57 percent was the just and reasonable ROE and that 

New England TOs’ existing ROE was unjust and unreasonable. The Commission 

required New England TOs to submit a compliance filing to implement their new ROEs 

effective October 16, 2014—the date of Opinion No. 531-A. 

 5

 Opinion No. 531, 147 FERC ¶ 61,234 at PP 144-145 & n.285. “Hope” and 

“Bluefield” refer to a pair of U.S. Supreme Court cases that require the Commission “to 

set a rate of return commensurate with other enterprises of comparable risk and sufficient 

to assure that enough capital is attracted to the utility to enable it to meet the public's 

needs.” Boroughs of Ellwood City, Grove City, New Wilmington, Wampum, & 

Zelienople, Pa. v. FERC, 731 F.2d 959, 967 (D.C. Cir. 1984) (citing FPC v. Hope Nat. 

Gas Co., 320 U.S. 591, 603 (1944) (Hope) and Bluefield Waterworks Improvement Co. v. 

Pub. Serv. Comm’n of W.V., 262 U.S. 679 (1923) (Bluefield)). 

6

 As discussed further below, the Risk Premium model and CAPM estimate cost of 

equity using the premium that investors expect to earn on a stock investment over and 

above the return that they expect to earn on a bond investment, and the Expected 

Earnings model is a method of calculating the earnings that an investor expects to receive 

on the book value of a particular stock. 

7

 Opinion No. 531, 147 FERC ¶ 61,234 at PP 147-149. 

8 Id. P 146. 
Docket Nos. EL14-12-003 and EL15-45-000 - 8 - 

B. Opinion No. 551 et seq.

On November 12, 2013, multiple complainants9 filed a complaint (First 

Complaint) in Docket No. EL14-12-000 pursuant to FPA section 206, alleging, among 

other things, that the Midcontinent Independent System Operator, Inc.’s (MISO) 

transmission-owning members’ (MISO TOs) base ROE reflected in MISO’s Open 

Access Transmission, Energy and Operating Reserve Markets Tariff (Tariff) was unjust 

and unreasonable.10 At the time of the First Complaint, MISO TOs had a base ROE of 

12.38 percent (except for the ATCLLC zone which had a 12.20 percent ROE),11 and their 

total ROE—i.e., the base ROE plus any ROE adders approved by the Commission—was 

not permitted to exceed 15.96 percent. The Commission established the MISO TOs’ 

 9

 The complainants consist of a group of large industrial customers: Association of 

Businesses Advocating Tariff Equity (ABATE); Coalition of MISO Transmission 

Customers (Coalition of MISO Customers); Illinois Industrial Energy Consumers (IIEC); 

Indiana Industrial Energy Consumers, Inc. (INDIEC); Minnesota Large Industrial Group 

(MLIG); and Wisconsin Industrial Energy Group. 

10 The following MISO transmission owners were named in the First Complaint: 

ALLETE, Inc. for its operating division Minnesota Power (and its subsidiary Superior 

Water, L&P); Ameren Services Company, as agent for Union Electric Company, Ameren 

Illinois Company, and Ameren Transmission Company of Illinois; American 

Transmission Company LLC (ATC); Cleco Power LLC; Duke Energy Corporation for 

Duke Energy Indiana, Inc.; Entergy Arkansas, Inc.; Entergy Louisiana, LLC; Entergy 

Gulf States Louisiana, L.L.C.; Entergy Mississippi, Inc.; Entergy New Orleans, Inc.; 

Entergy Texas, Inc.; Indianapolis Power & Light Company; International Transmission 

Company; ITC Midwest LLC; METC; MidAmerican Energy Company; Montana-Dakota 

Utilities Co.; Northern Indiana Public Service Company; Northern States Power 

Company, a Minnesota corporation, and Northern States Power Company, a Wisconsin 

corporation, subsidiaries of Xcel Energy Inc.; Northwestern Wisconsin Electric 

Company; Otter Tail Power Company; Southern Indiana Gas & Electric Company; and 

Wolverine Power Supply Cooperative, Inc. Intervenor Xcel Energy Services Inc. did not 

join certain of the MISO Transmission Owners’ pleadings in this proceeding, but 

generally supports this brief on behalf of respondents Northern States Power Company, a 

Minnesota corporation, and Northern States Power Company, a Wisconsin corporation. 

11 For the sake of clarity, we refer to this ROE of the MISO TOs as 12.38 percent 

in this order, without separately identifying that the ATCLLC zone had a 12.20 percent 

ROE. Our discussion and decisions with respect to the MISO TOs’ 12.38 percent ROE 

also apply to the 12.20 percent ATCLLC ROE. 
Docket Nos. EL14-12-003 and EL15-45-000 - 9 - 

preexisting 12.38 percent ROE in a 2002 decision.12 That ROE was based on a DCF 

analysis using financial data for the six-month period ending February 2002.13 On 

October 16, 2014, the same date that the Commission issued Opinion No. 531-A, it set 

the First Complaint for hearing before an Administrative Law Judge and established a 

refund effective date of November 12, 2013.14 

Following the hearing, the Presiding Judge issued an Initial Decision,15 and the 

Commission subsequently issued Opinion No. 551.16 In Opinion No. 551, the 

Commission calculated the just and reasonable ROE using the two-step DCF 

methodology from Opinion No. 531 and financial data for the period January 1 through 

June 30, 2015. The Commission affirmed the conclusions of Initial Decision (I), finding 

that the Presiding Judge correctly applied the two-step DCF analysis required by Opinion 

No. 531.17 The Commission also affirmed the Presiding Judge’s determination that, as in 

Opinion No. 531, there were anomalous capital market conditions such that the 

Commission had less confidence that the midpoint of the zone of reasonableness 

produced by a mechanical application of the DCF methodology satisfied the capital 

 12 See Midwest Indep. Transmission Sys. Operator, Inc., 99 FERC ¶ 63,011, initial 

decision affirmed as to base ROE, 100 FERC ¶ 61,292 (2002), reh’g denied, 102 FERC 

¶ 61,143 (2003), order on remand, 106 FERC ¶ 61,302 (2004). The ATCLLC zone base 

ROE of 12.20 percent was established as part of a settlement agreement that was filed 

with the Commission on March 26, 2004. In Docket No. ER04-108-000, the 

Commission approved the uncontested settlement. Am. Transmission Co. LLC, 

107 FERC ¶ 61,117 (2004). 

13 Midwest Indep. Transmission Sys. Operator, Inc., 99 FERC ¶ 63,011, App. A. 

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

Inc., 149 FERC ¶ 61,049, at P 188 (2014) (MISO I Hearing Order), order on reh’g, 

156 FERC ¶ 61,060 (2016) (MISO I Rehearing Order). In the MISO I Rehearing Order, 

the Commission denied requests for rehearing and clarification of the MISO I Hearing 

Order and clarified that non-public utility transmission owners are subject to the outcome 

of that proceeding. MISO I Rehearing Order, 156 FERC ¶ 61,060 at PP 47-48. 

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

Inc., 153 FERC ¶ 63,027 (2015) (Initial Decision (I)). 

16 Ass’n of Businesses Advocating Tariff Equity v. Midcontinent Indep. Sys. 

Operator, Inc., Opinion No. 551, 156 FERC ¶ 61,234 (2016) (affirming Initial Decision 

(I), 153 FERC ¶ 63,027). 

17 See generally Opinion No. 551, 156 FERC ¶ 61,234 at P 9. 
Docket Nos. EL14-12-003 and EL15-45-000 - 10 - 

attraction standards of Hope and Bluefield.

18 The Commission found that the Presiding 

Judge reasonably considered evidence of alternative methodologies for determining the 

ROE and the ROEs approved by state regulatory commissions, for purposes of deciding 

to set the ROE at the central tendency of the upper half of the zone of reasonableness, 

setting the base ROE for MISO TOs at 10.32 percent.19 The Commission required MISO 

TOs to submit a compliance filing to implement their new ROEs effective September 28, 

2016, the date of Opinion No. 551, and to provide refunds for the November 12, 2013-

February 11, 2015 refund period. Following the issuance of Opinion No. 551, numerous 

parties submitted requests for rehearing. 

C. Second Complaint Against MISO TOs’ ROE 

On February 12, 2015, a new set of complainants20 filed a complaint (Second 

Complaint) also alleging that the MISO TOs’ base ROE of 12.38 percent was unjust and 

unreasonable.21 Relying on an updated two-step DCF analysis, the Second Complaint 

 18 Id.

19 Id.

20 Complainants for the Second Complaint consist of: Arkansas Electric 

Cooperative Corporation (Arkansas Electric Cooperative); Mississippi Delta Energy 

Agency and its two members, Clarksdale Public Utilities Commission of the City of 

Clarksdale, Mississippi and Public Service Commission of Yazoo City of the City of 

Yazoo City, Mississippi; and Hoosier Energy Rural Electric Cooperative, Inc. (Hoosier 

Cooperative). 

21 The following MISO transmission owners were named in the Second 

Complaint: ALLETE, Inc. (for its operating division Minnesota Power, Inc. and its 

wholly-owned subsidiary Superior Water Light, & Power Company; Ameren Illinois 

Company; Union Electric Company (identified as Ameren Missouri); Ameren 

Transmission Company of Illinois; ATC; Cleco Power LLC; Duke Energy Business 

Services, LLC; Entergy Arkansas, Inc.; Entergy Gulf States Louisiana, LLC; Entergy 

Louisiana, LLC; Entergy Mississippi, Inc.; Entergy New Orleans, Inc.; Entergy Texas, 

Inc.; Indianapolis Power & Light Company; International Transmission Company, ITC 

Midwest LLC, and Michigan Electric Transmission Company, LLC; MidAmerican 

Energy Company; Montana-Dakota Utilities Co., Northern Indiana Public Service 

Company; Northern States Power Company-Minnesota; Northern States Power 

Company-Wisconsin; Otter Tail Power Company; and Southern Indiana Gas & Electric 

Company. 
Docket Nos. EL14-12-003 and EL15-45-000 - 11 - 

complainants argued that the base ROE should be no higher than 8.67 percent.22 On 

June 18, 2015, the Commission established hearing procedures and set a refund effective 

date of February 12, 2015.23

Parties filed requests for rehearing of the MISO II Hearing Order, and on July 21, 

2016, the Commission generally denied these rehearing requests.24 Following the 

MISO II Hearing Order, the Presiding Judge issued the Initial Decision on June 30, 

2016.25 The Presiding Judge adopted a zone of reasonableness of 6.75 percent to 10.68 

percent based on financial data for the period July 1, 2015 through December 31, 2015. 

The Presiding Judge also determined that the anomalous market conditions identified in 

Opinion No. 531 persisted and, after considering the alternative benchmark 

methodologies, that the just and reasonable ROE was 9.70 percent—halfway between the 

midpoint and the upper bound of the zone of reasonableness. The participants filed briefs 

on and opposing exception, which are currently pending before the Commission. 

D. Emera Maine 

On April 14, 2017, the United States Court of Appeals for the District of Columbia 

Circuit (D.C. Circuit) issued its Emera Maine decision, vacating and remanding Opinion 

No. 531 et seq. As an initial matter, the D.C. Circuit was not persuaded by New England 

TOs’ argument that an ROE within the DCF-produced zone of reasonableness could not 

be deemed unjust and unreasonable. The D.C. Circuit explained that the zone of 

reasonableness established by the DCF is not “coextensive” with the “statutory” zone of 

reasonableness envisioned by the FPA.26 Accordingly, the D.C. Circuit concluded that 

the fact that New England TOs’ existing ROE fell within the zone of reasonableness 

 22 Ark. Elec. Coop. Corp. v. ALLETE, Inc., 151 FERC ¶ 61,219, at P 1 (2015) 

(MISO II Hearing Order), order on reh’g, 156 FERC ¶ 61,061 (2016) 

(MISO II Rehearing Order). 

23 MISO II Hearing Order, 151 FERC ¶ 61,219 at P 1. 

24 See MISO II Rehearing Order, 156 FERC ¶ 61,061. 

25 Ark. Elec. Coop. Corp. v. ALLETE, Inc., 155 FERC ¶ 63,030 (2016) (Initial 

Decision (II)). 

26 Emera Maine, 854 F.3d at 22-23. 
Docket Nos. EL14-12-003 and EL15-45-000 - 12 - 

produced by the DCF did not necessarily indicate that it was just and reasonable for the 

purposes of the FPA.27 

Nevertheless, the D.C. Circuit found that the Commission had not adequately 

shown that the New England TOs’ existing ROE was unjust and unreasonable. The D.C. 

Circuit explained that the FPA’s statutory “zone of reasonableness creates a broad range 

of potentially lawful ROEs rather than a single just and reasonable ROE” and that 

whether a particular ROE is unjust and unreasonable depends on the “particular 

circumstances of the case.”28 Thus, the fact that New England TOs’ existing ROE did 

not equal the just and reasonable ROE that the Commission would have set using the 

current DCF inputs did not necessarily indicate that New England TOs’ existing ROE fell 

outside the statutory zone of reasonableness.29 As such, the D.C. Circuit concluded that 

Opinion No. 531 “failed to include an actual finding as to the lawfulness of [New 

England TOs’] existing base ROE” and that its conclusion that their existing ROE was 

unjust and unreasonable was itself arbitrary and capricious.30

The D.C. Circuit also found that the Commission had not adequately shown that 

the 10.57 percent ROE that it set was just and reasonable. Although recognizing that the 

Commission has the authority “to make ‘pragmatic adjustments’ to a utility's ROE based 

on the ‘particular circumstances’ of a case,” the D.C. Circuit nevertheless concluded that 

the Commission had not explained why setting the ROE at the upper midpoint was just 

and reasonable.31 The D.C. Circuit noted, in particular, that the Commission relied on the 

alternative models and state-regulated ROEs to support a base ROE above the midpoint, 

but that it did not rely on that evidence to support an ROE at the upper midpoint.32 

 27 Id. at 23. 

28 Id. at 23, 26. 

29 Id. at 27 (“To satisfy its dual burden under section 206, FERC was required to 

do more than show that its single ROE analysis generated a new just and reasonable ROE 

and conclusively declare that, consequently, the existing ROE was per se unjust and 

unreasonable.”). 

30 Id.

31 Id. (quoting FPC v. Nat. Gas Pipeline Co. of America, 315 U.S. 575, 586 

(1942)). 

32 Id. at 29 (“FERC’s reasoning is unclear. On the one hand, it argued that the 

alternative analyses supported its decision to place the base ROE above the midpoint, but 
Docket Nos. EL14-12-003 and EL15-45-000 - 13 - 

Similarly, the D.C. Circuit noted that the Commission had concluded that a base ROE of 

9.39 percent—the midpoint of the zone of reasonableness—might not be sufficient to 

satisfy Hope and Bluefield or to allow the utility to attract capital, but that the 

Commission had not similarly explained how a 10.57 percent base ROE was sufficient to 

meet either of those conditions. Because the D.C. Circuit found that the Commission had 

not pointed to record evidence supporting the specific point at which it set New England 

TOs’ ROE, the D.C. Circuit held that the Commission had not articulated the “rational 

connection” between the evidence and the rate that the FPA demands.33 

Based on the D.C. Circuit’s conclusion that the Commission had not met its 

burden either under the first or the second prong of FPA section 206, it vacated and 

remanded Opinion No. 531 et seq.34 Thus, the current state of affairs concerning the 

MISO TOs’ ROE is this: There are two currently pending complaints against their ROE, 

both of which have been fully litigated before a Presiding Judge. The D.C. Circuit 

vacated the Commission’s determinations in Opinion No. 531, upon which the 

Commission relied extensively in its order on the First Complaint (i.e., Opinion No. 551), 

meaning that Opinion No. 531 is no longer precedential,35 even though the Commission 

remains free to re-adopt those determinations on remand as long as it provides a reasoned 

basis for doing so.36 In the meantime, MISO TOs are continuing to collect their 10.32 

percent ROE, although the Commission has broad remedial authority to correct its legal 

error in order to make whatever ROE it sets on rehearing effective as of the date of 

Opinion No. 551.37

E. Briefing Orders 

On October 16, 2018, the Commission issued an order proposing a methodology 

for addressing the issues that were remanded to the Commission in Emera Maine and 

 

on the other hand, it stressed that none of these analyses were used to select the 10.57 

percent base ROE.”). 

33 Id. at 28-30. 

34 Id. at 30. 

35 ISO New England Inc. v. Bangor Hydro-Electric Co., 161 FERC ¶ 61,031, at 

P 28 (2017). 

36 Emera Maine, 854 F.3d at 30. 

37 See ISO New England Inc. v. Bangor Hydro-Electric Co., 161 FERC ¶ 61,031 

at PP 24, 34. 
Docket Nos. EL14-12-003 and EL15-45-000 - 14 - 

establishing a paper hearing on whether and how this methodology should apply to the 

four complaint proceedings concerning the New England TOs’ ROE.38 In the Coakley

Briefing Order, the Commission proposed to change its approach to determining base 

ROE by giving equal weight to four financial models, instead of primarily relying on the 

DCF methodology. The Commission stated that evidence indicates that investors do not 

rely on any one model to the exclusion of others. Therefore, relying on multiple financial 

models makes it more likely that our ROE determination will accurately reflect how 

investors make their investment decisions. 

Specifically, the Commission proposed to rely on three financial models that 

produce zones of reasonableness—the DCF model, CAPM, and Expected Earnings 

model—to establish a composite zone of reasonableness. The zone of reasonableness 

produced by each model would be given equal weight and averaged to determine the 

composite zone of reasonableness.39 

The Commission also proposed a framework for using the composite zone of 

reasonableness in evaluating whether an existing base ROE remains just and reasonable. 

The Commission proposed that, in order to find a utility’s existing ROE unjust and 

unreasonable under the first prong of FPA section 206, its ROE must be outside a range 

of presumptively just and reasonable ROEs for a utility of its risk profile, absent 

additional evidence to the contrary. In other words, the Commission would dismiss an 

ROE complaint if the targeted utility’s existing ROE falls within the range of 

presumptively just and reasonable ROEs for a utility of its risk profile unless that 

presumption is sufficiently rebutted. The Commission explained that, by the same token, 

a finding that the existing ROE of a utility falls outside that range would support a 

holding that the ROE has become unjust and unreasonable, absent additional evidence to 

the contrary.40 

The Commission explained that it is appropriate to calculate the applicable ranges 

of presumptively just and reasonable ROEs based on a utility’s risk profile because a 

utility’s risk profile remains the “particular circumstance[]” most relevant to determining 

whether a point within a zone of reasonableness is a just and reasonable ROE for that 

utility.41 The Commission further concluded that the “principal consideration for 

 38 Coakley v. Bangor Hydro-Elec. Co., 165 FERC ¶ 61,030 (2018) (Coakley

Briefing Order). 

39 See id. PP 16, 30. 

40 See id. PP 16, 28. 

41 Id. P 24 (quoting Emera Maine, 854 F.3d at 23). 
Docket Nos. EL14-12-003 and EL15-45-000 - 15 - 

determining whether an existing ROE within the overall zone of reasonableness has 

become unjust and unreasonable is the risk profile of the utility or utilities for which the 

Commission is setting the ROE.”42 

The Commission proposed that the applicable range of presumptively just and 

reasonable ROEs for a utility should correspond to those points that are closer to the ROE 

that the Commission should set for that utility than to the ROE for a utility of a different 

risk profile.43 For example, the Commission explained that it typically would be unjust 

and unreasonable for an average risk utility to receive an ROE that is closer to the ROE 

that would be just and reasonable for a utility of above- or below-average risk.44 In 

particular, for average risk utilities, the Commission proposed that the presumptively just 

and reasonable range would be the quartile of the zone of reasonableness centered on the 

central tendency of the composite zone of reasonableness. For below average risk 

utilities, the Commission proposed that such range would be the quartile of the zone of 

reasonableness centered on the central tendency of the lower half of the zone of 

reasonableness. For above average risk utilities, the Commission proposed that such 

range would be the quartile of the zone of reasonableness centered on the central 

tendency of the upper half of the zone of reasonableness.45 The Commission illustrated 

how these presumptively just and reasonable quartile ranges would be divided as follows: 

For purposes of establishing a new just and reasonable base ROE when the 

existing base ROE has been shown to be unjust and unreasonable, the Commission 

proposed using the above three models, plus the Risk Premium model. The Risk 

 42 Id. P 28. 

43 Id. P 27. 

44 Id. P 26. 

45 Id.
Docket Nos. EL14-12-003 and EL15-45-000 - 16 - 

Premium model produces a single numerical point rather than a range; therefore the 

Commission did not propose to use it to establish a composite zone of reasonableness. 

The Commission proposed to determine a new just and reasonable ROE for average risk 

utilities by determining the midpoint/medians of each zone of reasonableness produced 

by the DCF, CAPM, and Expected Earnings models and averaging those ROEs with the 

Risk Premium ROE, giving equal weight to each of the four figures. The Commission 

proposed to use the midpoint/medians of the lower and upper halves of the zones of 

reasonableness to determine ROEs for below average and above average risk utilities, 

respectively, and average those ROEs with the Risk Premium ROE.46 

On November 15, 2018, the Commission issued the Briefing Order in these 

proceedings. In that order, the Commission similarly established a paper hearing on 

whether and how the methodology proposed in the Coakley Briefing Order should apply 

to the two proceedings pending before the Commission involving MISO TOs’ ROE.47

II. Overview 

As discussed below, we adopt the revised base ROE methodology proposed in the 

Briefing Order, with certain revisions. The Commission will use this methodology to 

determine whether an existing base ROE is unjust and unreasonable under the first prong 

of section 206, and for determining a new just and reasonable replacement base ROE 

under the second prong of section 206 when an existing ROE has been shown to be 

unjust and unreasonable. However, we will not use the Expected Earnings model or Risk 

Premium model in our revised base ROE methodology, for the reasons we discuss below. 

As a result, we will use the DCF model and CAPM in our determinations under the first 

and second prongs of section 206, as we discuss further below. These models are the two 

methods most commonly used by investors for estimating the cost of equity.48 We will 

also use the ranges of presumptively just and reasonable ROEs in our analysis under the 

first prong of section 206, as the Commission proposed in the Briefing Order. 

In this order, we also make other, more specific findings regarding the 

implementation of these models in our revised base ROE methodology. In particular, in 

the DCF model, we will use a two-step DCF analysis that incorporates a long-term 

growth rate, use the short-term growth rate to calculate the (1+.5g) adjustment to 

dividend yield, and use only the Institutional Brokers’ Estimate System (IBES) as the 

source of short-term earnings growth estimates. In the CAPM, we will: (1) estimate the 

 46 Id. P 17. 

47 See Briefing Order, 165 FERC ¶ 61,118 at P 1. 

48 Trial Staff Initial Br. (I) at 8 (citing In re Connect Am. Fund, 28 FCC Rcd. 7123, 

7148 (2013)); Trial Staff Initial Br. (II) at 7 (citing same). 
Docket Nos. EL14-12-003 and EL15-45-000 - 17 - 

CAPM expected market return using a forward-looking approach; (2) use a one-step DCF 

model without any long-term growth projection for the DCF analysis within the CAPM; 

(3) use only IBES as the source of short-term earnings growth estimates in the DCF 

analysis within the CAPM; (4) screen from the CAPM analysis S&P 500 companies with 

growth rates that are negative or in excess of 20 percent; and (5) include a size premium 

adjustment. In addition, we also adopt a revised low-end outlier test that eliminates DCF 

and CAPM proxy group ROE results that are less than the yields of generic corporate Baa 

bonds plus 20 percent of the CAPM risk premium. 

Applying this revised base ROE methodology to the facts of the First Complaint, 

we review the MISO TOs’ 12.38 percent ROE that was the existing ROE reviewed in 

Opinion No. 551, which is pending on rehearing before us here. Under the revised base 

ROE methodology, the composite zone of reasonableness in the First Complaint 

proceeding is from 7.52 percent to 12.24 percent.49 As discussed below, we find that 

MISO TOs are of average risk, therefore the applicable quartile range of presumptively 

just and reasonable ROEs for MISO TOs in the First Complaint proceeding is from 9.29 

percent to 10.47 percent.50 Accordingly, MISO TOs’ 12.38 percent ROE is not treated as 

presumptively just and reasonable and in fact, is higher than the 12.24 percent top of the 

overall zone of reasonableness. As discussed below, in light of this and the other 

circumstances of the case, we find that MISO TOs’ 12.38 percent is unjust and 

unreasonable. Having found that MISO TOs’ existing 12.38 percent ROE is unjust and 

unreasonable, we then find that the just and reasonable replacement ROE for the MISO 

TOs in the First Complaint proceeding is 9.88 percent because MISO TOs are of average 

risk and the midpoint of the composite zone of reasonableness is 9.88 percent.51 

Accordingly, we grant rehearing of Opinion No. 551 in part to require the MISO TOs to 

adopt a 9.88 percent ROE effective September 28, 2016, the date Opinion No. 551 

required the MISO TOs to adopt a 10.32 percent ROE, and provide refunds, with interest 

for the applicable refund period, as discussed below. 

As discussed further below, in the Second Complaint proceeding, the ROE to be 

reviewed is the 9.88 percent ROE established in the First Complaint proceeding that is 

effective prospectively from September 28, 2016. Under the revised base ROE 

methodology, the composite zone of reasonableness in the Second Complaint proceeding 

is from 7.78 percent to 11.66 percent.52 As discussed below, we continue to find that 

 49 See Appendix C. 

50 See id.

51 See id. 

52 See id.
Docket Nos. EL14-12-003 and EL15-45-000 - 18 - 

MISO TOs are of average risk in the Second Complaint proceeding; therefore the 

applicable quartile range of presumptively just and reasonable ROEs for MISO TOs in 

that proceeding is from 9.23 percent to 10.20 percent.53 The 9.88 percent ROE that the 

Commission is reviewing for purposes of the Second Complaint proceeding falls within 

that range; therefore, the Commission presumes it to be just and reasonable. As 

discussed below, we find that this presumption has not been rebutted by the evidence in 

the Second Complaint proceeding. Accordingly, we affirm in part and reverse in part the 

Initial Decision (II) in the Second Complaint proceeding, dismiss the Second Complaint, 

and find that no refunds should be issued as a result of the resolution of that complaint. 

III. Use of Multiple Models Generally 

A. Background 

As noted above, in the Briefing Order, the Commission proposed to change its 

methodology for analyzing base ROEs under section 206 to rely on multiple financial 

models instead of primarily relying on only the DCF model. Specifically, the 

Commission proposed to rely on the three financial models that produce zones of 

reasonableness—the DCF, CAPM, and Expected Earnings models—in its ROE analysis 

under the first prong of section 206, and to rely on four financial models—the Risk 

Premium model, in addition to those used in the first prong analysis—in its ROE analysis 

under the second prong of section 206.54 

The Commission explained that changing its base ROE methodology to rely on 

these multiple financial models is appropriate because investors do not rely on any single 

financial model to make their investment decisions, but instead rely on these models and 

other methods to varying degrees. The Commission reasoned that, therefore, a more 

accurate estimate of what ROE is needed to induce investors to invest in a utility—i.e., 

what ROE a utility must offer in order to attract capital—would be provided by relying 

on multiple financial models because that is what investors do when making investment 

decisions.55 The Commission further explained that relying on multiple financial models 

is appropriate because any one model has the potential for errors or inaccuracies and 

 53 See id.

54 See Briefing Order, 165 FERC ¶ 61,118 at PP 17-18. 

55 See id. PP 37-49. 
Docket Nos. EL14-12-003 and EL15-45-000 - 19 - 

relying on multiple models together reduces the risks that errors or inaccuracies in any 

one model will produce an inaccurate cost of equity estimate.56

B. CAPs 

Complaint-Aligned Parties (CAP)57 argue that the Commission should continue to 

rely on the DCF as the primary, if not exclusive, model in its ROE analyses. CAPs assert 

that the DCF method still remains the most robust and instructive market-based method 

to use in the determination of just and reasonable ROEs.58 CAPs contend that the 

Commission’s concerns about continuing to rely on only the DCF model are misplaced.59 

CAPs argue that, to the extent the Commission adopts an ROE methodology that 

relies upon the CAPM model, it must be implemented properly and that CAPs’ witness 

 56 See id. PP 38-40. 

57 For purposes of the CAPs briefs in the First Complaint proceeding, CAPs 

include the following entities: American Municipal Power, Inc. (AMP); ABATE, 

Coalition of MISO Customers, IIEC, INDIEC, MLIG, and Wisconsin Industrial Group 

(WIEC) (collectively, Joint Complainants); Joint Consumer Advocates, including Indiana 

Office of Utility Consumer Counselor, Iowa Office of Consumer Advocate, Michigan 

Citizens Against Rate Excess, Minnesota Department of Commerce, and Citizens Utility 

Board of Wisconsin; Joint Customers, including Arkansas Electric Cooperative, 

Cooperative Energy, and Hoosier Cooperative; Organization of MISO States, Inc. 

(OMS); Mississippi Public Service Commission (MS PSC), Missouri Public Service 

Commission (MO PSC) and Missouri Joint Municipal Electric Utility Commission 

(MJMEUC) (collectively, Missouri-Mississippi Parties or MOMs); and Southwest 

Electric Cooperative, Inc. (SWEC). For purposes of the CAPs briefs in the Second 

Complaint proceeding, CAPs include Industrial Consumer Groups (ICG), comprising 

ABATE, Coalition of MISO Customers, IIEC, INDIEC, MLIG, and WIEC; Joint 

Consumer Advocates, comprising Illinois Citizens Utility Board, Indiana Office of Utility 

Consumer Counselor, Iowa Office of Consumer Advocate, Michigan Citizens Against 

Rate Excess, Minnesota Department of Commerce, and Citizens Utility Board of 

Wisconsin; Joint Complainants and Intervenor (JCI), comprising Arkansas Electric 

Cooperative, Cooperative Energy, and Hoosier Cooperative; OMS; Missouri-Mississippi 

Parties; and SWEC. 

58 CAPs Initial Br (I) at 12-14; CAPs Initial Br. (II) at 11-14; CAPs Reply Br. (I) 

at 6-9; CAPs Reply Br. (II) at 21-24. 

59 CAPs Initial Br. (I) at 14-22; CAPs Initial Br. (II) at 14-22. 
Docket Nos. EL14-12-003 and EL15-45-000 - 20 - 

Mr. Gorman provides a CAPM analysis that “produces reliable results.”60 CAPs 

similarly assert that, if the Commission uses the Risk Premium model in its ROE 

methodology, it should be revised in the manner recommended by CAPs and 

“Mr. Gorman addresses the correct approach for conducting a Risk Premium study that 

produces a reliable cost-of-equity estimate.”61 CAPs oppose the use of the Expected 

Earnings model in the Commission’s ROE methodology, arguing that it should receive 

no weight.62 CAPs contend that, at the most, the Expected Earnings model should be 

given significantly less weight than market-based models.63 

C. MISO TOs 

MISO TOs support the Commission’s proposal to use multiple financial models in 

its ROE methodology, asserting that the multiple model approach is a significant 

improvement over the approach of relying on only the DCF model.64 MISO TOs assert 

that the additional three models which the Commission proposes to use are widely relied 

upon by investors and present transparent cost-of-capital estimates.65 MISO TOs propose 

certain modifications to the DCF, CAPM, and Expected Earnings models and urge the 

Commission to apply the Risk Premium model in the same manner in this proceeding as 

the Commission proposed in the New England TOs’ ROE complaint proceedings.66

D. Trial Staff 

Trial Staff proposes various adjustments to the DCF, CAPM and Risk Premium 

models, but does not oppose the Commission using them in its ROE methodology in 

general.67 Trial Staff argues that the Expected Earnings model should not be included in 

 60 CAPs Initial Br. (I) at 27-28; CAPs Initial Br. (II) at 27. 

61 CAPs Initial Br. (I) at 34-35; CAPs Initial Br. (II) at 34-35. 

62 CAPs Initial Br. (I) at 14; CAPs Initial Br. (II) at 14. 

63 CAPs Initial Br. (I) at 46; CAPs Initial Br. (II) at 46. 

64 MISO TOs Initial Br. (I) at 1-2; MISO TOs Initial Br. (II) at 5; MISO TOs 

Reply Br. (I) at 5-19; MISO TOs Reply Br. (II) at 5-19. 

65 MISO TOs Initial Br. (I) at 4; MISO TOs Initial Br. (II) at 6. 

66 MISO TOs Initial Br. (I) at 6-7; MISO TOs Initial Br. (II) at 24. 

67 See Trial Staff Initial Br. (I) at 2; Trial Staff Initial Br. (II) at 2; Trial Staff Reply 

Br. (I) at 8-19; Trial Staff Reply Br. (II) at 8-19. 
Docket Nos. EL14-12-003 and EL15-45-000 - 21 - 

the Commission’s ROE methodology. Trial Staff asserts that the Commission has used 

market-based models for over 30 years to determine the cost of equity, but the Expected 

Earnings model is not a market-based method for estimating the cost of equity. Trial 

Staff also asserts that there is little evidence that the Expected Earnings approach is 

widely used by investors.68

E. LPSC 

The Louisiana Public Service Commission (LPSC) contends that the Commission 

should require certain changes to the Risk Premium model and CAPM if those models 

are used in the Commission’s ROE methodology, but does not oppose the use of those 

models in general.69 LPSC argues that the Expected Earnings model should not be used 

in the Commission’s ROE methodology, arguing, among other things, that the model has 

no legitimate relationship to investors’ required return on equity.70 LPSC argues that, if 

the Commission decides to use the Expected Earnings model, then it should adjust the 

analysis for market-to-book ratios.71

F. RPGI 

Resale Power Group of Iowa (RPGI) argues that the Commission should “reaffirm 

the primacy of the DCF model” and continue to use a DCF-based approach for setting 

ROEs.72 RPGI contends that, if the Commission uses multiple financial models in its 

ROE methodology, then the Commission should make changes to the CAPM and Risk 

Premium models, but it does not oppose the use of these two financial models in 

general.73 RPGI endorses Trial Staff’s proposal to exclude the Expected Earnings model 

from the Commission’s ROE methodology.74

 68 Trial Staff Initial Br. (I) at 2-3; Trial Staff Initial Br. (II) at 2-3. 

69 LPSC Initial Br. at 5-9, 29-42. 

70 Id. at 1-5, 13-29. 

71 Id. at 29. 

72 RPGI Initial Br. (I) at 5-7, 11-20; RPGI Initial Br. (II) at 12-23. 

73 RPGI Initial Br. (I) at 26-37; RPGI Initial Br. (II) at 29-40. 

74 RPGI Reply Br. (I) at 8; RPGI Reply Br. (II) at 7. 
Docket Nos. EL14-12-003 and EL15-45-000 - 22 - 

G. Alliant 

Alliant supports Trial Staff’s proposal to exclude the Expected Earnings model 

from the Commission’s ROE methodology.75 Alliant does not oppose the use of the 

DCF, CAPM or Risk Premium models in the Commission’s ROE methodology. 

H. Commission Determination 

We will expand our methodology for determining whether an existing base ROE is 

unjust and unreasonable under the first prong of section 206, and for determining a new 

just and reasonable replacement base ROE under the second prong of section 206 when 

an existing ROE has been shown to be unjust and unreasonable, to rely on multiple 

financial models. Specifically, we will use the DCF model and CAPM in our ROE 

methodology, but not the Expected Earnings or Risk Premium models. As discussed 

further below, we find that expanding our methodology to use the CAPM model in 

addition to the DCF model will better reflect how investors make their investment 

decisions. This should result in our ROE analyses producing cost of equity estimates that 

more accurately reflect what ROE a utility must offer in order to attract capital. As 

discussed in sections VI and VIII below, we find that, on balance, the Expected Earnings 

and Risk Premium models would not improve our ROE determinations sufficiently to 

justify using those models, in light of their flaws and the potential inaccuracies and 

complexity that they could introduce into our ROE analyses. 

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

is not required to rely upon the DCF methodology alone or even at all.76 Accordingly, 

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 

 75 Alliant Reply Br. at 5-7. 

76 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 methodology, provided that it 

adequately explains its reasons for doing so); Elec. Consumers Res. Council v. FERC, 

747 F.2d 1511, 1514 n.6 (D.C. Cir. 1984) (“[N]either statutes nor decisions of this court 

require that the Commission utilize a particular formula or a combination of formulae to 

determine whether rates are just and reasonable.”); NEPCO, Mun. Rate Comm. v. FERC, 

668 F.2d 1327, 1345 (D.C. Cir. 1987) (“FERC is not bound ‘to the service of any single 

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

at 586)); see also Emera Maine, 854 F.3d at 27 (noting that the Commission has authority 

to make “‘pragmatic adjustments’ to a utility’s ROE” based on the facts of the particular 

case (quoting FPC v. Nat. Gas Pipeline Co., 315 U.S. at 586)). 
Docket Nos. EL14-12-003 and EL15-45-000 - 23 - 

policies and standards are being deliberately changed, not casually ignored.”77 Our 

existing ROE methodology relies on the DCF model exclusively for purposes of 

determining the zone of reasonableness that is used under the first and second prongs of 

section 206. However, we find that now, in light of our expanded experience with ROE 

determinations under various market conditions and the court’s guidance in Emera 

Maine, expanding our ROE methodology to include the CAPM, as well as the DCF 

model, will better reflect how investors make their investment decisions and result in 

more accurate cost of equity estimates. 

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.”78 Thus, a key 

consideration in determining just and reasonable utility ROEs is determining what ROE a 

utility must offer in order to attract capital, i.e., induce investors to invest in the utility in 

light of its risk profile.79 As the Commission stated in Opinion No. 414-B,80 “the cost of 

common equity to a regulated enterprise depends upon what the market expects not upon 

precisely what is going to happen.”81 Thus, in determining what ROE to award a utility, 

we must look to how investors analyze and compare their investment opportunities. 

Investors have varying preferences as to which of the various methods for 

determining cost of equity they may use to inform their investment decisions. As 

Dr. Roger Morin states, “Investors do not necessarily subscribe to any one method, nor 

does the stock price reflect the application of any one single method by the price-setting 

 77 Nuclear Energy Inst., Inc. v. EPA, 373 F.3d 1251, 1296 (D.C. Cir. 2004) (per 

curiam) (internal citations and quotation marks omitted). 

78 Hope, 320 U.S. at 603. See also Canadian Ass’n of Petroleum Producers v. 

FERC, 254 F.3d 289, 293 (D.C. Cir. 2001) (“In order to attract capital, a utility must 

offer a risk-adjusted expected rate of return sufficient to attract investors.”). 

79 See Bluefield, 262 U.S. at 692-693 (discussing factors an investor considers in 

making investment decisions). 

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

(1998). 

81 Id. at 62,268. See also Kern River Gas Transmission Co., Opinion No. 486-B, 

126 FERC ¶ 61,034, at P 120 (2009). 
Docket Nos. EL14-12-003 and EL15-45-000 - 24 - 

investor. There is no monopoly as to which method is used by investors.”82 As discussed 

further below, the record in this proceeding demonstrates that the CAPM model is one of 

the primary methods investors use to measure the cost of equity, along with the DCF 

model.83 Moreover, like the DCF model, the CAPM model is market-oriented and 

produces a zone of reasonableness. Accordingly, we find that cost of equity estimates 

based on both models will provide a more reasonable measure of investor expectations, 

since they are among the information that investors rely upon when making investment 

decisions. 

We also find that the expansion of our ROE methodology to use the CAPM in 

addition to the DCF model will help address the issues that led the court to remand 

Opinion No. 531 in Emera Maine. In that proceeding involving New England TOs’ base 

ROE, the Commission found that it had “less confidence that the midpoint of the zone of 

reasonableness” produced by the DCF model “accurately reflect[ed] the equity returns 

necessary to meet the Hope and Bluefield capital attraction standards.”84 Because of this 

concern, the Commission considered “‘additional record evidence, including evidence of 

alternative benchmark methodologies” to inform the placement of ROE within the DCFproduced zone of reasonableness.85 The Commission found that that evidence “supported 

a finding that an upward adjustment from the midpoint was warranted.”86 The 

 82 Roger A. Morin, New Regulatory Finance 429 (Public Utilities Reports, Inc. 

2006) (Morin) at 429. 

83 See, e.g., Trial Staff Initial Br. (I), Keyton Aff. at 11 (“the DCF, CAPM, and 

Risk Premium methods which are widely used by investors.”); Trial Staff Initial Br. (II), 

Keyton Aff. (II) at 10 (stating same); MISO TOs Initial Br. (I) at 4 (explaining that the 

CAPM is “widely relied upon by investors”); MISO TOs Initial Br. (II) at 6 (explaining 

same); Trial Staff Reply Br. (I) at 5 (“‘There are three broad generic methods available to 

measure the cost of equity: DCF, Risk Premium, and CAPM. All three of these methods 

are accepted and used by the financial community and firmly supported in financial 

literature.’” (quoting San Diego Gas & Electric Company, Prepared Direct Testimony of 

Dr. Roger A. Morin on behalf of San Diego Gas & Electric Company, Docket No. ER19-

221-000, at 16-17 (filed Oct. 30, 2018))); Michael C. Ehrhardt and Eugene F. Brigham, 

Financial Management: Theory and Practice 253 (13th ed. 2011) (“the basic CAPM is 

still the most widely used method for thinking about required rates of return on stocks.”). 

84 Opinion No. 531-B, 150 FERC ¶ 61,165 at P 49 (quoting Opinion No. 531, 

147 FERC ¶ 61,234 at P 145). 

85 Opinion No. 531, 147 FERC ¶ 61,234 at P 145. 

86 Opinion No. 531-B, 150 FERC ¶ 61,165 at P 37. 
Docket Nos. EL14-12-003 and EL15-45-000 - 25 - 

Commission then set the New England TOs’ ROE at the 10.57 percent midpoint of the 

upper half of the DCF zone of reasonableness. In taking this action, the Commission 

emphasized that it was “‘not depart[ing] from [its] use of the DCF methodology.’”87 

In Emera Maine, the court held that the Commission “failed to explain how any 

evidence demonstrated that 10.57 percent was a just and reasonable base ROE.”88 The 

court found that this omission was particularly troublesome in light of the Commission 

concerns over the reliability of the DCF zone of reasonableness. The court also stated 

that “FERC never explained how 10.57 percent was just and reasonable when the 

alternative benchmarks and additional record evidence it used to justify a departure 

merely pointed to a base ROE somewhere above 9.39 percent.” The court also stated that 

“[o]n the one hand, [the Commission] argued that the alternative analyses supported its 

decision to place the base ROE above the midpoint, but on the other hand, it stressed that 

none of these analyses were used to select the 10.57 percent base ROE.”89 

We find that if the most useful types of additional record evidence that the 

Commission relied upon in Opinion No. 531, namely the CAPM analysis, are more 

directly incorporated into the formal ROE methodology and construction of the zone of 

reasonableness, then that evidence will be directly “used to select” a just and reasonable 

ROE and we will not make ROE decisions because evidence “merely point[s] to a base 

ROE somewhere” that is different than a given base ROE, but because that evidence will 

be directly used to calculate a specific cost of equity estimate. This will help ensure that 

our ROE determinations are directly connected to, and supported by justifications in the 

record evidence. Our new ROE methodology will do this by averaging the top and 

bottom of the DCF and CAPM zones of reasonableness to produce a composite zone of 

reasonableness and then setting the ROE of average risk utilities at the central tendency 

midpoint of that zone. 

Moreover, any methodology has the potential for errors or inaccuracies. 

Therefore, relying exclusively on any single methodology increases the risk that the 

Commission could authorize an unjust and unreasonable ROE. There is significant 

evidence indicating that combining estimates from different models is more accurate than 

relying on a single model.90 For example, in discussing “model risk,” Mr. McKenzie 

 87 Opinion No. 531, 147 FERC ¶ 61,234 at P 146. 

88 Emera Maine, 854 F.3d at 28. 

89 Id. at 28-29. 

90 See, e.g., In re. Connect Am. Fund, 28 FCC Rcd. 7123, 7147 (2013) (“As the 

cost of equity reflects the uncertain expectations of investors, there is potential for 

introducing significant errors into the estimates, and no single model can be counted on 
Docket Nos. EL14-12-003 and EL15-45-000 - 26 - 

explained that “when conditions associated with a model are outside of the normal range, 

there is a risk . . . that the theoretical model will fail to predict or represent the real 

phenomenon that is being modeled.”91 Similarly, Ms. Ellen Lapson testified on behalf of 

MISO TOs that “it is wise to consider a broader set of evidence from alternate models 

and methods of estimating investors’ cost of equity . . . Although all such methods are 

potentially subject to error, the use of multiple models that are based on different 

underlying assumptions provides a check on the reasonableness of the results of the DCF 

model and the placement of the [MISO TOs’] base ROE with the DCF range.”92

 As discussed further below, we find that the CAPM and DCF models most 

accurately reflect how investors make their investment decisions, therefore providing a 

more accurate cost of equity estimate and helping to minimize model risk to the greatest 

extent possible. 

 

exclusively to provide a precise estimate of the cost of equity.”); Use of a Multi-Stage 

Discounted Cash Flow Model in Determining the Railroad Industry’s Cost of Capital, 

STB Ex Parte No. 664 (Sub-No. 1), 2009 WL 197991, *11 (S.T.B. Jan. 23, 2009) (“As 

the Federal Reserve Board noted in its testimony in STB Ex Parte No. 664, academic 

studies had demonstrated that using multiple models will improve estimation techniques 

when each model provides new information. In addition, there is robust economic 

literature confirming that, in many cases, combining forecasts from different models is 

more accurate than relying on a single model.”) (citations omitted); EL15-45-000, 

Ex. MTO-1 at 28 (“Rather, reference to the results of a number of well accepted 

methodologies provides greater clarity regarding the extent to which DCF results may be 

distorted, and the use of multiple benchmarks is useful in guiding the determination of a 

just and reasonable ROE within the zone of reasonableness.”). 

91 Docket No. EL15-45-000, Ex. MTO-22 at 18-19 (citations omitted). See also 

Morin at 428 (“Reliance on any single method or preset formula is inappropriate when 

dealing with investor expectations because of possible measurement difficulties and 

vagaries in individual companies’ market data.”); id. at 429-30 (“If a regulatory 

commission relies on a single cost of equity estimate or on a single methodology, that 

commission greatly limits its flexibility and increases the risk of authorizing 

unreasonable rates of return. The results from one methodology . . . are likely to contain a 

high degree of measurement error and may be distorted by short-term aberrations.”). 

92 Docket No. EL14-12-001, Ex. MTO-39 at 37. 
Docket Nos. EL14-12-003 and EL15-45-000 - 27 - 

IV. Presumptively Just and Reasonable ROE Ranges for Determining if an 

Existing ROE is Unjust and Unreasonable under Prong One of Section 206 

A. Background 

As noted above, in the Briefing Order, the Commission proposed to use ranges of 

presumptively just and reasonable ROEs in determining whether an existing ROE is 

unjust and unreasonable under the first prong of section 206.93 As described below, 

CAPs and the RPGI oppose the Commission’s proposed approach of using ranges of 

presumptively just and reasonable ROEs while MISO TOs support the proposal. 

1. CAPs 

CAPs contend that the Commission’s proposed approach of establishing a range of 

presumptively just and reasonable ROEs would: (a) contravene the customer protection 

principles embodied in the FPA; (b) improperly tilt the balancing of interests under Hope 

and Bluefield in favor of industry over customers; (c) introduce an unlawful asymmetry 

between the treatment of FPA sections 205 and 206 filings; and (d) violate complainants’ 

due process rights. In addition, they argue that the proposal to establish ranges of 

presumptively just and reasonable ROEs is arbitrary and capricious because it fails to 

provide a reasoned explanation for the risk profile.94

CAPs assert that Emera Maine did not hold or imply that the Commission must 

accept a range of ROEs as just and reasonable. They contend that, instead, it held that the 

Commission had not provided a sufficiently clear explanation of what made it 

unreasonable to retain a prior ROE that exceeded the newly re-determined cost of equity. 

In addition, they argue that the mere fact that the existing ROE was higher than the ROE 

determined to be just and reasonable was not the basis for the Commission’s decisions in 

Opinion No. 551 and Initial Decision (II). They point out that both Opinion No. 551 and 

Initial Decision (II) found that the MISO TOs’ existing 12.38 percent ROE was outside 

the DCF zone of reasonableness. CAPs accordingly argue that any concerns in Emera 

Maine with respect to the Commission’s application of the first prong of section 206 

where the existing ROE is within the DCF zone of reasonableness are not present in these 

proceedings.95

 93 See Briefing Order, 165 FERC ¶ 61,118 at PP 24, 28-30. 

94 CAPs Initial Br. (I) at 67; CAPs Initial Br. (II) at 67. 

95 CAPs Initial Br. (I) at 68-69; CAPs Initial Br. (II) at 68-69. 
Docket Nos. EL14-12-003 and EL15-45-000 - 28 - 

CAPs argue that the Briefing Order presents its proposal to use ranges of 

presumptively just and reasonable ROEs as a response to the court’s observation in 

Emera Maine that there exists a “broad range of potentially lawful ROEs.”96 CAPs 

contend that, however, nothing in Emera Maine requires the Commission to create ranges 

of presumptively just and reasonable ROEs. CAPs assert that the court held that the 

Commission was correct in noting that “rates within the zone of reasonableness are not 

per se just and reasonable” and that “the fact that a rate falls within the zone of 

reasonableness does not establish that the rate is the just and reasonable rate for the utility 

at issue.”97 CAPs contend that the Emera Maine court’s reference to the “broad range of 

potentially lawful ROEs” was to the full breadth of the DCF range and that the court 

specifically affirmed that this range is not a zone of immunity from rate reductions under 

FPA section 206.98

In addition, CAPs assert that the proposal to use ranges of presumptively just and 

reasonable ROEs violates the Commission’s statutory duty to protect customers from 

excessive rates because it would presume ROEs within the zone to be lawful even when 

the preponderance of the evidence points to a lower ROE. They argue that the just and 

reasonable standard of FPA sections 205 and 206 permits not even a little unlawfulness 

and that “the primary aim of the [FPA is] to guard the consumer against excessive 

rates.”99 CAPs contend that, accordingly, the customer protection purpose of section 206 

requires the Commission to reduce existing rates that are shown to have become unjust, 

unreasonable, or unduly discriminatory, which conflicts with the use of ranges of 

presumptively just and reasonable ROEs.100

CAPs further argue that the use of ranges of presumptively just and reasonable 

ROEs would create an unlawful asymmetry between rate increases sought by utilities 

under FPA section 205 and rate reductions sought by consumers under FPA section 206. 

They contend that this would be the case because utilities filing under section 205 can 

continue to obtain approval of a proposed ROE increase if they show that the cost of 

 96 CAPs Initial Br. (I) at 70 (quoting Emera Maine, 854 F.3d at 26); CAPs Initial 

Br. (II) at 69 (quoting Emera Maine, 854 F.3d at 26). 

97 CAPs Initial Br. (I) at 70 (quoting Emera Maine, 854 F.3d at 23); CAPs Initial 

Br. (II) at 70 (quoting Emera Maine, 854 F.3d at 23). 

98 CAPs Initial Br. (I) at 71 (quoting Emera Maine, 854 F.3d at 23); CAPs Initial 

Br. (II) at 71 (quoting Emera Maine, 854 F.3d at 23) (emphasis added). 

99 CAPs Initial Br. (I) at 72; CAPs Initial Br. (II) at 72. 

100 CAPs Initial Br. (I) at 72-73; CAPs Initial Br. (II) at 72-73. 
Docket Nos. EL14-12-003 and EL15-45-000 - 29 - 

equity exceeds the existing ROE by any amount, but under the proposed presumption, 

customers filing complaints under section 206 would have to show that the existing ROE 

is so high that it is above the applicable range of presumptively just and reasonable base 

ROEs. CAPs assert that this treatment is contrary to the Mobile101 and Sierra102 cases 

and the 1988 Regulatory Fairness Act, all of which indicate that section 205 rate increase 

filings and section 206 complaints seeking rate decreases should be treated similarly. 

CAPs further contend that the use of ranges of presumptively just and reasonable ROEs 

will create an asymmetry between sections 205 and 206 by heightening the burden of 

proof faced by complainants under section 206.103 

In addition, CAPs argue that the proposal creates a conclusive presumption that 

violates customers’ due process rights. They contend that this is the case because the use 

of ranges of presumptively just and reasonable ROEs could allow an ROE to be 

considered presumptively just and reasonable even if the existing ROE exceeds the 

central value of all of the financial models that the Commission proposes to use. CAPs 

assert that the central values of the financial models are the best evidence of the cost of 

equity and if an ROE can exceed all of those values and still be considered presumptively 

just and reasonable, then the presumption is a conclusive presumption that violates 

customers’ due process rights. CAPs argue that, while the Commission’s Briefing Order 

indicates that the presumption can be rebutted with additional evidence to the contrary 

such as changes in capital market conditions, such changes in capital market conditions 

will already be reflected in the financial models and it is doubtful that customers will be 

able to produce additional evidence that is more effective than the collective evidence of 

the financial models. CAPs assert that the presumption is therefore effectively 

conclusive.104 

CAPs also contend that the proposal to use ranges of presumptively just and 

reasonable ROEs is arbitrary and capricious. They argue that this is the case first because 

the proposed presumption is not inferred from proven facts, as is required by court 

precedent,105 but rather from the erroneous conclusion that each of the MISO TOs is of 

average risk, combined with a logical fallacy. CAPs go on to contend that the 

 101 United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332 (1956). 

102 FPC v. Sierra Pac. Power Co., 350 U.S. 348 (1956).

103 CAPs Initial Br. (I) at 73-76; CAPs Initial Br. (II) at 73-75. 

104 CAPs Initial Br. (I) at 76-78; CAPs Initial Br. (II) at 76-78. 

105 CAPs Initial Br. (I) at 79 (citing U.S. v. Gainey, 380 U.S. 63, 78-79 (1965)); 

CAPs Initial Br. (II) at 78 (citing same). 
Docket Nos. EL14-12-003 and EL15-45-000 - 30 - 

Commission has not explained how the “broad range of potentially lawful ROEs” 

contemplated by Emera Maine becomes a range of presumptively just and reasonable 

ROEs. CAPs then assert that the Commission’s rationale appears to be that an existing 

ROE is reasonable even if it exceeds (or is below) the risk-appropriate just and 

reasonable ROE as long as it is closer to the risk-appropriate ROE than to an appropriate 

ROE for a utility of a different risk profile.106 They contend that this is arbitrary and 

capricious because the fact that an ROE lies closer to the just and reasonable ROE than to 

an appropriate ROE for a utility of a different risk profile does not render that ROE just 

and reasonable in light of court precedent that does not permit “even a little 

unlawfulness.”107 CAPs also argue that the proposal contradicts the court’s rulings in 

Emera Maine that “[w]hether a rate, even one within the zone of reasonableness, is 

unlawful depends on the particular circumstances of the case” and that “the fact that a 

rate falls within the zone of reasonableness does not establish that the rate is the just and 

reasonable rate for the utility at issue.”108

In addition, CAPs argue that it is arbitrary and capricious to assume that all 

utilities fall into one of only three risk groups—low risk, average risk, and high risk. 

They contend that the Commission has previously set ROEs at a wide variety of locations 

within the distribution of proxy results, not only at the upper or lower midpoint. CAPs 

suggest that the Commission could establish a greater number of more granular risk 

groups.109

2. MISO TOs 

MISO TOs support the Commission’s proposal in the Briefing Order to use the 

composite zone of reasonableness to identify a range of presumptively just and 

reasonable ROEs for utilities of similar risk profiles as an evidentiary tool to evaluate 

complaints under section 206 of the FPA. MISO TOs argue that it is well established that 

the Commission has the authority to adopt a rebuttable presumption to assist it in 

deciding whether or not to grant a complaint. They note that, in AEP Marketing,

110 the 

Commission described its authority to establish a new policy, including a new rebuttable 

 106 CAPs Initial Br. (I) at 79-80; CAPs Initial Br. (II) at 79. 

107 CAPs Initial Br. (I) at 80; CAPs Initial Br. (II) at 79-80. 

108 CAPs Initial Br. (I) at 80 (citing Emera Maine, 854 F.3d at 23); CAPs Initial 

Br. (II) at 80 (citing same). 

109 CAPs Initial Br. (I) at 82-83; CAPs Initial Br. (II) at 82-83. 

110 AEP Power Mktg., Inc., 107 FERC ¶ 61,018 (2004) (AEP Marketing). 
Docket Nos. EL14-12-003 and EL15-45-000 - 31 - 

presumption, as part of adjudication of a case-specific proceeding.111 MISO TOs further 

state that the Commission adopted a rebuttable presumption that a “price squeeze” 

indicates that a wholesale rate is unduly discriminatory in violation of section 206 of the 

FPA112 and the D.C. Circuit upheld this presumption.113

MISO TOs argue that it is immaterial whether the court in Emera Maine 

specifically mandated that the Commission use ranges of presumptively just and 

reasonable ROEs. They assert that the court in Emera Maine directed the Commission to 

provide a more complete explanation why the New England TOs’ base ROE was unjust 

and unreasonable and that the Commission’s adoption of ranges of presumptively just 

and reasonable ROEs is a logical step in analyzing whether an existing base ROE may no 

longer be just and reasonable under the first prong of FPA section 206. MISO TOs state 

that the Commission’s adoption of a rebuttable presumption that a base ROE within a 

portion of the zone of reasonableness is consistent with Emera Maine and other ROE 

precedents which provide that there may be more than one just and reasonable return, 

even though the Commission ultimately must fix a single, just and reasonable rate.114

 MISO TOs contend that the Commission’s adoption of ranges of presumptively 

just and reasonable ROEs does not contravene the Regulatory Fairness Act. They assert 

that the Regulatory Fairness Act sought to add symmetry between FPA sections 205 and 

206 by adding a refund obligation to FPA section 206 where previously there was none in 

order to match more closely the refund obligation in FPA section 205, but did not broadly 

require a uniform symmetry between sections 205 and 206 beyond what already existed 

between the two provisions. MISO TOs further argue that CAPs assume without basis 

that the Commission’s ranges of presumptively just and reasonable ROEs will not apply 

in section 205 proceedings and that if the Commission does apply those ranges in section 

205 proceedings, CAPs’ concerns about symmetry between sections 205 and 206 are 

moot.115

 111 MISO TOs Reply Br. (I) at 59-60 (citing AEP Marketing, 107 FERC ¶ 61,018 

at PP 199, 201). 

112 MISO TOs Reply Br. (I) at 60 (citing Conn. Light & Power Co., 8 FERC 

¶ 61,187, at 61,655 (1979)). 

113 MISO TOs Reply Br. (I) at 60 (citing Anaheim v. FERC, 941 F.2d 1234, 1241, 

1249 (D.C. Cir. 1991)). 

114 MISO TOs Reply Br. (I) at 61-63; MISO TOs Reply Br. (II) at 61-62. 

115 MISO TOs Reply Br. (I) at 64-65; MISO TOs Reply Br. (II) at 63-64. 
Docket Nos. EL14-12-003 and EL15-45-000 - 32 - 

MISO TOs also assert that CAPs erroneously attempt to characterize the 

presumption as conclusive or irrebuttable. MISO TOs state that CAPs purport to support 

their claim by arguing that the only evidence customers could possibly use to show a base 

ROE is unjust and unreasonable would be already incorporated into the Commission’s 

calculation of the composite zone of reasonableness and the zone of presumptively just 

and reasonable ROEs. MISO TOs disagree and state that, for example, evidence that is 

not already incorporated in those zones could include risk premium data, which is used in 

the formulation of a new base ROE in prong two of FPA section 206 but not for 

calculation of the zone of reasonableness, non-utility stock prices and investor 

expectations for non-utility stocks, various types of bond yields, investor testimony and 

testimony of customer hardship.116

MISO TOs further argue that nothing about the approach of using ranges of 

presumptively just and reasonable ROEs contravenes the customer protection purpose of 

section 206. They contend that the approach will promote the Commission’s compliance 

with its mandate to reduce existing rates only when they are shown to be unjust, 

unreasonable, or unduly discriminatory by providing an objective benchmark against 

which to measure existing rates. In addition, MISO TOs note that the rebuttable 

presumption provides value to customers and utilities alike, not only utilities as CAPs 

suggest. MISO TOs assert that a zone of presumptively just and reasonable ROEs is also 

a useful tool for making a prima facie case that an existing base ROE may no longer be 

just and reasonable, which will benefit consumers that file complaints.117 

MISO TOs request that the Commission clarify that, just as a base ROE falling 

within the applicable quartile of the composite range of returns that is commensurate with 

the utility’s risk profile creates a rebuttable presumption that such base ROE remains just 

and reasonable, a base ROE outside of the same quartile is only rebuttably presumed to 

be no longer just and reasonable.118

3. RPGI 

RPGI argues that the proposed approach of using ranges of presumptively just and 

reasonable ROEs effectively shields existing ROEs from modification absent a showing 

that the ROE is outside the applicable range. RPGI asserts that no such margin applies to 

any other existing cost of service component of a formula rate like those employed by 

most transmission utilities under current Commission practice. RPGI contends that, if the 

cost of furnishing regulated service declines, it is subject to adjustment and true-up on an 

 116 MISO TOs Reply Br. (I) at 67-68; MISO TOs Reply Br. (II) at 66-67. 

117 MISO TOs Reply Br. (I) at 68-69; MISO TOs Reply Br. (II) at 67-68. 

118 MISO TOs Initial Br. (I) at 6; MISO TOs Initial Br. (II) at 7-8. 
Docket Nos. EL14-12-003 and EL15-45-000 - 33 - 

annual basis under formula rates. RPGI contends that it is arbitrary and unfair to 

consumers to allow a zone of protection within which changes to a base ROE allowance 

will be disregarded, given the magnitude of the costs at issue. RPGI also contends that 

the Commission does not indicate that it intends to determine whether to dismiss a 

complaint and whether to grant a complaint on the basis of the same process. In addition, 

RPGI asserts that the Commission should clarify how it intends to resolve factual issues 

raised by the process in which a complaint and answer are filed. RPGI contends that, if 

the Commission anticipates that it will be in a position to resolve all factual issues 

instrumental to denying a complaint, then it should follow that it can resolve all issues 

relating to the establishment of a just and reasonable replacement ROE allowance where 

it finds that a complainant has satisfied that same standard.119

RPGI argues that the Commission should not clarify, as MISO TOs request, that if 

a base ROE falls outside the applicable quartile zone of presumptively just and 

reasonable ROEs, it is only rebuttably presumed to be no longer just and reasonable. 

RPGI contends that this would unfairly benefit utilities by giving them additional 

procedures to defend an existing ROE and would delay adjudication of just and 

reasonable rates.120

B. Commission Determination 

1. Use of Presumptively Just and Reasonable ROE Ranges 

Generally 

In Emera Maine, the court found that our prior practice of using “a single ROE 

analysis” to demonstrate both: (1) that an existing ROE is unjust and unreasonable under 

the first prong of FPA section 206; and (2) that a new ROE is just and reasonable under 

the second prong is contrary to the FPA.121 In response to that decision, we adopt a new 

framework for evaluating whether an existing ROE remains just and reasonable for 

purposes of the first prong of FPA section 206. Specifically, we adopt the use of ranges 

of presumptively just and reasonable ROEs based on the risk profile of a utility or group 

of utilities to inform our decision of whether an existing ROE has become unjust and 

unreasonable, as proposed in the Briefing Order.122 We reiterate that, for average risk 

utilities, the presumptively just and reasonable range is the quartile of the overall 

composite zone of reasonableness centered on the central tendency of the overall zone of 

 119 RPGI Initial Br. (I) at 40-41; RPGI Initial Br. (II) at 43-44. 

120 RPGI Reply Br. (II) at 24-26. 

121 Emera Maine, 854 F.3d at 27. 

122 See Briefing Order, 165 FERC ¶ 61,118 at PP 17, 24, 28-30. 
Docket Nos. EL14-12-003 and EL15-45-000 - 34 - 

reasonableness; for below average risk utilities, that range is the quartile of the zone of 

reasonableness centered on the central tendency of the lower half of the zone of 

reasonableness; and for above average risk utilities, that range is the quartile of the zone 

of reasonableness centered on the central tendency of the upper half of the zone of 

reasonableness. These ranges of presumptively just and reasonable located within the 

overall composite zone of reasonableness are again illustrated below. 

We recognize that this facet of our new ROE methodology departs from our prior 

policy and precedent. As courts have held, “[t]he Commission can depart from a prior 

policy or line of precedent, but it must acknowledge that it is doing so and provide a 

reasoned explanation.”123 The D.C. Circuit has explained that 

[a]n agency is free to discard precedents or practices it no 

longer believes correct. Indeed we expect that any agency 

may well change its past practices with advances in 

knowledge in its given field or as its relevant experience and 

expertise expands. If an agency decides to change course, 

however, we require it to supply a reasoned analysis 

indicating that prior policies and standards are being 

deliberately changed, not casually ignored.124

 123 La. PSC v. FERC, 772 F.3d 1297, 1303 (D.C. Cir. 2014) (citing FCC v. Fox 

Television Stations, Inc., 556 U.S. 502, 515 (2009); Motor Vehicle Mfrs. Ass’n v. State 

Farm Mut. Auto. Ins. Co., 463 U.S. 29, 57 (1983)). 

124 Nuclear Energy Inst., Inc. v. EPA, 373 F.3d 1251, 1296 (D.C. Cir. 2004) (per 

curiam) (internal citations and quotation marks omitted). 
Docket Nos. EL14-12-003 and EL15-45-000 - 35 - 

That same court has affirmed the Commission’s departure from prior policy when the 

Commission has “explained how changed circumstances justified a new policy.”125 

Similarly, agency action has been upheld where “to the extent the agency departed from 

precedent, it offered a reasonable explanation for doing so.”126

 We find that this change to our prior methodology for determining whether an 

existing ROE is unjust and unreasonable is necessary to ensure that our ROE 

determinations under section 206 satisfy the requirements of the Emera Maine decision. 

In that case, the court found that the Commission’s decision that “a single ROE analysis 

generating a new just and reasonable ROE necessarily proved that the Transmission 

Owners’ existing ROE was unjust and unreasonable” is contrary to the FPA.127 The court 

found that this decision “relied on [the Commission’s] assumption that all ROEs other 

than the one FERC identifies as the utility’s just and reasonable ROE are per se unlawful 

in a section 206 proceeding.”128 However, the court held that, because “the zone of 

reasonableness creates a broad range of potentially lawful ROEs rather than a single just 

and reasonable ROE,” a finding that a particular ROE is just and reasonable, “standing 

alone, ‘does not amount to a finding that every other rate of return’” is not just and 

reasonable.129 Rather, the Commission must explain what circumstances render an 

existing ROE unjust and unreasonable in order to satisfy its burden of proof under the 

first prong of FPA section 206.130

As discussed in detail later in this order, the Commission has long based its 

decisions concerning just and reasonable ROEs for public utilities on the “current market 

cost of equity.”131 Accordingly, the starting point for determining whether a public 

utility’s existing ROE has become unjust and unreasonable must be a consideration of 

 125 ANR Pipeline Co. v. FERC, 205 F.3d 403, 407 (D.C. Cir. 2000). 

126 Busse Broad. Corp. v. FCC, 87 F.3d 1456, 1458 (D.C. Cir. 1996). 

127 Emera Maine, 854 F.3d at 26. 

128 Id. 

129 Id. (quoting Papago Tribal Util. Auth. v. FERC, 723 F.2d 950, 857 (D.C. Cir. 

1983)). 

130 Id. 

131 Generic Determination of Rate of Return on Common Equity for Public 

Utilities, Order No. 420, FERC Stats. & Regs. ¶ 30,644 at 31,367 (1985) (crossreferenced at 31 FERC ¶ 61,168). 
Docket Nos. EL14-12-003 and EL15-45-000 - 36 - 

whether the current market cost of equity has changed since the existing ROE was 

established. For this purpose, we intend to use the DCF and CAPM financial models to 

establish a composite zone of reasonableness reflecting the current market cost of equity, 

as discussed below. However, neither of those models “conclusively determines or 

estimates the expected return for an individual firm. Each methodology possesses its 

own way of examining investor behavior, its own premises, and its own set of 

simplifications of reality. Each method proceeds from different fundamental premises 

that cannot be validated empirically.”132 

Accordingly, while the results of these models “inform” our determination 

whether an existing ROE has become unjust and unreasonable, the models are too 

imprecise to “rigidly . . . determine” that issue.133 The models can, at best, produce a 

general estimate of the current cost of equity. As a result, there is no single percentage 

current cost of equity that we can select from the zone of reasonableness that will 

demonstrate that all other ROEs within the zone of reasonableness are per se unjust and 

unreasonable. Put another way, as the court held in Emera Maine, the mere fact that the 

financial models now produce a cost of equity that is somewhat lower than the existing 

ROE is, “without any further explanation,” insufficient to satisfy our burden under FPA 

section 206 to “prove that Transmission Owners’ existing base ROE was unlawful.”134 

Rather, the court requires that we explain the “particular circumstances” that support an 

explicit finding that the existing ROE has become unjust and unreasonable.135 

Given the imprecise tools available to us for estimating the current cost of equity, 

we find that our explanation in such circumstances must include a showing that the 

existing ROE is now outside some range of potentially just and reasonable ROEs within 

the zone of reasonableness for the public utility at issue, in light of our estimate of the 

current market cost of equity, or alternatively, that other evidence convincingly 

demonstrates that the existing ROE is unjust and unreasonable despite it falling within 

that range. Given the Court’s explanation that there is “‘a substantial spread’ of 

potentially reasonable rates,”136 we believe that a range of potentially just and reasonable 

ROEs will likely be the best evidence of what is a just and reasonable ROE for the utility 

 132 Morin at 429. 

133 Emera Maine, 854 F.3d at 26. 

134 Id.

135 Id. (quoting Montana-Dakota Utilities Co. v. Northwestern Pub. Serv. Co., 341 

U.S. 246, 251 (1951)). 

136 Id.
Docket Nos. EL14-12-003 and EL15-45-000 - 37 - 

at issue. Therefore, we find that it is appropriate to treat an ROE that falls within that 

range as presumptively just and reasonable, unless other evidence is sufficient to rebut 

that presumption. We also find that the circumstance most relevant to determining that 

range is the utility’s risk profile. As the Supreme Court explained in Hope, when 

describing what has become the standard for evaluating whether an ROE is just and 

reasonable under the FPA, a utility’s ROE “should be commensurate with returns on 

investments in other enterprises having corresponding risks.”137 Indeed, the D.C. Circuit 

has explained that failing to consider a utility’s risk profile, at least relative to the proxy 

group companies, can itself be arbitrary and capricious.138 By the same token, an ROE—

even one within the zone of reasonableness—that is not commensurate with the returns 

on investments in other enterprises having “corresponding risks” will not be just and 

reasonable. Accordingly, we find that, in order to explain the “particular circumstances” 

that support an explicit finding that the existing ROE has become unjust and 

unreasonable, we must determine the relevant utility’s risk profile and then identify a 

range of presumptively just and reasonable ROEs within the overall zone of 

reasonableness for that utility based on its risk profile. 

Consistent with the Commission’s well-established policy on relative risk analysis, 

we find that the measure of central tendency for the entire zone of reasonableness should 

be the starting point for identifying the range within the overall zone of reasonableness 

that represents presumptively just and reasonable ROEs for utilities with an average risk 

profile.139 Similarly, the starting points for identifying the ranges within the overall zone 

of reasonableness that represent presumptively just and reasonable ROEs for utilities with 

above or below average risk profiles should be the measures of central tendency of the 

upper and lower halves of the zone of reasonableness, respectively.140 Logic dictates that 

the end points of those ranges should not be closer to the starting points for the ranges of 

 137 Hope, 320 U.S. at 603 (emphasis added); Petal Gas Storage, L.L.C. v. FERC, 

496 F.3d 695, 698 (D.C. Cir. 2007) (discussing this standard in the context of whether 

rates are just and reasonable). 

138 Petal Gas, 496 F.3d at 700. 

139 See, e.g., Emera Maine, 854 F.3d at 27 (citing Tenn. Gas Pipeline Co. v. FERC, 

926 F.2d 1206, 1213 (D.C. Cir. 1991)) (“We have noted that the midpoint is a good 

‘starting place’ for the placement of the ROE.”). 

140 See, e.g., id. at 30 (citing Tenn. Gas Pipeline, 926 F.2d at 1213) (where “the 

utility at issue was riskier than the proxy group . . . the midpoint of the upper half was ‘an 

obvious place to begin.’”); Potomac-Appalachian Transmission Highline, LLC, 158 

FERC ¶ 61,050, at PP 270, 273 (2017) (setting ROE at the “measure of central tendency 

of the lower half of the zone of reasonableness . . . Given [the utility’s] low level of risk 

as compared to the proxy group.”). 
Docket Nos. EL14-12-003 and EL15-45-000 - 38 - 

utilities with different risk profiles than they are to their own starting point. Applying 

those principles, we find that the range within the overall zone of reasonableness that best 

represents presumptively just and reasonable ROEs for average risk utilities is the 

quartile of the zone of reasonableness centered on the central tendency of the entire zone 

of reasonableness, while the ranges within the overall zone of reasonableness that best 

represent presumptively just and reasonable ROEs for above- and below- average utilities 

are the quartiles centered on the central tendencies of the upper and lower halves of the 

zone of reasonableness, respectively. 

This is the reasoning underlying how we constructed the ranges of presumptively 

just and reasonable ROEs proposed in the Briefing Order. We are now changing our 

ROE methodology to incorporate these ranges of presumptively just and reasonable 

ROEs into our analysis of whether an existing ROE is just and reasonable. We do so in 

order to satisfy the court’s requirements in Emera Maine that our section 206 analysis 

produce an “actual finding as to the lawfulness” of an existing ROE and that we “explain 

what circumstances” led to that finding. Along with the prevailing market conditions, a 

utility’s risk profile is the most important circumstance to be considered in determining 

whether an existing ROE is unjust and unreasonable. Using the ranges of presumptively 

just and reasonable ROEs objectively and automatically incorporates risk profile into our 

ROE analysis so that we can ensure that we explain how this most important 

circumstance factors into our ROE determinations under section 206, as the court 

required in Emera Maine. 

While previous Commission determinations under section 206 regarding ROEs 

may have made “actual finding[s] as to the lawfulness” of existing ROEs and sufficiently 

“explain[ed] what circumstances” led to those findings without the use of ranges of 

presumptively just and reasonable ROEs as we are adopting herein, we find that using 

such ranges is now necessary to ensure that our determinations meet the requirements of 

the court in the Emera Maine decision and is well within the Commission’s 

“‘considerable latitude in developing a methodology responsive to its regulatory 

challenge.’”141 We believe that using such ranges incorporates a utility’s risk profile into 

our ROE analysis in a concrete and objective way that will establish a direct connection 

between the most important circumstance of the case—a utility’s risk profile—and our 

ultimate determination as to whether an existing ROE is unjust and unreasonable. In 

addition, because our determination of a utility’s risk profile will lead to a rebuttable 

presumption of lawfulness or unlawfulness, our reasoning underlying that determination 

will largely “explain what circumstances” support our “actual finding as to the 

lawfulness” of the existing ROE. That is because, if the presumption is not rebutted, the 

reasoning underlying our risk profile determination will support our finding as to 

 141 Emera Maine, 854 F.3d at 20 (citations and internal quotation marks omitted) 

(citing S.C. Pub. Serv. Auth. v. FERC, 762 F.3d 41, 55 (D.C. Cir. 2014)). 
Docket Nos. EL14-12-003 and EL15-45-000 - 39 - 

lawfulness and, if the presumption is rebutted, we will have to explicitly explain how the 

other evidence rebuts the presumption and leads to our finding as to unlawfulness. 

Moreover, while using ranges of presumptively just and reasonable ROEs is 

necessary to ensure that our ROE determinations under section 206 meet the 

requirements of the Emera Maine decision, we believe that it will also provide more 

general benefits to consumers and utilities. Specifically, “[r]atemaking . . . is not a 

science”142 and the overall composite zone of reasonableness that is calculated under the 

revised methodology will still “create[] a broad range of potentially lawful ROEs rather 

than a single just and reasonable ROE.”143 In addition, it remains true under the new 

ROE methodology, as it did under our prior policy and precedent, that “[w]hether a rate, 

even one within the zone of reasonableness, is unlawful depends on the particular 

circumstances of the case.”144 Accordingly, while the overall composite zone of 

reasonableness informs the Commission’s assessment of whether an existing ROE is 

unjust and unreasonable under section 206, potential complainants and respondents still 

face a substantial amount of uncertainty as to whether an existing ROE is unjust and 

unreasonable in light of the particular circumstances of the case. 

We believe that using ranges of presumptively just and reasonable ROEs will 

provide additional certainty and predictability to parties because it will provide an 

additional objective indicator of whether an existing ROE may be unjust and 

unreasonable under section 206. This additional guidance should help potential 

complainants assess whether an existing ROE may be unjust and unreasonable and avoid 

expending time and resources on complaints that are not likely to succeed. Similarly, 

utilities will be able to better assess whether their existing ROEs are likely to be found 

unjust and unreasonable under section 206 and, if so, proactively file to reduce their 

ROEs in advance of complaints. 

At the same time, we recognize that whether an existing ROE is unjust and 

unreasonable, even one that falls within the applicable range of presumptively just and 

reasonable ROEs, still “depends on the particular circumstances of the case.”145 

Accordingly, if an existing ROE falls within the applicable range of presumptively just 

and reasonable ROEs, the presumption that the ROE is just and reasonable is a rebuttable 

presumption. Therefore, other evidence regarding the particular circumstances of the 

case can demonstrate that an existing ROE is unjust and unreasonable even if falls within 

 142 Boston Edison Co. v. FERC, 885 F.2d 962, 969–70 (1st Cir. 1989). 

143 Emera Maine, 854 F.3d at 26. 

144 Id. at 23. 

145 Id.
Docket Nos. EL14-12-003 and EL15-45-000 - 40 - 

the applicable range of presumptively just and reasonable ROEs, such as evidence 

regarding non-utility stock prices, investor expectations for non-utility stocks, various 

types of bond yields and their relation to stock prices, investor and other expert 

testimony, and testimony regarding the effects of rates on customers. We believe that 

employing a rebuttable presumption will provide additional certainty and transparency to 

parties while also not restricting the Commission’s ability to consider the particular 

circumstances of the case, as required by applicable precedent. 

2. Arguments Opposing the Use of Presumptively Just and 

Reasonable ROE Ranges 

We are not persuaded by the arguments opposing the use of ranges of 

presumptively just and reasonable ROEs as proposed in the Briefing Order. CAPs argue 

that the court’s holding in Emera Maine did not require that we “must accept a range of 

ROEs as just and reasonable.”146 CAPs’ argument on this point is inapposite. If an 

existing ROE falls within the applicable range of presumptively just and reasonable 

ROEs, it does not mean that we “must accept” that ROE as just and reasonable nor do 

such ranges establish that every ROE within that range “must” be just and reasonable. As 

we discuss further below, if an existing ROE falls within the applicable range of 

presumptively just and reasonable ROEs, then it is only rebuttably presumed to be just 

and reasonable. That presumption may be rebutted by other evidence regarding the 

particular circumstances of the case and the Commission may find that an existing ROE 

is unjust and unreasonable even if it falls within the applicable range of presumptively 

just and reasonable ROEs. 

CAPs further assert that the court in Emera Maine only held that the Commission 

“was required to do more than show that its single ROE analysis generated a new just and 

reasonable ROE and conclusively declare that, consequently, the existing ROE was per se 

unjust and unreasonable.”147 It is true that the court held this, but it further held that the 

Commission’s analysis did not satisfy section 206 because it “failed to include an actual 

finding as to the lawfulness of Transmission Owners’ existing base ROE”148 and 

explained that such a finding should “explain what circumstances rendered Transmission 

Owners’ existing rate unlawful.”149 The court also stated that the Commission’s decision 

 146 CAPs Initial Br. (I) at 68; CAPs Initial Br. (II) at 68. 

147 CAPs Initial Br. (I) at 68 (citing Emera Maine, 854 F.3d at 15); CAPs Initial 

Br. (II) at 68 (citing same). 

148 Emera Maine, 854 F.3d at 27. 

149 Id. at 26.
Docket Nos. EL14-12-003 and EL15-45-000 - 41 - 

“relied on its assumption that all ROEs other than the one FERC identifies as the utility’s 

just and reasonable ROE are per se unlawful in a section 206 proceeding”,150 but 

explained that this reasoning was insufficient because “the zone of reasonableness creates 

a broad range of potentially lawful ROEs rather than a single just and reasonable ROE, 

meaning that FERC’s finding that 10.57 percent was a just and reasonable ROE, standing 

alone, ‘did not amount to a finding that every other rate of return was not.’”151 Similarly, 

the court explained that finding that a just and reasonable ROE would be a “‘a numerical 

value below the existing numerical value’”152 was “without any further explanation . . . 

insufficient to prove that Transmission Owners’ existing base ROE was unlawful.”153 

Thus, CAPs’ quote of the Emera Maine case is accurate but incomplete. In light of this 

more complete context of the court’s holding, we find that using ranges of presumptively 

just and reasonable ROEs in our ROE methodology is necessary in order to ensure that 

our ROE determinations under section 206 meet the requirements of the court’s holding 

in Emera Maine. 

In particular, using such ranges will produce a specific result from our risk profile 

determination—a rebuttable presumption—and then we will make an explicit finding as 

to whether the other evidence presented by the parties in the case has rebutted that 

presumption. This analysis will allow the Commission to “explain what circumstances” 

support our “actual finding as to the lawfulness” in a structured manner. Moreover, 

because risk profile is the particular circumstance most relevant to determining whether 

an existing ROE is unjust and unreasonable, using ranges of presumptively just and 

reasonable ROEs based on a utility’s risk profile will ensure that the risk profile 

determination has a clear and significant connection to our ultimate finding as to 

lawfulness. We find that the use of ranges of presumptively just and reasonable ROEs in 

our ROE methodology ensures that our determinations satisfy the requirements of the 

Emera Maine decision. 

CAPs also argue that using ranges of presumptively just and reasonable ROEs 

violates the Commission’s statutory duty to protect customers from excessive rates 

because it would presume ROEs within the range to be lawful even when the 

 150 Id.

151 Id. (citing Papago Tribal Util. Auth. v. FERC, 723 F.2d 950, 952–53 (D.C. 

Cir. 1983)). 

152 Id. (citing Opinion No. 531-B, 150 FERC ¶ 61,165 at P 32). 

153 Id.
Docket Nos. EL14-12-003 and EL15-45-000 - 42 - 

preponderance of the evidence points to a lower ROE.154 RPGI makes a similar 

argument, asserting that the use of these ranges effectively shields existing ROEs from 

modification absent a showing that they fall outside of the applicable range.155 We 

disagree. Using ranges of presumptively just and reasonable ROEs will not hinder the 

Commission’s ability to protect customers from excessive rates or necessarily require a 

showing that the relevant ROE falls entirely outside of the applicable range. As 

explained above, we will use the range of presumptively just and reasonable ROEs as an 

additional tool to help inform our ROE analyses. The range of presumptively just and 

reasonable ROEs will provide an initial indication of whether an existing ROE may be 

unjust and unreasonable which we will consider along with all of the other evidence in 

the applicable record, including evidence addressing the particular circumstances of the 

case. The presumption that will apply if an existing ROE falls within the applicable 

range of presumptively just and reasonable ROEs is rebuttable. Accordingly, the 

Commission can still find that the ROE is unjust and unreasonable based upon the 

preponderance of the evidence, even if it falls within the applicable range of 

presumptively just and reasonable ROEs. Moreover, as the court held in Emera Maine, 

the mere fact the financial models now produce a cost of equity that is somewhat lower 

than the existing ROE is, “without any further explanation,” insufficient to satisfy our 

burden under FPA section 206 to “prove that Transmission Owners’ existing base ROE 

was unlawful.”156 Thus, contrary to CAPs’ assertion, even if the evidence points to a 

lower ROE, this alone “without any further explanation” is insufficient to support a 

finding that the existing ROE is unjust and unreasonable. 

In opposing our use of presumptively just and reasonable ROEs, CAPs contend 

that we should take the approach that the Emera Maine court specifically rejected. CAPs 

assert that the court in Emera Maine held that “at any given time and for the particular 

circumstances of each case, there is ultimately a single ROE level that is just and 

reasonable.”157 On the contrary, the court explicitly held that there is a “broad range of 

potentially lawful ROEs rather than a single just and reasonable ROE”158 and reversed the 

Commission’s finding that an existing ROE was unjust and unreasonable because it 

exceeded the single just and reasonable ROE that the Commission would have set. CAPs 

similarly argue that ranges of presumptively just and reasonable ROEs are unlawful 

 154 CAPs Initial Br. (I) at 72-73; CAPs Initial Br. (II) at 72-73. 

155 RPGI Initial Br. (I) at 40; RPGI Initial Br. (II) at 43. 

156 Emera Maine, 854 F.3d at 26. 

157 CAPs Initial Br. (I) at 71-72 (emphasis in original); CAPs Initial Br. (II) at 71 

(emphasis in original). 

158 Emera Maine, 854 F.3d at 26. 
Docket Nos. EL14-12-003 and EL15-45-000 - 43 - 

because the Commission cannot allow returns “that exceed the cost-based level.” 

However, the court in Emera Maine found that the Commission must do more than 

simply determine what the cost-based ROE is and then determine if the existing ROE is 

unjust and unreasonable based on whether it exceeds that cost-based level. Accordingly, 

we disagree with CAPs’ apparent position that the Commission should continue to follow 

the approach that was reversed in Emera Maine of identifying the cost of equity and then 

finding that an existing ROE is unjust and unreasonable under prong one of section 206 if 

it exceeds that cost of equity. 

 CAPs also argue that our use of ranges of presumptively just and reasonable 

ROEs will create an unlawful asymmetry between rate increases sought by utilities under 

FPA section 205 and rate reductions sought by consumers under FPA section 206. 

According to CAPs, utilities filing under section 205 can continue to obtain approval of a 

proposed ROE increase if they show that the cost of equity exceeds the existing ROE by 

any amount, but under the proposed presumption, customers filing complaints under 

section 206 would have to show that the existing ROE is so high that it is above the 

applicable range of presumptively just and reasonable base ROEs.159 We disagree that 

the use of ranges of presumptively just and reasonable ROEs will create any unlawful 

difference between our treatment of filings under section 205 and section 206. As 

an initial matter, “[t]he purpose of section 206 is ‘quite different’ from that of 

section 205”160 and “[s]ection 206’s procedures are ‘entirely different’ and ‘stricter’ than 

those of section 205.”161 As the D.C. Circuit has further explained, “[i]n contrast to 

section 206, section 205 ‘is intended for the benefit of the utility,’”162 and the 

Commission “plays ‘an essentially passive and reactive’ role under section 205.”163 The 

court in Emera Maine further explained that “A utility filing a rate adjustment under 

section 205 must show that the adjustment is lawful. The proponent of a rate change 

under section 206, however, bears ‘the burden of proving that the existing rate 

is unlawful.’”164 We find that there is nothing unlawful about using ranges of 

 159 CAPs Initial Br. (I) at 73-75; CAPs Initial Br. (II) at 73-74. 

160 Emera Maine, 854 F.3d at 24 (quoting City of Winnfield, La. v. FERC, 744 

F.2d 871, 875 (D.C. Cir. 1984)). 

161 Id. (quoting City of Anaheim, Cal. v. FERC, 558 F.3d 521, 525 (D.C. Cir. 

2009)). 

162 Id. (quoting City of Winnfield v. FERC, 744 F.2d at 875). 

163 Id. (quoting Atl. City Elec. Co. v. FERC, 295 F.3d 1, 10 (D.C. Cir. 2002)). 

164 Id. (emphasis in original) (quoting Ala. Power Co. v. FERC, 993 F.2d 1557, 

1571 (D.C. Cir. 1993)). 
Docket Nos. EL14-12-003 and EL15-45-000 - 44 - 

presumptively just and reasonable ROEs to inform our analysis of whether an existing 

ROE has been shown to be unlawful under section 206. The showing that is required 

under section 206 differs from the showing that is required under section 205. Using 

ranges of just and reasonable ROEs will not change this fact. It remains the case that 

demonstrating that a proposed rate change is lawful under section 205 and demonstrating 

that an existing rate is unlawful under section 206 are two different standards. CAPs 

frame their argument as opposing the use of ranges of presumptively just and reasonable 

ROEs, but they are in fact taking issue with the different standards that apply to 

section 205 filings and section 206 complaints. We lack the authority to change those 

standards and our modification of the Commission’s ROE methodology to use ranges of 

presumptively just and reasonable ROEs adheres to those standards. 

In addition, we reiterate that customers filing complaints under section 206 do not 

necessarily have to show that the existing ROE is so high that it is above the applicable 

range of presumptively just and reasonable base ROEs in order to demonstrate that an 

existing ROE is unjust and unreasonable. As noted above, the presumption is a 

rebuttable one and whether an existing ROE falls within the applicable range is just one 

piece of evidence that the Commission will consider along with all of the evidence in a 

particular case. 

In support of their argument, CAPs point to court precedent ruling that “[t]he 

statutory ‘just and reasonable’ standard is the same under section 205 and section 206.”165 

However, the same court in Emera Maine, citing that same case, clarified that “while 

‘[t]he just and reasonable lodestar is no loftier under section 206 than under section 205,’ 

the showing required of FERC to exercise its section 206 authority to change an existing 

rate differs from anything required for FERC to approve a utility’s proposed rate 

adjustment under section 205.”166 Therefore, precedent does not require the 

Commission’s analysis under sections 205 and 206 to be the same. On the contrary, the 

statutes themselves require different showings and thus a different analysis by the 

Commission. The Commission’s use of ranges of presumptively just and reasonable 

ROEs in reviewing complaints under section 206 will help it determine if an existing rate 

has been shown to be unjust and unreasonable and that does not create any unlawful 

asymmetry with its analysis under section 205. 

CAPs’ contention that the Commission’s use of such ranges also contravenes the 

Regulatory Fairness Act, which modified FPA section 206(b) to provide the Commission 

 165 CAPS Initial Br. (I) at 74 (citing FirstEnergy Serv. Co. v. FERC, 758 F.3d 346, 

353 (D.C. Cir. 2014)); CAPS Initial Br. (II) at 74 (citing same). 

166 Emera Maine, 854 F.3d at 24 (quoting FirstEnergy, 758 F.3d at 353) (internal 

quotation marks omitted). 
Docket Nos. EL14-12-003 and EL15-45-000 - 45 - 

some refund authority, is also unavailing. CAPs assert that this is the case because the 

Regulatory Fairness Act was intended to add symmetry between the Commission’s 

treatment of section 205 rate increase filings and section 206 complaints seeking rate 

decreases.167 However, a step to “add symmetry” between the sections does not mean 

that they are completely symmetrical. In fact, as discussed above “[s]ection 206’s 

procedures are ‘entirely different’ and ‘stricter’ than those of section 205.”168 

The fact that the Commission’s analysis under section 206 differs from its analysis 

under section 205 is not only consistent with the Regulatory Fairness Act but also 

mandated by the statutory language of sections 205 and 206. CAPs further assert that 

Mobile and Sierra support their argument because those cases provide that a rate increase 

filing made and suspended under FPA section 205 and a rate decrease complaint filed 

under FPA section 206 are both subject to the same “character” and “scope.”169 We are 

not persuaded by this contention because, as discussed above, “while ‘[t]he just and 

reasonable lodestar is no loftier under section 206 than under section 205,’ the showing 

required of FERC to exercise its section 206 authority to change an existing rate differs 

from anything required for FERC to approve a utility’s proposed rate adjustment under 

section 205.”170 It is consistent with Mobile and Sierra for the Commission to employ 

one analysis to determine if the required showing that an existing ROE is unjust and 

unreasonable has been made under the first prong of section 206 and a somewhat 

different analysis to determine if a showing has been made under section 205 that a 

proposed ROE is just and reasonable. 

CAPs also argue that using ranges of presumptively just and reasonable ROEs 

heightens the burden of proof faced by complainants, thereby creating an unlawful 

asymmetry between the burden of proof that utilities must meet to raise rates under FPA 

section 205, and the burden of proof that customers must meet to obtain lower rates under 

FPA section 206.171 We disagree. The change to our ROE methodology to utilize ranges 

of presumptively just and reasonable ROEs does not change the burden of proof that 

 167 CAPS Initial Br. (I) at 74-75; CAPS Initial Br. (II) at 74. 

168 Emera Maine, 854 F.3d at 24 (quoting City of Anaheim v. FERC, 558 F.3d 

at 525). 

169 CAPs Initial Br. (I) at 74 (citing United Gas Pipe Line Co. v. Mobile Gas Serv. 

Corp., 350 U.S. 332, 341 (1956); CAPs Initial Br. (II) at 74 (citing same). 

170 Emera Maine, 854 F.3d at 24 (quoting FirstEnergy, 758 F.3d at 353) (internal 

quotation marks omitted). 

171 CAPs Initial Br. (I) at 75-76; CAPs Initial Br. (II) at 75. 
Docket Nos. EL14-12-003 and EL15-45-000 - 46 - 

parties face under section 205 or section 206. It is merely an objective benchmark that 

will be used in our overall analysis of base ROEs to help determine if an existing rate has 

been shown to be unjust and unreasonable under section 206. It remains the case, as it 

was before implementing this modification to our ROE methodology, that “[a] utility 

filing a rate adjustment under section 205 must show that the adjustment is lawful” while 

“[t]he proponent of a rate change under section 206, however, bears ‘the burden of 

proving that the existing rate is unlawful.’”172 The use of ranges of presumptively just 

and reasonable ROEs does not change these burdens. Those ranges will merely serve to 

inform our assessment of ROEs. The fact that our use of those ranges will involve 

employing a rebuttable presumption does not change the burdens that apply. As MISO 

TOs note, the Commission has previously adopted a rebuttable presumption in the 

context of section 206. For example, in AEP Marketing,

173 the Commission adopted a 

rebuttable presumption that a utility does not possess market power in generation if it 

passes two market power screens and a rebuttable presumption that a utility does have 

market power if it fails either screen.174 The Commission explained that “[f]ailure of a 

screen will provide the basis for instituting a section 206 proceeding and will establish a 

rebuttable presumption of market power in the section 206 proceeding.”175 This 

presumption is now incorporated in the Commission’s regulations.176 The Commission 

also previously adopted a rebuttable presumption that a “price squeeze” indicates a 

wholesale rate is unduly discriminatory in violation of section 206 of the FPA.177 Indeed, 

the use of rebuttable presumptions in the context of section 206 analyses does not create 

an unlawful asymmetry with section 205 as CAPs suggest. Complainants continue to 

bear the burden of proving that the existing rate is unlawful and this burden is unchanged 

regardless of whether the rebuttable presumption is triggered. The addition of the ranges 

of presumptively just and reasonable ROEs merely provides additional detail regarding 

 172 Emera Maine, 854 F.3d at 24 (emphasis in original) (quoting Ala. Power Co. v. 

FERC, 993 F.2d at 1571). 

173 AEP Power Mktg., 107 FERC ¶ 61,018. 

174 See id. P 37. 

175 Id. P 201. 

176 See 18 C.F.R. §35.37(c)(1) (2019). 

177 See Conn. Light & Power Co., 8 FERC at 61,655 (“Based on the above, we 

conclude that given the establishment of a prima facie case of price discrimination and 

competition, it is reasonable from an administrative point of view to presume that there is 

a reasonable probability of an anticompetitive effect. The utility, of course, will have an 

opportunity to rebut this presumption.”). 
Docket Nos. EL14-12-003 and EL15-45-000 - 47 - 

how a complainant must approach its effort to satisfying that burden. As MISO TOs 

note, the Commission has broad discretion over what weight to give evidence presented 

to it,178 and our use of ranges of presumptively just and reasonable ROEs merely provides 

additional detail as to our evidentiary expectations for complainants’ satisfying the 

burden of proof under prong one of FPA section 206. 

CAPs further contend that, at worst, the use of such ranges creates a conclusive 

presumption that violates customers’ due process rights. They argue that this is the case 

because the central values of the financial models are the best evidence of cost of equity 

but the ranges of presumptively just and reasonable ROEs would allow an existing ROE 

to exceed the central values of all of the financial models and still be presumed just and 

reasonable. CAPs assert that it would violate their due process rights to presume the 

lawfulness of rates that have been shown to be excessive by the same financial models 

that are used to establish the range of presumptively just and reasonable ROEs. They 

argue that this is further true because it is doubtful that customers will be able to produce 

additional evidence that is more effective than the collective evidence of the financial 

models.179 This argument is unavailing. As discussed above, the presumption that will 

apply if an ROE falls within the applicable range of presumptively just and reasonable 

ROEs is a rebuttable presumption. Contrary to CAPs’ suggestion, there is a wide variety 

of potential additional evidence that could be used to rebut the applicable presumption. 

For example, complainants could offer evidence regarding non-utility stock prices, 

investor expectations for non-utility stocks, various types of bond yields and their relation 

to stock prices, and investor and other expert testimony, including testimony regarding 

the effects of rates on customers. Moreover, even if an ROE falls within the applicable 

range of presumptively just and reasonable ROEs, the relative location of that ROE 

within the range, and the level of the ROE relative to the central values of the other 

financial models could be relevant. Accordingly, it is not the case, as CAPs imply, that 

the central values of the financial models would be ignored merely because an ROE falls 

within the applicable range of presumptively just and reasonable ROEs. These are just 

illustrative examples of the types of evidence that could be used to potentially rebut the 

presumption. There is a wide array of potential evidence that could be used to rebut the 

presumption and therefore we disagree with CAPs’ contention that the presumption is 

conclusive. 

CAPs also argue that the proposal to use ranges of presumptively just and 

reasonable ROEs is arbitrary and capricious because the proposed presumption is not 

 178 See e.g., Hope, 320 U.S. at 622 (“The amount of evidence to be admitted on 

any point was of course in the agency's reasonable discretion, and it was free to give its 

own weight to these or other factors and to determine from all the evidence its own 

judgment as to the necessary rates.”). 

179 CAPs Initial Br. (I) at 76-78; CAPs Initial Br. (II) at 76-78. 
Docket Nos. EL14-12-003 and EL15-45-000 - 48 - 

inferred from proven facts. We disagree. The presumption is inferred from proven facts, 

namely the zones of reasonableness produced by the DCF and CAPM which use 

verifiable data inputs, the objective calculations of the overall composite zone of 

reasonableness, where the applicable range of presumptively just and reasonable ROEs is 

located within that overall zone, the identification of where the relevant existing ROE 

falls within that overall zone, and the determination of whether it falls within the 

applicable range of presumptively just and reasonable ROEs. 

Moreover, we disagree with CAPs’ contention that the rationale underlying how 

the ranges of presumptively just and reasonable ROEs are constructed is flawed. CAPs 

point to the Commission’s statement in the Briefing Order that “for an average risk 

utility, the ‘broad range of potentially lawful ROEs’ that the D.C. Circuit contemplated in 

Emera should correspond to those points that are closer to the ROE that the Commission 

would set for that utility than to the ROE for a utility of a different risk profile,”180 and 

then assert that the Commission has not explained how the potentially lawful ROEs 

contemplated in Emera Maine for the DCF zone of reasonableness became presumptively

lawful ROEs under its new proposal. As an initial matter, we clarify that the ranges of 

presumptively just and reasonable ROEs are not coextensive with the “broad range of 

potentially lawful ROEs” contemplated in Emera Maine. As the court explained “the 

zone of reasonableness creates a broad range of potentially lawful ROEs.”181 The court 

was referencing the overall zone of reasonableness and we clarify that, under our revised 

methodology, the composite overall zone of reasonableness will still represent the “broad 

range of potentially lawful ROEs” for a utility or group of utilities. The ranges of 

presumptively just and reasonable ROEs are intended to assist the Commission, as well 

as market participants, in determining whether an ROE that falls within the overall 

composite zone of reasonableness is just and reasonable because “[w]hether a particular 

rate within the zone is the just and reasonable rate for the utility at issue depends on a 

number of factors” and “[t]hus, the fact that a rate falls within the zone of reasonableness 

does not establish that the rate is the just and reasonable rate for the utility at issue.”182 

Accordingly, we clarify that the potentially lawful ROEs contemplated in this language 

of Emera Maine are not coextensive with the applicable range of presumptively just and 

reasonable ROEs under our revised methodology. As a result, CAPs’ argument on this 

point does not demonstrate any flaw in our methodology.

CAPs also point to the Commission’s statement in the Briefing Order that the 

applicable range of presumptively just and reasonable ROEs for a diverse group of 

 180 Briefing Order, 165 FERC ¶ 61,118 at P 29. 

181 Emera Maine, 854 F.3d at 26. 

182 Id. at 23. 
Docket Nos. EL14-12-003 and EL15-45-000 - 49 - 

average risk utilities is one quarter of the zone of reasonableness, centered on the 

midpoint because “[e]very potential ROE within that range is closer to the current just 

and reasonable ROE for an average-risk utility than the current just and reasonable ROE 

for a utility of a different risk profile.”183 CAPs counter that the observation that an ROE 

lies closer to the just and reasonable ROE than to some appropriate ROE for a utility of a 

different risk profile does not render that ROE just and reasonable. CAPs have 

misconstrued the point of the statement. Nothing in our rationale asserts the position 

CAPs describes. The fact that an ROE lies closer to the just and reasonable ROE than to 

an appropriate ROE for a utility of a different risk profile does not render that ROE just 

and reasonable, but it does provide some evidence indicating that the ROE may be just 

and reasonable. That is why our revised methodology uses that information to determine 

how to construct the ranges of presumptively just and reasonable ROEs, which we will 

then use as one piece of evidence in our overall assessment of whether an ROE is just and 

reasonable. Our rationale does not find that this information conclusively establishes that 

an ROE is just and reasonable, but instead that it is some evidence indicating that the 

ROE is just and reasonable. Using this information to construct the ranges of 

presumptively just and reasonable ROEs is the most effective manner in which we can 

incorporate this information into our ROE methodology. 

In addition, CAPs argue that the use of only three risk groups (below-average risk, 

average risk, and above-average risk) in the ranges of presumptively just and reasonable 

ROEs is arbitrary. They assert that the Commission has previously set ROEs at a wide 

variety of locations within the distribution of proxy results, not only at the upper or lower 

midpoint. CAPs suggest that the Commission could establish more granular risk groups, 

for example using five risk groups of very-low-risk, moderately-low-risk, average-risk, 

moderately-high-risk, and very-high risk. We are not persuaded by this argument. The 

quartile approach using three risk groups strikes an appropriate balance between the 

interests of customers and utilities. We find that the ranges that are produced by this 

approach are narrow enough to protect customers from unjust and unreasonable ROEs 

while also providing utilities and all market participants with an additional objective 

benchmark that the Commission will use to assess whether an ROE is likely unjust and 

unreasonable. This will provide additional transparency and certainty with respect to our 

ROE analyses without giving undue preference to a utility’s existing ROE or to a 

challenge of an existing ROE. As noted above, the use of three risk groups is supported 

by the fact that, under that construct, every ROE within the applicable presumptively just 

and reasonable range will be closer to the traditional starting place for evaluating the 

 183 CAPs Initial Br. (I) at 79-80 (citing Briefing Order, 165 FERC ¶ 61,118 at 

P 29); CAPs Initial Br. (II) at 79 (citing same). 
Docket Nos. EL14-12-003 and EL15-45-000 - 50 - 

ROE of a utility with that risk profile184 than it will be to the corresponding traditional 

starting place for a utility of a different risk profile. This approach will most effectively 

identify whether a given ROE is likely more appropriate for a utility of the applicable risk 

profile than it would be for a utility of a different risk profile, which will help inform our 

assessment of whether the ROE is unjust and unreasonable in light of all of the particular 

circumstances of the case. Because “[r]atemaking . . . is not a science,”185 we could have 

constructed the ranges of presumptively just and reasonable ROEs using a different 

number of risk groups or with wider or narrower ranges.186 However, we find that, in 

light of the record in these proceedings and our past experience with ROE analyses, the 

approach we are adopting herein will best balance the interests of consumers and utilities 

and most effectively allow us to determine if an ROE is unjust and unreasonable. 

MISO TOs request that the Commission clarify that a base ROE that falls outside 

of the applicable range of presumptively just and reasonable ROEs is only rebuttably 

presumed to be no longer just and reasonable, just as an ROE that falls within the zone is 

only rebuttably presumed to be just and reasonable.187 RPGI opposes this clarification, 

arguing that it would unfairly benefit utilities.188 We clarify that the Commission will 

apply a rebuttable presumption to both ROEs that fall within the applicable range of 

presumptively just and reasonable ROEs and those that fall outside of the applicable 

range. In other words, ROEs that fall within the applicable range will be presumed to be 

just and reasonable, unless that presumption is rebutted, and those that fall outside of the 

applicable range will be presumed to be unjust and unreasonable, unless that presumption 

is rebutted. 

 184 See, e.g., Emera Maine, 854 F.3d at 27 (“We have noted that the midpoint is a 

good ‘starting place’ for the placement of the ROE.”) (citing Tenn. Gas Pipeline Co. v. 

FERC, 926 F.2d 1206, 1213 (D.C. Cir. 1991)); id. at 30 (where “the utility at issue was 

riskier than the proxy group . . . the midpoint of the upper half was ‘an obvious place to 

begin.’”) (citing Tenn. Gas Pipeline, 926 F.2d at 1213); Potomac-Appalachian 

Transmission Highline, LLC, 158 FERC ¶ 61,050, at PP 270, 273 (2017) (setting ROE at 

the “measure of central tendency of the lower half of the zone of reasonableness . . . 

Given [the utility’s] low level of risk as compared to the proxy group.”). 

185 Boston Edison Co. v. FERC, 885 F.2d 962, 969-70 (1st Cir. 1989). 

186 See, e.g., CAPs Initial Br. (I) at 82-83 (proposing five risk groups with sextiles 

within the composite zone applying to each group). 

187 MISO TOs Initial Br. (I) at 6; MISO TOs Initial Br. (II) at 7-8. 

188 RPGI Reply Br. (II) at 24-26. 
Docket Nos. EL14-12-003 and EL15-45-000 - 51 - 

RPGI requests that the Commission acknowledge that it intends to determine 

whether to dismiss a complaint and whether to grant a complaint on the basis of the same 

process under the new ROE methodology. Specifically, RPGI contends that, if the 

Commission anticipates that it will be in a position to resolve all factual issues 

instrumental to denying a complaint if the relevant ROE falls within the applicable range 

of presumptively just and reasonable ROEs and the presumption is not rebutted, then the 

Commission should apply an equivalent standard for granting complaints.189 We clarify 

that we intend to determine whether to dismiss a complaint and whether to grant a 

complaint on the basis of the same process under the new ROE methodology. The ranges 

of presumptively just and reasonable ROEs and the other changes to our methodology 

adopted in this order will apply generally to our overall assessment of existing ROEs 

under FPA section 206. There will be no difference in how the methodology is applied in 

the context of potentially dismissing a complaint as opposed to potentially granting a 

complaint, outside of the differences in the statutory and regulatory burdens and 

requirements that complainants and respondents face under section 206 which, as noted 

above, the revised methodology adopted herein cannot and does not change. With 

respect to RPGI’s contention that, if the Commission anticipates that it will be able to 

resolve all factual issues relevant to denying a complaint, it should also be able to do so 

with respect to granting a complaint, we clarify that we do not necessarily anticipate that 

the revised methodology adopted in this order will allow us to resolve all factual issues in 

every ROE case without additional hearing or settlement procedures. As was the case 

before this order, there may be cases where we will be able to resolve all factual issues 

before us and dismiss or grant a complaint without additional procedures. However, 

there may be other cases where there are issues of material fact in dispute that cannot be 

resolved based upon the record and will require additional procedures. We will not 

approach the question of whether there are issues of material fact differently in 

determining if a complaint will be granted as opposed to if a complaint will be denied, 

again outside of the differences in the statutory and regulatory burdens and requirements 

that complainants and respondents face under section 206 which the revised methodology 

adopted herein does not change. 

V. DCF 

A. Background 

The DCF model is based on the premise that an investment in common stock is 

worth the present value of the infinite stream of dividends discounted at a market rate 

commensurate with the investment’s risk. With simplifying assumptions, the DCF model 

results in the investor using the following formula to determine share price: 

 189 RPGI Initial Br. (I) at 41; RPGI Initial Br. (II) at 44. 
Docket Nos. EL14-12-003 and EL15-45-000 - 52 - 

P = D/k-g, 

where “P” is the price of the common stock, “D” is the current dividend, “k” is the 

discount rate (or investors’ required rate of return), and “g” is the expected growth rate in 

dividends. 

Unlike investors, the Commission uses the DCF model to determine the ROE (the 

“k” component) to be included in the utility’s rates, rather than to estimate a stock’s 

value. Therefore, the Commission rearranges the DCF formula to solve for “k”, the 

discount rate, which represents the rate of return that investors require to invest in a 

company’s common stock. The Commission also multiplies the dividend yield by the 

expression (1+.5g) to account for the fact that dividends are paid on a quarterly basis. 

Multiplying the dividend yield by (1+.5g) increases the dividend yield by one half of the 

growth rate and produces what the Commission refers to as the “adjusted dividend yield.” 

Under the resulting formula, ROE equals the adjusted dividend yield plus the expected 

future growth rate of dividends and can be expressed as follows: 

k=D/P (1+.5g) + g. 

Under the Commission’s two-step DCF methodology, the input for the expected 

future growth rate of dividends, “g,” is calculated using both short-term and long-term 

growth projections.190 Those two growth rate estimates are averaged, with the short-term 

growth rate estimate receiving two-thirds weighting and the long-term growth rate 

estimate receiving one-third weighting, to create a composite growth rate.191

B. Dividend Yield 

In the First Complaint proceeding, all parties, including the MISO TOs, calculated 

the adjusted dividend yield using the same composite growth rate, including both shortand long-term growth rates, for the (1+.5g) adjustment the Commission uses for the 

expected future growth rate of dividends. Accordingly, the Presiding Judge in that 

proceeding, and the Commission in Opinion No. 551, also calculated the adjusted 

dividend yield using the composite growth rate, and no party sought rehearing of Opinion 

No. 551 on this issue. 

Initially, all parties in the Second Complaint proceeding, including the MISO TOs, 

also proposed to calculate the adjusted dividend yield using the composite growth rate for 

 190 Opinion No. 531, 147 FERC ¶ 61,234 at PP 15-17, 36-40; Opinion No. 531-A, 

149 FERC ¶ 61,032 at P 10. 

191 Opinion No. 531, 147 FERC ¶ 61,234 at PP 17, 39. 
Docket Nos. EL14-12-003 and EL15-45-000 - 53 - 

the (1+.5g) adjustment. However, three days after the MISO TOs filed their update 

testimony in the Second Complaint proceeding, the Commission issued Opinion No. 546 

in Seaway Crude Pipeline Co. LLC,

192 holding that only a short-term growth projection 

should be used in calculating the (1+.5g) adjustment to dividend yield. The Commission 

stated that “the short-term IBES growth rate is far more representative of the growth 

investors expect over the coming year than is the [composite] growth rate.”193 At the 

hearing in the Second Complaint proceeding, the MISO TOs presented modified dividend 

yield calculations consistent with Opinion No. 546, using only short-term growth 

projections to calculate the (1+.5g) adjustment to dividend yield.194 However, the 

Presiding Judge, without discussion, used the same composite growth rate to calculate the 

adjusted dividend yield as used for the expected future growth in dividends. 

1. MISO TOs 

In their brief on exceptions to Initial Decision (II) in the Second Complaint 

proceeding and in the initial affidavits of their witness Mr. McKenzie in response to the 

Briefing Order, MISO TOs argue that only the short-term IBES growth rate should be 

used to calculate the (1+.5g) adjustment to dividend yield. They point out that the 

Commission found in Opinion No. 546 that a projected GDP growth rate should not be 

used in adjusting the dividend yield, because the short-term IBES growth rate is more 

representative of the growth investors expect over the coming year than a composite 

growth rate also reflecting GDP growth.195 In their brief on exceptions, MISO TOs 

explain that the Commission has long held that “[t]he appropriate dividend figure to use 

in the DCF equation is the amount which is expected to be received by the investor 

during the twelve months following the purchase of the stock.”196 MISO TOs assert that 

the Commission assumes that the dividend will be increased annually and that the next 

increase will occur on average six months after the stock purchase.197 Therefore, the 

 192 Seaway Crude Pipeline Co., Opinion No. 546, 154 FERC ¶ 61,070, at PP 198-

200 (2016). 

193 Id. P 198. 

194 Ex. MTO-140 (II). Tr. 310-311 (II). 

195 MISO TOs Initial Br. (I), App. 2 McKenzie Aff. (I) at 17-18; MISO TOs Initial 

Br. (II), App. 2 McKenzie Aff. (II) at 18-19; MISO TOs Br. On Exceptions at 38-44. 

196 Id. at 42 (quoting Conn. Light & Power Co., Opinion No. 305-A, 45 FERC 

¶ 61,370, at 62,168-69 (1988)). 

197 Id. at 40 (citing Opinion No. 305-A, 45 FERC at 62,169). 
Docket Nos. EL14-12-003 and EL15-45-000 - 54 - 

actual dividend yield during the six-month study period must be adjusted upward for the 

first expected dividend increase. MISO TOs state that, because the adjusted dividend 

yield is intended to reflect investor expectations during just one year, it is inherently a 

short-run figure, and therefore the short-term IBES growth projection is the appropriate 

growth projection to use in making the adjustment. 

2. CAPs 

CAPs oppose MISO TOs recommendation to use only a short-term dividend 

growth rate, for purposes of the (1+ .5g) adjustment to the dividend yield.198 Instead, 

they recommend using a composite growth rate consistent with Opinion Nos. 531 and

551 and Initial Decision (II).

CAPs contend that the Commission’s longstanding practice has been to use the 

composite growth rate, not the short-term IBES growth projection, as the “g” in the (1 + 

.5g) dividend adjustment factor.199 They state that this practice is appropriate, because 

the purpose of the adjustment is to account for the quarterly, rather than annual, payment 

of dividends, and therefore the adjustment requires a projection of growth in dividends, 

not growth in earnings. CAPs state that projected long-term earnings growth is the best 

available predictor of near-term dividend growth because: (1) long-term earnings growth 

funds long-term dividend growth; and (2) utility holding companies moderate their nearterm dividend growth in order to avoid cutting dividends when earnings fall. Thus, CAPs 

claim, “the composite growth rate is a better predictor of near-term dividend yield 

increases than is the first-stage growth rate.”200 CAPs state that this conclusion is borne 

out in the record of the Second Complaint proceeding, where, to take one example, OGE 

Energy’s earnings have increased during the last five years by 6.84 percent annually, but 

its dividends have only increased by 4.5 percent annually.201 

CAPs also reject the MISO TOs’ argument that Opinion No. 546 established a 

new DCF methodology for electric utilities. Rather, CAPs state that Opinion No. 546 

concerned an oil pipeline master limited partnership (MLP) and was a “case-specific 

determination” that the pipeline’s DCF study should not be disregarded because of a 

relatively minor difference related to the dividend adjustment. CAPs point out that the 

 198 CAPs Reply Br. (I) at 22-25; CAPs Reply Br. (II) at 40-44; CAPs Br. Opposing 

Exceptions at 40-44. 

199 CAPs Reply Br. (I) at 23. CAPs Reply Br. (II) at 42. 

200 CAPs Reply Br. (I) at 23; CAPs Reply Br. (II) at 42. 

201 CAPs Br. Opposing Exceptions at 43. 
Docket Nos. EL14-12-003 and EL15-45-000 - 55 - 

pipeline had argued that, for MLPs, the short-term earnings growth rate was the best 

predictor of the coming year’s earnings growth, because MLPs distribute most available 

cash to investors, and therefore near-term dividends growth would be expected to track 

near-term earnings growth. CAPs assert that this determination in Opinion No. 546 was 

never meant to apply to electric utilities.202 In addition, CAPs argue that the MISO TOs’ 

recommended methodology of using different growth rates for future dividends and cash 

flows would distort the DCF model’s results.203

3. Trial Staff 

Trial Staff also opposes using only a short-term dividend growth rate, for purposes 

of the (1+ .5g) adjustment to the dividend yield. Trial Staff contends that MISO TOs’ 

reliance on Opinion No. 546 is misplaced. Trial Staff states that that case involved an oil 

pipeline and used a proxy group of only oil pipeline MLPs, which “distribute most 

available cash to investors.”204 Trial Staff instead asserts that “investors value stable 

dividends” and that “adjusted dividend yield calculations should be based on expectations 

of long-term earnings growth, which requires the use of the composite growth rate.”205

 

Trial Staff also contends that, if the Opinion No. 546 dividend adjustment 

methodology is applied to public utilities, it is likely to reduce the low-end DCF results 

and increase the high-end DCF results. That is because proxy companies with high-end 

DCF results generally have IBES growth rates that are higher than the GDP growth 

projection, while proxy companies with low-end DCF results have IBES growth 

projections that are less than the GDP growth projection. However, Trial Staff states that 

the reduced low-end DCF results are likely to be eliminated by the low-end outlier test, 

but the high-end results will not be eliminated. As a result, Trial Staff asserts that the 

Opinion No. 546 methodology is likely to increase the midpoint ROE.206

4. Commission Determination 

The Commission will use the short-term growth rate to calculate the (1+.5g) 

adjustment to dividend yield. As noted in Opinion No. 305-A, 

 202 Id. at 41-42. 

203 CAPs Reply Br. (I) at 22-24; CAPs Reply Br. (II) at 41-43. 

204 Trial Staff Reply Br. (I) at 8; Trial Staff Reply Br. (II) at 8. 

205 Trial Staff Reply Br. (I) at 9; Trial Staff Reply Br. (II) at 9. 

206 Trial Staff Br. Opposing Exceptions at 20-21. 
Docket Nos. EL14-12-003 and EL15-45-000 - 56 - 

The appropriate dividend figure to use in the DCF equation is 

that amount which is expected to be received by the investor 

during the twelve months following the purchase of the stock. 

To estimate that amount, we generally make the following 

two simplifying assumptions: (a) that the dividend rate will 

be increased annually (this has been the recent practice for 

electric utilities); and (b) that the next increase will occur, on 

average, six months after the stock purchase.207

Because this first dividend is necessarily paid within the time period covered by the IBES 

short-term growth projection, that rate is the more appropriate growth rate for calculating 

the (1+.5g) adjustment to the dividend yield. 

We are not persuaded by the contention that the Commission should apply 

Opinion No. 546 only to oil pipeline MLPs. Opinion No. 546 approved use of the shortterm IBES growth projection to calculate the (1+.5g) adjustment to dividend yield on the 

ground that “the short-term IBES growth rate is far more representative of the growth 

investors expect over the coming year than is the two-stage growth rate.”208 That 

rationale applies equally to public utilities as to oil pipelines. It does not turn on any 

unique feature of oil pipeline MLPs, such as their slower expected long-term growth 

because of the fact MLPs distribute most available cash to investors. We find that the 

adjusted dividend yield methodology used in Opinion No. 546 should be applied both to 

electric utilities and pipeline companies. Furthermore, we do not agree that using 

different growth rates would distort the DCF’s results; the adjusted dividend yield, which 

concerns only the dividend received in the first year after a stock’s purchase, is logically 

distinct from the infinite stream of dividends received from holding the stock in 

perpetuity. 

We do not find Trial Staff’s assertion that using only the IBES growth rate in 

calculating the adjusted dividend yield is likely to increase the midpoint ROE to be a 

basis for requiring the composite growth rate to be used in calculating the adjusted 

dividend yield. As noted above, the adjusted dividend yield only considers expected 

growth within the year after a stock’s purchase, and so should be calculated using a shortterm growth rate. In any event, as the Commission stated in Opinion No. 546, using only 

the IBES short-term growth projection to make the (1+.g) adjustment to dividend yield 

has a de minimis effect on the outcome of the DCF analysis, increasing proxy company 

ROEs by only one or two basis points. 

 207 Opinion No. 305-A, 45 FERC ¶ 61,370 at 62,168-69. 

208 Opinion No. 546, 154 FERC ¶ 61,070 at P 198. 
Docket Nos. EL14-12-003 and EL15-45-000 - 57 - 

C. Short-Term Growth Rate 

1. Opinion No. 551 

In the First Complaint proceeding, the MISO TOs proposed to use earnings 

growth projections published by Value Line as the short-term projection of the future 

growth in dividends. However, the Presiding Judge adopted the IBES 3 to 5 year growth 

projections published by Yahoo! Finance, stating that the Commission has “long relied 

on IBES growth projections as evidence of the growth rates expected by the investment 

community.”209 Additionally, the Presiding Judge stated that the Commission’s policy 

that ROE should be determined using the most recent financial data in the record (i.e., 

data for the last six months of 2015) dictates use of the IBES growth projections, because 

the MISO TOs had only provided Value Line data from the first half of 2015, whereas the 

other parties had provided IBES growth projections through July 13, 2015.210 In their 

brief on exceptions, MISO TOs stated they were not excepting to the Presiding Judge’s 

use of IBES growth projections in the First Complaint proceeding, because the record did 

not contain Value Line growth estimates from the last half of 2015. However, they 

requested that the Commission confirm that, in future proceedings, Value Line growth 

projections would constitute an acceptable and comparable source of short-term earnings 

growth estimates that may be considered for use in the two-step DCF analysis.211 

In Opinion No. 551, the Commission denied MISO TOs’ request for clarification 

that the Value Line growth projections constitute an acceptable and comparable source of 

short-term earnings growth estimates that may be considered for use in the two-step DCF 

analysis. It stated, that while the Commission has not mandated the exclusive use of 

IBES data in its natural gas and oil pipeline rate of return cases, the Commission has 

stated that “IBES data is the preferred data source for computing the short-term growth 

rate”212 and explained that “IBES data is a compilation of projected growth rates from 

 209 Initial Decision (I), 153 FERC ¶ 63,027 at PP 44, 46.

210 Id. PP 48-49. 

211 See Opinion No. 551, 156 FERC ¶ 61,234 at PP 46-53. 

212 Nw. Pipeline Corp., 92 FERC ¶ 61,287, at 62,002 (2000). See also Nw. 

Pipeline Corp., 79 FERC ¶ 61,309, at 62,385 (1997) (finding that “[t]he IBES figures 

should be used for the short-run growth rate of reach of the proxy companies.”). 
Docket Nos. EL14-12-003 and EL15-45-000 - 58 - 

various knowledgeable financial advisors within the investment community.”213 As such, 

the IBES short-term growth estimates generally represent consensus growth rate 

estimates by a number of analysts. The Commission stated that, by contrast, it has 

rejected the use of Value Line growth estimates, because they are the estimates of a single 

analyst and do not constitute such consensus estimates.214

 

In response to MISO TOs’ argument that the Value Line estimates should be 

considered a comparable source, the Commission cited Opinion No. 531, which states 

that the Commission “has long relied on IBES growth projections as evidence of the 

growth rates expected by the investment community.”215 The Commission also noted 

that Opinion No. 531 states that, while the Commission could conceivably allow the 

substitution of “comparable data,” an “alternative source of growth rate data should only 

be used when that source can be used for the growth projections of all of the proxy group 

companies” because using different sources could “produce skewed results, because 

those sources may take different approaches to calculating growth rates.”216 The 

Commission confirmed that this is the reason that it has “consistently used a single 

investor service such as IBES for the investment analysts’ growth rate estimates.”217 

Thus, the Commission stated that, while it is willing to use short-term growth data 

published by a source comparable to IBES, because Value Line does not publish 

consensus growth rate estimates, it cannot be considered comparable.218 The 

Commission also stated that published consensus estimates sourced from investment 

 213 See, e.g., Nw. Pipeline Corp., 87 FERC ¶ 61,266, at 62,058-59 (1999); 

Enbridge Pipelines (KPC), 100 FERC ¶ 61,260, at P 234 (2002). 

214 Opinion No. 551, 156 FERC ¶ 61,234 at P 62 (citing Nw. Pipeline Corp., 

87 FERC at 62,058-59; Enbridge Pipelines (KPC), 100 FERC ¶ 61,260 at P 234; Opinion 

No. 531-B, 150 FERC ¶ 61,165 at P 72 n.145 (stating that the Value Line data “for any 

company consists of an earnings estimate from only one analyst, rather than consensus 

estimates”)). 

215 Id. P 63 (citing Opinion No. 531, 147 FERC ¶ 61,234 at PP 89-90). 

216 Id. (citing ISO New England, Inc., 109 FERC ¶ 61,147, at P 205 (2004) 

(finding that a presiding judge is not precluded from finding candidates for inclusion in 

the proxy group for which comparable data can reasonably be substituted for the growth 

rate data reported by IBES or Value Line)). 

217 Id.

218 Id. P 64. 
Docket Nos. EL14-12-003 and EL15-45-000 - 59 - 

analysts, e.g., IBES’s growth rate estimates, are updated on a rolling basis, sometimes as 

frequently as daily, and are therefore superior to Value Line’s growth rate estimates, 

which are updated only on a lagging, quarterly basis.219 

2. MISO TOs’ Request for Rehearing of Opinion No. 551 

MISO TOs sought rehearing of Opinion No. 551 on this issue.220 MISO TOs 

argue that nothing in the record suggests that investors are more likely to rely on an 

earnings forecast if more analysts helped develop the forecast. Additionally, MISO TOs 

argue that Value Line’s growth projections have as much, if not more, influence on 

investment decision-making as the IBES estimates.221 Furthermore, they assert that the 

IBES growth estimates lack transparency regarding the forecast and updating procedures, 

a defect “not common to Value Line’s estimates.”222 As an example of this opacity, 

MISO TOs point to Mr. Keyton’s testimony which, they argue, concedes that there is no 

way to know how many analysts contribute to any IBES growth estimate.223 In contrast, 

MISO TOs contend that Dr. Avera argued that Value Line’s short-term growth estimates 

meet the same objective criteria of IBES’s, are widely relied upon by investors, and are 

based on transparent forecast techniques explained in Value Line’s user manual.224

 MISO TOs further contend that the Commission relied on an erroneous 

assumption about the frequency of IBES updates, as Mr. Solomon stated that the IBES 

update frequency is indeterminable. Additionally, MISO TOs argue that Dr. Avera 

explained that Value Line’s projections “are updated on a scheduled basis, which 

removes debate about the potential staleness of the underlying data.”225 MISO TOs 

argue, therefore, that the record contradicts the Commission’s findings about the update 

frequency of IBES and Value-Line. Nonetheless, MISO TOs argue that update frequency 

 219 Id. 

220 MISO TOs Rehearing Request at 5. 

221 Id. at 8. 

222 Id. 

223 Id. 

224 Id. at 8-9. 

225 Id. at 9. 
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is irrelevant in light of the fact that the investment community relies on Value Line.

226 To 

this point, they argue that “[w]hat matters is whether” growth estimates are representative 

of investor expectations, and that investors’ “undisputed reliance” on Value Line

establishes that such estimates are suitable for the DCF model.227 MISO TOs also argue 

that the Commission has relied on Value Line investment data in other contexts.228

Furthermore, MISO TOs argue that the Commission erroneously assumed that 

investors are more likely to rely on a consensus forecast even though the record does not 

demonstrate that IBES estimates reflect a greater consensus of input than Value Line

estimates. To this point, they argue that Mr. Keyton stated, and Mr. Solomon confirmed, 

that there is no way to ascertain the number of IBES analysts contributing to an estimate 

or if more than one analyst was responsible for any particular forecast.229 MISO TOs 

therefore ask the Commission to grant rehearing and leave open the ability of parties to 

propose appropriate alternatives to IBES, including Value Line.

230 Additionally, MISO 

TOs argue that undisputed record evidence confirms that Value Line estimates are 

reviewed by a committee of peer analysts, which undercuts the worth of the 

Commission’s determination that such estimates are only published under the name of a 

single analyst.231 They also argue that, even if IBES provides updates with greater 

frequency, this is actually a disadvantage because such updates do not adhere to any 

known schedule or published metrics. In contrast, MISO TOs point out that Value Line’s 

earnings forecasts are updated quarterly in accordance with documented procedures.232

MISO TOs also argue that the Commission has not rejected the use of Value Line

growth estimates in natural gas pipeline rate cases based on the fact that they are 

estimates of a single analyst and do not constitute consensus estimates.233 They argue 

 226 Id. at 10. 

227 Id. 

228 Id. (citing Opinion No. 531, 147 FERC ¶ 61,234 at P 102 and Kern River Gas 

Transmission Co., Opinion No. 486-C, 129 FERC ¶ 61,240, at P 50 (2009)). 

229 Id. at 11. 

230 Id. at 12. 

231 Id.

232 Id. at 13. 

233 Id. at 14. 
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that this finding in Opinion No. 551 contradicts the Commission’s earlier finding in 

Opinion No. 531-B, where the Commission concluded that investors’ reliance on IBES 

growth projections does not vary depending upon the “the exact number of analysts 

contributing to any particular IBES growth projection.”234

Finally, MISO TOs argue that the Commission’s categorical rejection of Value 

Line growth projections deprives the Commission of information relevant to the 

determination of a just and reasonable ROE.235

3. Second Complaint Proceeding 

In the Second Complaint proceeding, the MISO TOs again proposed to use Value 

Line growth projections as the short-term projection of growth in future dividends. The 

Presiding Judge, however, rejected that proposal and determined that IBES data should 

be used.236 The Presiding Judge held that, because the Commission had used IBES data 

as the short-term growth projection in Opinion No. 531, the MISO TOs had the burden to 

demonstrate that use of Value Line growth projections would be preferable in this case. 

The Presiding Judge was not persuaded by the MISO TOs’ contention that the Value Line

short-term growth projection should be used, because the resulting DCF midpoint and 

upper midpoints (9.50 and 10.89 percent) are closer to the result of the alternative 

methodologies than the DCF midpoint and upper midpoint produced using IBES growth 

projections (8.72 and 9.70 percent).237 The Presiding Judge found that the alternative 

methodologies should not be referred to in deciding what short-term growth projection 

should be used in a DCF analysis. The Presiding Judge also found that use of the IBES 

short-term growth projections “better conforms to the Commission’s admonition that 

the DCF model incorporate the most recent data available,”238 because the IBES 

projections in the record were obtained as late as January 8, 2016, while the Value Line

growth projections were obtained for various proxy group companies on October 30, 

November 30, and December 18, 2015. 

In its brief on exceptions, MISO TOs argued, among other things, that prior 

reliance on IBES does not foreclose the use of Value Line growth projections, and it 

 234 Opinion No. 531-B, 150 FERC ¶ 61,165 at P 72. 

235 MISO TOs Rehearing Request at 18-19. 

236 Initial Decision (II), 155 FERC ¶ 63,030 at PP 32-45. 

237 Id. PP 36-41. 

238 Initial Decision (II), 155 FERC ¶ 63,030 at P 42. 
Docket Nos. EL14-12-003 and EL15-45-000 - 62 - 

again argued that the Value Line DCF is corroborated by the results of its risk premium, 

CAPM, and expected earnings analyses.239 MISO TOs contend that a DCF analysis 

using Value Line short-term growth projections produces ROEs close to those produced 

by the alternative methodologies, such as a DCF analysis using IBES short-term growth 

projections. MISO TOs also argued that the Value Line estimates are at least as current 

as the IBES estimates. MISO TOs explained that, although the IBES growth projections 

in the record were in an IBES report published in January 2016, the analyst growth 

projections reflected in the report may have been made as much as 180 days earlier. 

MISO TOs cited evidence that Yahoo Finance provides no information as to the schedule 

or frequency of updates to any of the analyst growth projections used to create the 

consensus IBES growth projection published by Yahoo Finance. 

In their briefs opposing exceptions, CAPs, OMS, RPGI, and Trial Staff all 

disagree with MISO TOs on this issue.240 CAPs contend that Value Line growth 

projections are not similar to IBES short-term growth projections for at least three 

reasons. First, IBES short-term growth projections represent a consensus of the views of 

multiple analysts, while Value Line projections are made by only one analyst. Second, 

CAPs state that the Value Line growth rates are substantially retrospective in contrast to 

the prospective IBES growth projections. CAPs state that IBES analysts typically start 

from a single most recent historical year, make adjustments to that base year to remove 

non-recurring gains or losses, and then project normalized earnings growth over a three to 

five year period. However, Value Line growth rates represent an estimate of growth from 

a three-year historical period to a three-year forecast period, with the base period starting 

up to four years before the date of the Value Line publication.241 Third, CAPs assert that 

the Value Line growth rates do not reflect as accurate a normalization of non-recurring 

base period gains and losses as the IBES projections. They state that the Value Line

growth rates rely solely on an averaging of the three historical years, whereas IBES 

participating analysts make adjustments to the most recent year to remove specific nonrecurring gains and losses.242 OMS and Trial Staff also argue that the IBES growth 

projections are more current, because IBES updates its data base on a daily basis as 

participating analysts provide new inputs, whereas Value Line publishes on a rolling 

 239 MISO TOs Br. on Exceptions at 12-30. 

240 CAPs Br. Opposing Exceptions at 6-32; OMS-JCA Br. Opposing Exceptions 

at 9-16; RPGI Br. Opposing Exceptions at 4-29; Trial Staff Br. Opposing Exceptions at 

6-13. 

241 CAPs Br. Opposing Exceptions at 12-13. 

242 Id. at 13. 
Docket Nos. EL14-12-003 and EL15-45-000 - 63 - 

quarterly basis.243 Trial Staff and RPGI also oppose MISO TOs’ reliance on alternative 

methodologies to support use of Value Line growth rates in the DCF model, asserting that 

alternative methodologies may only be considered after the DCF analysis has been 

completed.244

4. Briefing Order 

 In the Briefing Order, the Commission stated that, while IBES growth 

projections represented a consensus in the past, they may not reflect as robust a 

consensus at this point.245 The Commission stated that this concern stems from the fact 

that most investment analysts that make and publish quarterly and annual earnings 

estimates no longer make and publish three-to-five year short-term projections of 

earnings growth and that in recent years, the IBES data for many proxy companies have 

reflected between one and three analysts’ short-term growth projections.246 The 

Commission further stated that the reduced number of short-term growth projections 

means that a significant change in a single analyst’s growth projection for a particular 

proxy company can significantly affect that company’s DCF analysis result.247 

5. MISO TOs’ Initial Briefs 

In their brief in the First Complaint proceeding, MISO TOs state that they do not 

propose reliance on growth rates from a source other than IBES to resolve the First 

Complaint.248 However, they ask the Commission to clarify that it is receptive to 

considering in the future other sources of growth rate estimates that are widely relied 

 243 OMS-JCA Br. Opposing Exceptions at 13-14; Trial Staff Br. Opposing 

Exceptions at 12. 

244 Trial Staff Br. Opposing Exceptions at 9-11; RPGI Br. Opposing Exceptions 

at 14. 

245 Briefing Order, 165 FERC ¶ 61,118 at P 48. 

246 Id. P 49 (citing Coakley Briefing Order, 165 FERC ¶ 61,030 at P 47). 

247 See e.g., id. P 48 (noting, for example, that one analyst’s error involving the 

growth projection for Portland General Electric Company (Portland General) reduced the 

overall Reuters consensus projected short-term percentage growth in earnings for 

Portland General from 10.96 percent to 7.80 percent). 

248 MISO TOs Initial Br. (I) at 22. 
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upon in the investment community, such as Value Line.

249 They argue that, from the 

earliest application of the two-step DCF, the Commission has neither adopted nor 

endorsed IBES as the only source of data for developing short-term growth projections.250 

They also state that the Commission has conceded that there is no perfect data source for 

such estimates and that the order directing briefing questions whether IBES growth rates 

reflect investor consensus.251 For these reasons, they ask the Commission to clarify that 

it is open to considering sources of short-term earnings growth rate estimates other than 

IBES.252 

In their brief in the Second Complaint proceeding, MISO TOs propose to use the 

Value Line growth estimates they presented at the hearing as the short-term estimate of 

the future growth in dividends.253 MISO TOs rely on the same rationale as in their Brief 

on Exceptions to Initial Decision (II). 

6. RPGI Initial Briefs 

RPGI provides arguments in support of the use of IBES. RPGI contends that the 

Commission has previously considered and rejected concerns regarding the number of 

IBES analysts when using such data in the DCF model and the Commission has 

previously found that calculating the “common equity to a regulated enterprise depends 

upon what the market expects not upon precisely what is going to happen.”254 RPGI 

argues that the focus of the analysis in formulating a policy choice among financial 

models should not be whether the IBES growth estimates are the product of numerous 

inputs but whether there is “sufficient continuity and regularity over time in the 

publication of analysts’ estimates that investors might reasonably make use of those 

 249 Id. 

250 Id. at 23 (citing Ozark Gas Transmission Sys., 68 FERC ¶ 61,032, at 61,106 

(1994), order on reh’g, 71 FERC ¶ 61,138 (1995)). 

251 Id. (citing Opinion No. 414-B, 85 FERC at 62,269 (1998)). 

252 Id. 

253 MISO TOs Initial Br. (II), App. 2 McKenzie Aff. (II) at 19-20. 

254 RPGI Initial Br. (I) at 22 (citing Opinion No. 414-B, 85 FERC at 62,268-69); 

RPGI Initial Br. (II) at 26 (citing same). 
Docket Nos. EL14-12-003 and EL15-45-000 - 65 - 

estimates in evaluating proxy companies’ prospects.”255 It argues that there is no 

evidence to suggest that IBES inputs fail under this analysis. 

RPGI also states that investors continue to make use of IBES forecasts and thus, 

the DCF continues to meet the Commission’s established criterion for selecting which 

source to use—that the source is used by investors.256 It also argues that it is not a defect 

that IBES forecasts “appear to be published on a basis that excludes estimates made more 

than six months prior.”257

7. CAPs Reply Brief 

CAPs’ reply brief in the First Complaint proceeding did not address the issue of 

what short-term growth projection to use in the DCF model. However, in their reply 

brief in the Second Complaint proceeding, CAPs oppose use of Value Line as the shortterm growth projection, repeating the same arguments they made in their brief opposing 

exceptions in the Second Complaint proceeding. 

8. Trial Staff Reply Briefs 

In reply to MISO TOs’ Initial Briefs in both complaint proceedings, Trial Staff 

reiterates the Commission’s arguments about its preference for IBES. It also points to 

Opinion No. 531-B, where the Commission stated that it is “preferable to use a consistent 

source of dividend growth projections for all members of the proxy group as provided by 

IBES, rather than to use different sources of growth projections depending upon the 

number of analysts contributing to each IBES growth projection.”258 Moreover, Trial 

Staff states that the Commission has a long history of finding that IBES is the preferred 

data source for computing the short-term growth rates259 and that alternate sources should 

only be used when they are available for the growth projections for all proxy group 

companies in order to avoid skewed results.260 Trial Staff also points out that the 

 255 RPGI Initial Br. (I) at 22; RPGI Initial Br. (II) at 26. 

256 RPGI Initial Br. (I) at 23; RPGI Initial Br. (II) at 27. 

257 RPGI Initial Br. (I) at 23; RPGI Initial Br. (II) at 27. 

258 Trial Staff Reply Br. (I) at 15-16 (citing Opinion No. 531-B, 150 FERC 

¶ 61,165 at P 72); Trial Staff Reply Br. (II) at 15. 

259 Trial Staff Reply Br. (I) at 16; Trial Staff Reply Br. (II) at 15. 

260 Trial Staff Reply Br. (I) at 17; Trial Staff Reply Br. (II) at 17. 
Docket Nos. EL14-12-003 and EL15-45-000 - 66 - 

Commission has found that IBES is updated on a rolling basis, sometimes as frequently 

as daily, while Value Line’s growth estimates are updated only on a lagging quarterly 

basis.261 Trial Staff therefore recommends that the Commission reject the proposed use 

of Value Line-based short-term growth rates in the future and any alternative source that 

does not include all proxy group companies.262 

9. Commission Determination 

For the reasons discussed below, we deny MISO TOs’ request for rehearing of 

Opinion No. 551’s rejection of their request for clarification that Value Line growth 

projections constitute an acceptable source of short-term earnings growth estimates for 

use in the two-step DCF analysis. We also affirm the Presiding Judge’s rejection of the 

MISO TOs’ proposal in the Second Complaint proceeding to use Value Line growth 

projections as the short-term growth projection for purposes of the two-step DCF analysis 

and therefore we deny MISO TOs’ exceptions on this point. 

In Opinion No. 531, the Commission held that “in future public utility cases, the 

Commission will adopt the same two-step DCF methodology it uses in natural gas and oil 

pipeline cases.”263 Although the Commission has refrained from mandating the exclusive 

use of IBES data in its natural gas and oil pipeline rate of return cases, the Commission 

has in fact used IBES data for the short-term growth projection in every such case since 

the Commission initiated the two-step DCF model 25 years ago in Ozark Gas 

Transmission System.

264 For example, when the Commission increased the weighting of 

the short-term growth projection from one-half to two-thirds in Opinion Nos. 414-A and 

414-B,265 the Commission reaffirmed the use of IBES data for the short-term growth 

projection and rejected the use of Value Line short-term growth projections. Opinion 

No. 414-B cited testimony that “there is a body of evidence showing that the most 

reliable measure of investor expected growth is the growth forecasts, such as IBES, 

 261 Trial Staff Reply Br. (I) at 14-15; Trial Staff Reply Br. (II) at 14-15. 

262 Trial Staff Reply Br. (I) at 17-18; Trial Staff Reply Br. (II) at 17. 

263 Opinion No. 531, 147 FERC ¶ 61,234 at P 39. 

264 Ozark Gas Transmission Sys., 68 FERC ¶ 61,032 at 61,106-07. Nw. Pipeline 

Corp., 79 FERC ¶ 61,309 at 62,384-85. 

265 Transcon. Gas Pipe Line Corp., Opinion No. 414-A, 84 FERC ¶ 61,084 at 

61,423-24 (1998), reh’g denied, Opinion No. 414-B, 85 FERC at 62,268-69. 
Docket Nos. EL14-12-003 and EL15-45-000 - 67 - 

published by security analysts.”266 That evidence included the article by Robert Harris, 

entitled Using Analysts’ Growth Forecasts to Estimate Shareholder Required Rates of 

Return,

267 upon which the MISO TOs rely in this case to support their use of a one-step 

DCF method as part of their CAPM analysis. Opinion No. 414-B stated that article 

supported the use of IBES growth projections.268 The Commission also quoted the 

testimony of the pipeline’s witness that “[t]he analysts from which IBES collects 

forecasts are professionals, exercising their best judgment as to the future growth in 

earnings of the companies they follow . . . Their analyses are provided as a service to 

investors and should therefore serve as a good measure of the expectations investors have 

formed. I believe that IBES and Zacks Investment Research . . . are the best sources. 

IBES is well known in the investment community, and I believe draws on more 

professional forecasts than any other similar service except for Zacks.”269 

The Commission continued to follow this precedent in subsequent natural gas and 

oil pipeline rate of return cases.270 The Commission also rejected proposals to average 

IBES short-term growth projections with Value Line growth estimates, finding that Value 

Line projections are “projections from a single source” and their use would “dilute the 

industry consensus reflected in the IBES data.”271 

Similarly, when the Commission modified its proxy group policies to permit 

MLPs to be included in natural gas and oil pipeline proxy groups, the Commission held 

that IBES growth projections should also be used for MLPs, finding that those 

 266 Opinion No. 414-B, 85 FERC at 62,269. 

267 Robert S. Harris, Using Analysts’ Growth Forecasts to Estimate Shareholder 

Required Rates of Return, Fin. Mgmt., Spring 1986. 

268 Opinion No. 414-B, 85 FERC at 62,269 n.34. 

269 Id. at 62,269 

270 See, e.g., Nw. Pipeline Corp., 87 FERC at 62,058-59 (explaining that the “IBES 

data is a compilation of projected growth rates from various knowledgeable financial 

advisors within the investment community”); Nw. Pipeline Corp., 92 FERC at 62,002; 

and Enbridge Pipelines (KPC), 100 FERC ¶ 61,260, at P 234 (2002). 

271 Nw. Pipeline Corp., 87 FERC at 62,058-59; Enbridge Pipelines (KPC), 100 

FERC ¶ 61,260 at P 234. 
Docket Nos. EL14-12-003 and EL15-45-000 - 68 - 

projections remain “the best and most reliable source of growth information available.”272 

The Commission again found that investors rely on the IBES growth projections in 

making investment decisions, because they are widely available and generally reflect the 

input of a number of financial analysts. The Commission also rejected a proposal to use 

Value Line reports to test the reasonableness of IBES growth projections.273 

MISO TOs have failed to provide a persuasive reason for the Commission to 

modify this longstanding policy concerning the short-term growth projection to be used 

in the two-step DCF model. For the reasons we discuss below, we continue to find the 

use of IBES three-to-five year growth projections preferable to the use of Value Line

growth projections. 

MISO TOs point out that, in Opinion No. 531, the Commission stated that the 

short-term growth projection to be used in the two-step DCF model “will be based on the 

five-year projections reported by IBES (or a comparable source).”274 They contend that 

Value Line is a “comparable source,” and thus Opinion No. 531 permitted its use. 

However, we find that Value Line is not a comparable source. As we have previously 

found, the IBES growth projections generally represent consensus growth estimates by a 

number of analysts.275 By contrast, the Value Line growth estimates represent the growth 

projection of a single analyst, as Opinion No. 531-B stated.276 MISO TOs assert that the 

Value Line growth estimates are comparable to consensus estimates, because they “are 

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

analysts.”277 However, regardless of any review process within Value Line, the fact 

remains that the Value Line growth projections are projections by a single institution. By 

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

Equity, 123 FERC ¶ 61,048, at P 75 (2008) (Proxy Group Policy Statement). 

273 Id. PP 83-84. 

274 MISO TOs Br. on Exceptions at 14 (citing Opinion No. 531, 147 FERC 

¶ 61,234 at P 39). 

275 Ex. JCI-14 (II) at 27 (“IBES consensus estimates are normally based on the 

average of multiple analysts, or brokerage or investment firms’ estimates.”). 

276 Opinion No. 531-B, 150 FERC ¶ 61,165 at P 72 n.145 (stating that the Value 

Line data “for any company consists of an earnings estimate from only one analyst, rather 

than consensus estimates”). 

277 MISO TOs Rehearing Request at 12 (citing Ex. S-1 at 17 and Ex. MTO-1 

at 27). 
Docket Nos. EL14-12-003 and EL15-45-000 - 69 - 

contrast, IBES compiles the growth projections of a number of analysts at different 

brokerage and investment firms. The IBES growth projections thus generally represent 

an average of projections made independently of one another by a number of analysts at 

different institutions.278 Data sources can reflect investor expectations by being used by 

large numbers of investors and/or being themselves the results of the analysis of a diverse 

group of persons in the investment community. Both IBES and Value Line growth rates 

are used by large numbers of investors but only IBES growth rates reflect the analysis of 

a diverse group of persons in the investment community. 

Academic research supports the use of consensus forecasts such as those reported 

by IBES for purposes of the DCF growth projection, rather than the forecast of a single 

analyst or institution. For example, Roger Morin states, 

Exclusive reliance on a single analyst’s growth forecast runs 

the risk of being unrepresentative of investors’ consensus 

forecast. One would expect that averages of analysts’ growth 

forecasts, such as those contained in IBES or Zacks, are more 

reliable estimates of investors’ consensus expectations likely 

to be impounded in stock prices. Averages of analysts’ 

growth forecasts rather than a single analyst’s forecasts are 

more reliable estimates of investors’ consensus 

expectations.279 

The Harris article, Required Rates of Return, cited by Opinion No. 414-B, similarly 

supports the use of a survey of multiple analyst growth projections, such as IBES, for the 

DCF growth projection. In addition, Harris and Marston concluded in Estimating 

Shareholder Risk Premia Using Analysts’ Growth Forecasts that use of IBES growth 

 278 As MISO TOs point out, the Commission has recognized that in a few 

instances an IBES growth projection may be based on the projection of a single analyst. 

MISO TOs Rehearing Request at 16 (citing Opinion No. 531-B, 150 FERC ¶ 61,165 at 

P 71-72). However, the fact that a few of the IBES growth projections may not represent 

the consensus of more than one analyst or institution’s growth projection does not justify 

shifting to a source of growth projections in which none of the growth projections reflect 

a consensus of more than one analyst or institution’s growth projection. For the reasons 

discussed above, we believe it is appropriate to use as many consensus growth 

projections as possible, and participants are free to propose alternatives to IBES to the 

extent they may provide more robust consensus projections. 

279 Morin at 302. 
Docket Nos. EL14-12-003 and EL15-45-000 - 70 - 

projections offer “a straightforward and powerful aid in establishing required rates of 

return either for corporate investment decisions or in the regulatory arena.”280

The record in these proceedings includes testimony to the same effect. For 

example, CAPs’ witness, Mr. Gorman, stated, “Because IBES captures a greater number 

of analysts’ growth rate projections, it more likely reflects the information used by 

investors to form investment decisions.”281 Similarly, Trial Staff’s witness, Mr. Keyton, 

stated, “I believe that IBES growth estimates have a higher potential for representing a 

broader consensus in the investor community.”282 Thus, we believe it is appropriate to 

use IBES as the short-term growth projection, not simply because investors use IBES, but 

also because the consensus growth projection reported by IBES reflects the information 

which the analysts, brokerage and investments firms contributing to IBES provide to their 

clients. 

We also find that the IBES growth projections are generally more timely than the 

Value Line projections. IBES updates its data base on a daily basis as participating 

analysts revise their forecasts,283 whereas Value Line publishes its projections on a rolling 

quarterly basis.284 Thus, the IBES consensus growth projection will immediately reflect 

any change a contributing analyst makes in its forecast. However, Value Line will not 

reflect such changes until its next quarterly report. MISO TOs suggest that some analyst 

projections reflected in the IBES consensus projections may be stale, whereas Value 

Line’s quarterly publication schedule guarantees that all analyst projections are updated 

on a quarterly basis. However, the record indicates that IBES has a policy of retaining 

each analyst’s estimate in its data base for only 180 days.285 Although some questions 

have been raised as to whether Yahoo Finance always follows this policy, in this case the 

evidence indicates that the IBES growth projections for the proxy companies are 

regularly updated. For example, the IBES growth projections of 26 of the 30 companies 

 280 Robert S. Harris & Felicia C. Marston, Estimating Shareholder Risk Premia 

Using Analysts’ Growth Forecasts, Fin. Mgmt., Summer 1992, at 6. 

281 Ex. ICG-15 at 10 (II). 

282 Ex. S-1 at 112 (II). 

283 As testified by Mr. Solomon, Yahoo Finance, which publishes IBES, 

“update[s] it daily as any of the growth rates that it accesses changes.” Hearing Transcript 

(II) at 31. 

284 Ex. MTO -22 (II) at 79. 

285 Hearing Transcript (II) at 128. 
Docket Nos. EL14-12-003 and EL15-45-000 - 71 - 

that are in the proxy groups for both the First and Second Complaint proceedings 

changed in the course of the six months between the dates when the IBES projections 

were downloaded.286 

MISO TOs also contend that the Commission has relied on Value Line growth 

forecasts in its public utility rate of return cases in the past.287 However, in each of the 

cases cited by MISO TOs, Value Line data was used for the purpose of implementing the 

“br + sv” growth formula288 which the Commission previously used as part of the onestep DCF model, but the Commission discontinued using that model in Opinion No. 531. 

The Commission used Value Line data, rather than IBES data, for the purpose of 

implementing the br + sv formula, because not all of the necessary data is published by 

IBES. In any event, the Commission also consistently used IBES growth projections as a 

second growth projection as part of its one-step DCF method.289 

MISO TOs suggest that IBES growth projections could be overly optimistic, 

because analysts contributing to those projections may be selling the stocks that they 

are reporting on, whereas Value Line is an independent research firm not engaged in 

buying and selling stocks.290 The Commission disagreed with this contention in Opinion 

No. 414-B, stating that analysts have a significant incentive to make their analyses as 

accurate as possible to meet the needs of their clients.291 Investors will not utilize 

brokerage firms whose analysts repeatedly overstate the growth potential of companies. 

Moreover, there is no evidence in these proceedings that analysts contributing to IBES 

 286 Compare the IBES growth projections in the MISO Initial Decision, 153 FERC 

¶ 61,027, App. B to the IBES growth projections in Ex. MTO-34 (II) at 1. 

287 MISO TOs Br. on Exceptions at 14 (citing, e.g., RiteLine Ill., LLC, 137 FERC 

¶ 61,039 (2011), reh’g denied, 149 FERC ¶ 61,238 (2014); N. Pass Transmission LLC, 

134 FERC ¶ 61,095 (2011); Bangor Hydro-Elec. Co., 122 FERC ¶ 61,265 (2008); So. 

Cal. Edison Co., Opinion No. 445, 92 FERC ¶ 61,070, at 61,263 (2000). 

288 Under that formula, “b” is the expected retention formula, “r” is the expected 

earned rate of return on common equity, “s” is the percent of common equity expected to 

be issued annually as new common stock, and “v” is the equity accretion rate. 

289 See, e.g., RiteLine Ill., LLC, 137 FERC ¶ 61,039, at P 68; N. Pass Transmission 

LLC, 134 FERC ¶ 61,095, at P 46; Pub. Serv. Elec. & Gas Co., 126 FERC ¶ 61,219, at 

P 62 (2009); Opinion No. 445, 92 FERC at 61,265. 

290 MISO TOs Rehearing Request at 17 n. 44. 

291 Opinion No. 414-B, 85 FERC at 62,270. 
Docket Nos. EL14-12-003 and EL15-45-000 - 72 - 

provide more optimistic growth projections, than Value Line analysts. In fact, the Value 

Line growth rates tend to be higher than those of IBES. For instance, in the Second 

Complaint, where the MISO TOs seek to use Value Line instead of IBES data, use of the 

former instead of the later would increase the midpoint of their proposed DCF zone of 

reasonableness by 77 basis points from 8.73 percent to 9.50 percent.292 

Finally, MISO TOs contend that the Presiding Judge in the Second Complaint 

proceeding erred in rejecting their contention that the Value Line short-term growth 

projection should be used, because the resulting DCF midpoint and upper midpoints (9.50 

and 10.89 percent) are closer to the results of the alternative methodologies than the DCF 

midpoint and upper midpoint produced using IBES growth projections (8.72 and 9.70 

percent).293 The Commission denies this exception. In this order, we are deciding to use 

only the DCF and CAPM models to determine public utility ROEs. Therefore, the fact 

that using Value Line growth projections may produce results closer to the ROEs 

proposed by MISO TOs based on the Expected Earnings and Risk Premium models is 

irrelevant. More significantly, we find that the DCF and CAPM models should be 

implemented independently of one another. They are separate models based on different 

assumptions and inputs. We have no basis to find either model more reliable than the 

other. Therefore, there is no reason to decide issues concerning the implementation of 

either model based upon which resolution produces an ROE closest to the ROE produced 

by the other model. 

The Commission has discretion in this proceeding to make a determination about 

available data sources in calculating the DCF. In making this determination, we agree 

with Trial Staff that it is preferable for the Commission to use a consistent source of 

dividend growth, such as IBES, for projections for all members of the proxy group.294 

Furthermore, we again note that the Commission has historically relied on IBES as the 

preferred source for computing short-term growth rates.295 

MISO TOs also ask the Commission to leave open the ability of parties to propose 

appropriate alternatives to IBES, including Value Line. Parties are free to propose 

whatever data sources they deem appropriate. However, absent compelling reasons why, 

we will continue to rely exclusively on IBES as the preferred source for short-term 

growth projections for the purpose of performing the DCF analysis. Moreover, while this 

order lays out changes to the Commission’s method for determining the ROE, wherever 

 292 Ex. MTO-34 (II). 

293 Initial Decision (II), 155 FERC ¶ 63,030 at P 39. 

294 Trial Staff Reply Br. at 15-16 (citing Ex. 531-B at P 72). 

295 Trial Staff Reply Br. at 16. 
Docket Nos. EL14-12-003 and EL15-45-000 - 73 - 

possible, we seek to provide predictability. Such predictability would be undermined if, 

in each proceeding, parties cherry pick whichever data best supports their desired results, 

leaving the Commission to adjudicate which is superior in each proceeding. Although 

MISO TOs have offered arguments to suggest that Value Line is a comparable source, the 

record in this proceeding still indicates that IBES is more stable and robust because IBES 

represents the views of multiple analysts and is updated more frequently. 

D. Long-Term Growth Projection 

As described above, the Commission’s current policy is to require the DCF 

analysis of an individual company to include a projection of the long-term growth in 

dividends based on the growth in gross domestic product (GDP). The long-term growth 

projection is given one-third weight, with a short-term growth projection given two-thirds 

weight. For the reasons we discuss below, the Commission reaffirms this policy and will 

continue to require a long-term growth projection in the DCF analysis. 

1. Opinion No. 551 

During the hearing in the First Complaint proceeding, the MISO TOs, CAPs, and 

Trial Staff all presented DCF studies that included long-term growth projections based on 

growth in GDP, consistent with Commission policy. The Presiding Judge approved the 

4.39 percent GDP growth projection included in Trial Staff’s DCF study, reasoning that 

its method of calculating the growth rate most closely paralleled that which the 

Commission used in Opinion No. 531.296 Thereafter, when the Initial Decision was 

considered by the Commission, no exceptions were raised by any party regarding the 

Presiding Judge’s rulings concerning the long-term growth projection. The Commission 

approved the DCF study with a long-term growth projection in Opinion No. 551,297 and 

no issue concerning the use of long-term growth projections in the DCF study was raised 

on rehearing of Opinion No. 551. 

2. Second Complaint Proceeding 

In the Second Complaint proceeding, the participants, including the MISO TOs, 

again all presented DCF studies that included long-term growth projections based on 

growth in GDP, and the Presiding Judge again adopted Trial Staff’s long-term growth 

projection of 4.35 percent. No party filed an exception to the Presiding Judge’s finding 

on this issue. 

 296 Initial Decision (I), 153 FERC ¶ 63,027 at PP 51-53. 

297 Opinion No. 551, 156 FERC ¶ 61,234 at P 65. 
Docket Nos. EL14-12-003 and EL15-45-000 - 74 - 

3. Initial Briefs 

In their Initial Brief in response to the Briefing Order, MISO TOs assert that, 

when the Commission adopted the two-step DCF method for electric utilities in Opinion 

No. 531, the Commission concluded that the long-term growth rate portion of that 

method moderates the estimated cost of equity, rendering a high-end outlier test 

unnecessary.298 MISO TOs accordingly oppose the high-end outlier test proposed in the 

Briefing Order. However, they state that, if the Commission nevertheless applies a highend outlier test to the DCF model, then it should employ a single-stage, constant growth 

DCF, rather than a two-stage DCF, and eliminate the long-term growth projection.299 

The MISO TOs contend that there are significant shortcomings in using GDP 

growth rates as part of the DCF analysis. MISO TOs’ witness, Mr. McKenzie, comments 

that practical application of the DCF model requires a growth estimate that matches 

investors’ expectations, which he asserts is less than the 30 year horizon for GDP growth 

estimates. 

MISO TOs assert that there are no utility-specific, long-term growth projections 

available to the public. Therefore, although the DCF model is supposed to reflect 

investor behavior, it includes GDP growth estimates that investors do not use. As a 

result, this approach gives greater weight to the theory that all firms’ growth rates 

converge to long-term GDP growth over actual investor behavior.300 

MISO TOs assert that GDP growth estimates understate investors’ expectations 

for electric utility growth and fall well short of analysts’ estimates of the proxy 

companies’ growth rates during the study periods in these proceedings.301 Mr. McKenzie 

asserts that actual historical growth rates for certain individual proxy companies refute 

the notion that the long-term growth of electric utilities is constrained by GDP. For 

example, he states that Value Line reports included in the First Complaint proceeding 

record indicate that Alliant Energy and Eversource Energy had a 10-year earnings per 

share growth rate of 8 percent, while OGE Energy and IDACORP, Inc., had 10-year 

 298 MISO TOs Initial Br. (I) at 16 (citing Opinion No. 531, 147 FERC ¶ 61,234 at 

P 118). 

299 Id. at 20 (citing App. 2 McKenzie Aff. (I) at 50-51). 

300 Id. at 20-21 (citing App. 2 McKenzie Aff. (I) at 42-43). 

301 Id. at 21 (citing App. 2 McKenzie Aff. (I) at 47). MISO TOs Initial Br. (II) at 

36 (citing App. 2 McKenzie Aff. (II) at 43-44). 
Docket Nos. EL14-12-003 and EL15-45-000 - 75 - 

earnings per share growth rates of 8.5 percent and 9.0 percent respectively.302 

Mr. McKenzie also states that Value Line reports in the Second Complaint proceeding 

record indicate that ALLETTE, Eversource Energy, OGE Energy, and IDACORP had 

10-year earnings per share growth rates of 7.0 percent, 8.0 percent, 8.5 percent, and 9.0 

percent, respectively.303 MISO TOs explain that Myron Gordon, the founder of the DCF 

model, believed that it should use growth estimates that correspond to investor 

expectations, and he was dubious about incorporating long-term growth rates into the 

DCF model.304 

Also, the MISO TOs state that, according to Mr. McKenzie, the instant case does 

not present the kind of circumstances that might support using a two-step DCF with longterm growth estimates.305 Mr. McKenzie states that when the Commission adopted the 

two-step DCF model for natural gas pipelines, the IBES short-term growth projections 

for those pipelines were substantially higher than the projected growth in GDP. For 

example, in Transcontinental Gas Pipe Line Corp., the IBES growth rates for the proxy 

group ranged from 8.0 percent to 15.0 percent and averaged 11.3 percent.306 However, in 

the First Complaint proceeding, the IBES growth projections of all but one of the proxy 

companies are less than 8.0 percent,307 and in the Second Complaint proceeding the IBES 

growth projections of all but two of the proxy companies are less than 8.0 percent.308 

Therefore, Mr. McKenzie asserts that there is no evidence in these proceedings that 

analysts’ short-term earnings per share growth projections for electric utilities are 

characterized by the short-term optimism that led the Commission to adopt the two-step 

DCF model for natural gas pipelines. Mr. McKenzie also states that evidence presented 

by CAPs that electric utilities have entered a cycle of significant capital spending on 

 302 MISO TOs Initial Br. (I), App. 2 McKenzie Aff. (I) at 47. 

303 MISO TOs Initial Br. (II), App. 2 McKenzie Aff. (II) at 43-44. 

304 MISO TOs Initial Br. (I) at 21; id., App. 2 McKenzie Aff. (I) at 49 (citing 

Myron J. Gordon, The Cost of Capital to a Public Utility, 100-01 (MSU Pub. Util. 

Studies 1974)). 

305 Id. at 21 (citing App. 2 McKenzie Aff. (I) at 48-51). 

306 MISO TOs Initial Br. (I), App. 2 McKenzie Aff. (I) at 50 (citing Opinion 

No. 414-A, 84 FERC ¶ 61,084 at App. A). 

307 MISO TOs Initial Br. (I), App. 2 McKenzie Aff. (I) at 51 n.111. 

308 MISO TOs Initial Br. (II), App. 2 McKenzie Aff. (II) at 48 n.97. 
Docket Nos. EL14-12-003 and EL15-45-000 - 76 - 

utility infrastructure suggests that GDP growth estimates understate investors’ growth 

expectations for electric utilities.309 

4. Reply Briefs 

In their Reply Briefs, CAPs, Trial Staff and RPGI addressed issues raised by the 

MISO TOs. These three parties oppose MISO TOs’ proposal to use a single-stage, 

constant growth DCF, rather than the two-step DCF method if the Commission applies a 

screen for high-end outliers.310 RPGI asserts that over time the Commission has adopted 

and expanded its preference for the two-step DCF method, including support for the 

theoretical assumptions of the DCF formula requiring the use of a two-stage growth 

component.311 CAPs argue that it is important to use an accurate representation of longterm dividend stream that investors expect, regardless of the tests used to filter outliers. 

CAPs also argue that, because MISO TOs are not proposing to filter out any DCF highend results from the study-period analysis in this proceeding, they are essentially 

conceding that in this case the DCF model should apply a two-step composite growth 

rate.312 

Moreover, in response to MISO TOs’ assertion that the DCF model requires a 

growth estimate that matches investors’ expectations, CAPs assert that this is a reason to 

use the long-term GDP constraints on analysts’ projected rate of near-term growth in 

earnings per share. CAPs state that rational investors know what Dr. Roger Morin 

explains in his textbook: that utility holding companies seek to keep dividend growth on a 

path they can sustain over the long term to avoid having to cut dividends when earnings 

are down.313 CAPs comment that the Commission recognized the importance of 

factoring in long-term growth even before Opinion No. 531,314 but now MISO TOs are 

 309 MISO TOs Initial Br. (I), App. 2 McKenzie Aff. (I) at 47-48, 51. 

310 See CAPs Reply Br. (I) at 9; Trial Staff Reply Br. (I) at 18-19; RPGI Reply Br. 

(I) at 20-21. 

311 RPGI Reply Br. (I) at 21 (citing Ozark Gas Transmission Sys., 68 FERC 

at 61,105-07; Wyoming Interstate Co., 69 FERC ¶ 61,259 (1994); Nw. Pipeline Corp., 

71 FERC ¶ 61,253, at 61,992 (1995)). 

312 CAPs Reply Br. (I) at 9. 

313 CAPs Reply Br. (I) at 10 (citing Morin at 284). 

314 Opinion No. 531, 147 FERC ¶ 61,234; Opinion No. 531-A, 149 FERC 

¶ 61,032; Opinion No. 531-B, 150 FERC ¶ 61,165. 
Docket Nos. EL14-12-003 and EL15-45-000 - 77 - 

proposing to eliminate consideration of whether the growth projected by analysts for the 

next three-to-five years is sustainable over the long term. Further, CAPs argue that, 

consistent with its findings in Opinion No. 531, the Commission factored in a long-term 

growth projection in Opinion No. 551, and MISO TOs’ did not seek rehearing.315 

CAPs comment that Mr. McKenzie does not provide evidence to support his claim 

that investors do not rely on estimates of GDP growth in evaluating growth expectations 

for utility stocks.316 CAPs state that Warren Buffet, who they say may be both the largest 

and most followed individual investor in U.S. electric utilities, has made clear that he 

expects stocks’ long term earnings growth to be constrained by GDP growth.317 

Further, CAPs dispute MISO TOs’ reliance on the fact that in the First Complaint 

proceeding four of the proxy companies had 10-year earnings per share growth rates 

averaging 8.4 percent and in the Second Complaint proceeding four proxy companies had 

10-year earnings per share growth rates averaging 8.1 percent. CAPs argue that, because 

the DCF model “turns” on investors’ expected stream of dividend receipts, the growth in 

dividends over the last 10 years is more meaningful than growth in earnings per share. 

CAPS assert that in the First and Second Complaint proceedings the growth in dividends 

for the four proxy companies in question averaged less than 3.9 percent and 4.9 percent 

respectively.318 Also, CAPs contend that Mr. McKenzie’s focus on four proxy 

companies was cherry-picking. CAPs point out that in the First and Second Complaint 

proceedings, just looking at the top of the alphabet, one could equally point to the low 

10-year earnings per share growth rates of American Electric Power (1.5 percent), 

Ameren (-2.0 percent), CenterPoint Energy (2.0 percent), and Consolidated Edison (3.5 

percent).319 

 315 See CAPs Reply Br. (I) at 11. 

316 Id. 

317 Id. (citing Fortune, “Mr. Buffet on the Stock Market,” Fortune, November 22, 

1999), https://money.cnn.com/magazines/fortune/fortune_archive/1999/11/22/269071/

(“You know, someone once told me that New York has more lawyers than people. I 

think that’s the same fellow who thinks profits will become larger than GDP. When you 

begin to expect the growth of a component factor to forever outpace that of the aggregate, 

you get into certain mathematical problems.”). 

318 Id. at 12; CAPs Reply Br. (II) at 27. 

319 CAPs Reply Br. (I) at 12 (citing Ex. JC-10 at 44, 45, 48, 50). CAPs Reply Br. 

(II) at 27-28 (citing Ex. JCI-9 at 60, 61, 63 & 65). 
Docket Nos. EL14-12-003 and EL15-45-000 - 78 - 

MISO TOs argue that capital expenditures forecast in 2018 for 2018 imply higher 

long-term growth. In response, CAPs assert that the Commission should not accept 

Mr. McKenzie’s view that capital investment can generate profit expansions that will 

long exceed GDP growth.320 CAPs first argue that the relevance of this report in 

ascertaining the cost of equity during the study periods in these proceedings is not clear, 

because the April 2018 Regulatory Research Associates report uses data that post-dates 

both study periods. In any event, CAPs state that the referenced report indicates that 

capital expenditures of the covered electric industry holding companies will shrink from 

2018 to 2020 to a level below that of 2016. CAPs also state that the Commission’s 

composite-growth method giving two-thirds weight to the IBES short-term growth 

projection already assumes that near-term growth will continue for decades. Further, 

CAPs assert that the real focus of the DCF model is the expected rate of growth in 

dividends per share and that the near-term growth rate is better projected by factoring in 

long-term GDP growth, because electric utilities seek to keep dividend growth on a path 

they can sustain over the long run. CAPs argue that the resulting moderation of earnings 

growth in realized dividend growth can be seen by comparing past earnings per share 

(EPS) growth projections to actual dividend per share growth.321 

CAPs dispute MISO TOs’ reliance upon a 1974 publication expressing skepticism 

about the use of the two-stage DCF model. They argue that in the intervening decades 

the DCF model has been widely adopted and refined. They cite to Dr. Morin, author of a 

text cited by the Commission in the Briefing Order, as supporting “[a] multiple-stage 

DCF model that better mirrors the patterns of future dividend growth,” and recognizing 

that “[a] transition must occur between the first stage of growth forecast by analysts for 

the first five years and the company’s long-term sustainable growth rate.”322

CAPs disagree with MISO TOs’ argument that the two-stage DCF was appropriate 

in the 1990s when electric utilities were transitioning to non-regulated markets, but that 

expectations of widespread deregulation no longer exist. CAPs explain that in fact the 

 320 MISO TOs Reply Br. (I) at 12-13 (citing S&P Global Market Intelligence, RRA 

Financial Focus – Utility Capital Expenditures Update, Regulatory Research Associates 

(Apr. 20, 2018)). 

321 CAPs Reply Br. (I) at 12-14. CAPs witness, Mr. Gorman, provides a 

comparison of the 2015 projections of three-to-five year EPS growth that are the basis for 

the composite growth rate used in Opinion No. 551 to the DPS growth rate between then 

and now. These companies’ projected EPS growth rate averaged 5.15 percent, whereas 

their realized DPS growth rate averaged 3.83 percent. CAP witness Gorman Ex. JC-109 

at 1. 

322 CAPs Reply Br. (I) at 14 (quoting Morin at 309). 
Docket Nos. EL14-12-003 and EL15-45-000 - 79 - 

Commission used a one-stage DCF model for electric utilities during the transitional 

period,323 but that in Opinion No. 531, the Commission determined that it was no longer 

appropriate to consider the transitional period of deregulation as the basis for assuming 

utility stocks’ near-term growth rates would continue indefinitely.324 

CAPs argue that MISO TOs mischaracterize the testimony of Dr. J. Randall 

Woolridge before the Virginia State Commission as supporting the constant growth DCF 

model for DCF valuation procedures. CAPs argue that, in fact, Dr. Woodridge opposed 

basing DCF growth rate solely on analysts’ projections of the near-term EPS growth.325 

Trial Staff comments that their expert witness, Mr. Keyton, disagrees with 

McKenzie’s elimination of the long-term growth component in the DCF. Trial Staff cites 

to the Commission’s determination in Williston Basin Interstate Pipeline Company and 

Opinion No. 531 rejecting the one-step or constant growth DCF model in favor of a twostep DCF model.326 Trial Staff also relies upon Dr. Morin who supports incorporating 

a long-term growth estimate in the DCF model and who was the Commission’s authority 

for the conclusion that “all company growth rates, especially utility service growth rates, 

converge to a level consistent with the growth rate of the aggregate economy.”327 

Mr. Keyton also notes that Professors Brigham and Ehrhardt support the use of longer 

term growth rates.328

5. Commission Determination 

 We disagree with MISO TOs’ contention that the Commission should eliminate 

the long-term growth projection based on GDP from its DCF analysis of electric utilities. 

As the Commission held in Opinion No. 531, 

The DCF model is based on the premise that an investment in 

common stock is worth the present value of the infinite 

stream of future dividends discounted at a market rate 

 323 Id. at 15 (citing Opinion No. 445, 92 FERC at 61,266). 

324 Id. (citing Ex. JC-108 at 24). 

325 Id. at 16-17. (CAPs question the relevance of this testimony in an unrelated 

proceeding. Id.) 

326 Trial Staff Reply Br. (I) at 18. 

327 Id. at 19 (quoting Opinion No. 531, 147 FERC ¶ 61,234 at P 36 n.63). 

328 Id. 
Docket Nos. EL14-12-003 and EL15-45-000 - 80 - 

commensurate with the investment’s risk.[329] Corporations 

have indefinite lives and therefore will pay dividends for an 

indefinite period. For that reason, the Commission stated as 

long ago as 1983, when it first adopted the constant growth 

DCF model for gas pipeline cases, that ‘projections by 

investment advisory services of growth for relatively short 

periods of years into the future’ cannot be relied on ‘without 

further consideration.’ Thus, as the Commission held in 

Ozark, the constant growth DCF model requires consideration 

of long-term growth projections.330

MISO TOs have not provided a persuasive basis for us to depart from this policy. 

Although MISO TOs cite a 1974 article by Myron Gordon arguing that analysts’ shortterm growth projections may be used without reference to a longer-term projection, more 

recent academic works support inclusion of a long-term growth projection based on GDP. 

For example, in New Regulatory Finance, Roger Morin recognizes that there is a growing 

consensus that security analysts’ growth projections are “the best place to start” in 

projecting growth in dividends. However, he continues, 

The problem is that from the standpoint of the DCF model 

that extends into perpetuity, analysts’ horizons are too short, 

typically five years. It is often unrealistic for such growth to 

continue into perpetuity. A transition must occur between the 

first stage of growth forecast by analysts for the first five 

years and the company’s long-term sustainable growth rate . . 

. It is useful to remember that eventually all company growth 

rates, especially utility service growth rates, converge to a 

level consistent with the growth rate of the aggregate 

economy.331 

 329 As the Commission explained, “The DCF model assumes growth for an infinite 

period of time. This can be approximated as 50 years because the present value of a one 

dollar dividend received 50 years in the future, discounted at 12 percent, is less than one 

cent.” Ozark Gas Transmission Sys., 68 FERC at 61,105 n.32 (citing Eugene F. Brigham 

& Louis C. Gapenski, Financial Management 291 (1991)). 

330 Opinion No. 531, 147 FERC ¶ 61,234 at P 33 (quoting Consol. Gas Supply 

Corp., 24 FERC ¶ 61,046, at 61,105 (1983)) (footnotes omitted). 

331 Morin at 308. 
Docket Nos. EL14-12-003 and EL15-45-000 - 81 - 

Dr. Morin goes on to state that one way to account for the two stages of growth is to 

adopt a blended growth rate as the Commission does, giving two-thirds weight to 

analysts’ five-year growth projections and one-third weight to long-range projections of 

growth in GDP projected for the very long-term.332 

MISO TOs argue that, regardless of the fact that the underlying theory of the DCF 

model requires a long-term growth projection, as a practical matter investors rely solely 

on short-term growth projections, such as the IBES three-to-five year growth projections. 

MISO TOs assert that there are no long-term projections of the growth of public utilities 

and therefore investors must be limited to using short-term growth projections. However, 

MISO TOs fail to counter evidence that sophisticated investors do in fact consider longterm economic trends, including long-term growth in GDP, when estimating the future 

growth in earnings or dividends. For example, CAPs note that Warren Buffet has made 

clear that he expects firms’ long-term earnings growth to be limited by GDP growth, 

stating, 

You know, someone once told me that New York has more 

lawyers than people. I think that’s the same fellow who 

thinks profits will become larger than GDP. When you begin 

to expect the growth of a component factor to forever outpace 

that of the aggregate, you get into certain mathematical 

problems.333 

MISO TOs nevertheless assert that GDP does not constrain the growth in earnings 

of electric utilities, stating that the record in the First Complaint proceeding contains 

Value Line reports showing that four electric utilities had earnings per share growth rates 

over the previous 10 years of 8 to 10 percent, and the record in the Second Complaint 

proceeding contains similar Value Line reports showing that four electric utilities had 

earnings per growth rates of 7 to 9 percent. MISO TOs point to the proxy group 

companies featuring the highest growth rates, while the growth rates of the overall proxy 

group contradict their position. The First Complaint proceeding record includes Value 

 332 Id. at 309. In Corporate Finance, A Focused Approach, at 279 (Fourth 

Edition), Ehrhardt and Brigham also state “dividend growth for most mature firms is 

generally expected to continue in the future at about the same rate as nominal gross 

domestic product (real GDP plus inflation),” and they also discuss a blended approach for 

determining the growth projection for the constant growth DCF model when the shortterm growth projection is unsustainable. Id. at 324. 

333 “Mr. Buffet on the Stock Market,” Fortune, November 22, 1999. 
Docket Nos. EL14-12-003 and EL15-45-000 - 82 - 

Line reports showing the average 10-year earnings growth rates for 41 electric utilities.334 

The median 10-year earnings growth rate for all 41 electric utilities was 3.5 percent, 

which is less than the long-term projected nominal GDP growth rate of 4.39 percent in 

that proceeding. Similarly, the Second Complaint proceeding record includes Value Line

reports showing the average 10-year earnings growth rates for 30 electric utilities.335 The 

median 10-year earnings growth rate for all 30 of those electric utilities is also 3.5 

percent, which is less than the long-term projected nominal GDP growth rate of 4.35 

percent in that proceeding. Thus, a review of all the Value Line reports in the exhibits 

cited by the MISO TOs indicates 10-year earnings growth more in line with the growth of 

the economy as whole. 

In any event, the fact some electric utilities may maintain earnings growth in 

excess of GDP for periods of 10 years or more is not inconsistent with the Commission’s 

two-step DCF model. As the Commission has previously explained, our two-step DCF 

model does not assume that an electric utility’s growth rate will immediately drop to the 

GDP growth rate following the fifth year of the IBES short-term growth projection. “Our 

decision to give the IBES data two-thirds weight and the long-term projection one-third 

weight is the equivalent, in a 50-year model, of averaging 33 years at the higher IBES 

number and 17 years at the lower GDP number.”336 Therefore, the fact some electric 

utilities may have earnings growth in excess of the growth in GDP for periods of 10 years 

or more is not inconsistent with our holding that GDP is appropriate as a long-term 

growth rate given one-third weight. 

MISO TOs also argue investors may expect public utilities to have earnings and 

dividend growth in excess of GDP, pointing to several reports that public utility capital 

expenditures are expected to increase. For example, MISO TOs cite a 2014 S&P report, 

stating among other things, “[b]eginning in 2017, we expect the industry’s generation and 

overall capital spending needs to pick up significantly, consistently exceeding $100 

billion annually.”337 In addition, they cite a 2018 report stating, “[f]orecasted 2018 

capital expenditures for the 52 electric and gas utilities in the RRA universe climbed to 

 334 Ex. JCI-109 (I) at 42-86. 

335 Ex. JCI-109 (II) at 58-90. 

336 Williston Basin Interstate Pipeline Co., 87 FERC ¶ 61,264 at 62,004 (1999). 

See also Williston Basin Interstate Pipeline Co., 84 FERC ¶ 61,081 at 61,384-85 (1998). 

337 Standard & Poor’s Corporation, The Outlook for U.S. Regulated Utilities 

Remains Stable on Increasing Capital Spending and Robust Financial Performance, 

RatingsDirect (Dec. 16, 2014) (2014 S&P Report). 
Docket Nos. EL14-12-003 and EL15-45-000 - 83 - 

an all-time high of $141.1 billion.” 338 MISO TOs’ reliance on these reports is 

unavailing. These reports relate to the public utilities’ capital spending in the relatively 

near future, within a time frame during which, as discussed in the preceding paragraph, 

the two-step DCF model assumes growth consistent with the IBES growth projection. 

Therefore, these reports do not undercut the underlying rationale of the two-step DCF 

model that firms cannot grow faster than GDP over the indefinite long-term. Moreover, 

the 2018 S&P report was issued over two years after the financial study periods in the 

two complaint proceedings, the second of which ended on December 31, 2015, and 

therefore that report could not affect investor expectations during the time periods at 

issue in these proceedings. In any event, as CAPs point out, the 2018 S&P report 

indicates that capital expenditures of the covered electric industry holdings companies 

will shrink from 2018 to 2020 to a level below that of 2016.339 

MISO TOs also seek to distinguish electric utilities from natural gas pipelines with 

respect to the need for a long-term growth projection. They argue that the IBES shortterm growth projections of electric utilities are generally lower than natural gas pipeline 

IBES growth projections in the cases where the Commission first adopted the two-step 

DCF model. Opinion No. 531 recognized that the IBES growth projections of electric 

utilities reflect a different pattern from those of natural gas and oil pipelines. Although 

pipeline IBES growth projections are consistently higher than the long-term growth of 

GDP, that is not true of electric utilities.340 Nevertheless, Opinion No. 531 adopted the 

two-step DCF model for electric utilities. The Commission pointed out that it had held 

that giving some effect to the long-term growth projection will aid in normalizing any 

distortions that might be reflected in short-term data limited to a narrow segment of the 

economy.341 Opinion No. 531 concluded that this reasoning applied 

regardless of whether the short-term growth projection is 

greater or less than the growth of the economy as a whole. 

 338 S&P Global Market Intelligence, RRA Financial Focus – Utility Capital 

Expenditures Update, Regulatory Research Associations (Apr. 20, 2018) (2018 S&P 

Report). 

339 See 2018 S&P Report, Table 1 (“Total Electric” Cap Ex of $93.6 million in 

2016A, $106.6 million in 2018E, and $86.2 million in 2020E, its most distant 

prediction.). 

340 Opinion No. 531, 147 FERC ¶ 61,234 at P 30 (citing S. Cal. Edison Co., 

92 FERC at 61,261). 

341 Opinion No. 531, 147 FERC ¶ 61,234 at P 38 (citing Opinion No. 414-A, 

84 FERC at 61,423). 
Docket Nos. EL14-12-003 and EL15-45-000 - 84 - 

Over the long-run, a regulated firm may reasonably be 

expected to grow at the rate of the average firm in the 

economy; growth either significantly above or below the 

growth of the economy as a whole is unlikely to continue 

indefinitely. Using the same long-term growth projection for 

all public utilities is consistent with this expectation.342

In any event, regardless of the fact that the IBES growth projections of a number 

of public utilities are less than or about equal to projected growth in GDP, the IBES 

growth projections of the public utility proxy companies that set the top of the DCF zone 

of reasonableness in both proceedings are substantially above projected growth in GDP. 

In the First Complaint proceeding, TECO Energy (TECO) sets the top of the zone of 

reasonableness. The IBES short-term growth projection for TECO is 7.68 percent, 329 

basis points above the long-term GDP growth projection of 4.39 percent.343 In the 

Second Complaint proceeding, PNM Resources, Inc. (PNM) sets the top of the zone of 

reasonableness. The IBES short-term growth projection for PNM is 9.30 percent, over 

twice the long-term GDP growth projection in that case of 4.35 percent.344 Thus, these 

public utilities present the same circumstances as the pipelines in the cases where the 

Commission adopted the two-step DCF method – IBES short-term growth projections 

substantially in excess of GDP growth. Because we determine the central tendency of the 

zone of reasonableness using the midpoint, it is particularly important that the ROEs of 

the companies setting the top of the zone be determined consistent with the underlying 

theory of the DCF model, requiring use of a long-term growth projection. 

Finally, MISO TOs assert that, if the Commission applies a high-end outlier test to 

the DCF model, there will remain no rationale for requiring the long-term growth 

component of the two-step DCF model. The existence of the high-end outlier test is 

irrelevant to the question of whether a long-term growth projection should be included in 

a DCF analysis of public utilities. The high-end outlier tests eliminates outlier proxy 

group members. It does not address the fact that, over the long-term, companies cannot 

maintain their short-term growth rates and must, to some extent, converge on the growth 

rate of the overall economy. Furthermore, the high-end outlier test we adopt later in this 

order does not screen out any of the ROEs produced by the DCF analysis of the proxy 

groups in these two cases, including the ROE results discussed above that establish the 

top of the zones of reasonableness in these two cases. 

 342 Id. 

343 Initial Decision (I), 153 FERC ¶ 63,027 at App. B. 

344 CAPs Initial Br. (II) at App. I. 
Docket Nos. EL14-12-003 and EL15-45-000 - 85 - 

E. Has DCF Performed Inconsistently with Underlying Theory 

In both Opinion Nos. 531 and 551, the Commission found that, because of unusual 

capital market conditions, the Commission had “less confidence” that the midpoint of the 

zone of reasonableness determined by the DCF analysis satisfied the Hope and Bluefield

capital attraction standards.345 For example, in Opinion No. 551, the Commission stated 

that bond yields remained at historically low levels during the January to June 2015 study 

period in the First Complaint proceeding. The yield on 10-year U.S. Treasury bonds, 

which the Commission noted in Opinion No. 531346 was below two percent in that case 

and had not been below three percent since the 1950s, was at 2.07 percent during the 

Opinion No. 551 study period.347 Also, the yield on short-term U.S. Treasury bonds was 

historically low, ranging from zero to 0.25 percent.348 

Opinion No. 551 then considered the alternative cost of equity models to 

corroborate the Commission’s determination to set MISO TOs’ ROE “at a point above 

the midpoint” of the DCF analysis’ zone of reasonableness, i.e., the midpoint of the upper 

half of the zone.349 However, the Commission emphasized that it was not departing from 

the use of the DCF methodology to determine the zone of reasonableness.350 At the 

hearings on the Second Complaint, the participants devoted a substantial portion of their 

evidentiary presentations to debating whether the continuing low-interest rate capital 

market conditions should be considered “anomalous” and whether those conditions 

distort the results of a DCF analysis.351

In the Briefing Order, the Commission stated that those issues are largely 

irrelevant under the Briefing Order’s proposed approach to determining just and 

 345 Opinion No. 531, 147 FERC ¶ 61,234 at P 145; Opinion No. 551, 156 FERC 

¶ 61,234 at P 119. 

346 Opinion No. 531, 147 FERC ¶ 61,234 at P 145 n.285. 

347 Opinion No. 551, 156 FERC ¶ 61,234 at P 121. 

348 Id. 

349 Id. P 135. 

350 Id. P 137. 

351 See, e.g., Exs. JCA-1 at 6-18, JCI-1 at 29-32, 38, ICG-15 at 18-30, MTO-1 

at 21-28, 102-105, MTO-16 at 16-38. 
Docket Nos. EL14-12-003 and EL15-45-000 - 86 - 

reasonable ROEs.352 The Commission stated that, under this approach, it would average 

the cost of equity results produced by the DCF model with the results produced by the 

other proposed models, using the midpoint/medians of the models that produce zones of 

reasonableness, to get one average figure for the cost of equity. Therefore, the 

Commission would not be making an adjustment above the midpoint/median as it did in 

Opinion No. 551. The Commission stated that, as a result, there was no need to find that 

low-interest rate capital market conditions distort the results of a DCF analysis so as to 

justify adjusting the ROE for average risk utilities above the midpoint. To the contrary, 

the Commission’s primary reason for proposing to average the results of the DCF 

analysis with the results of other models is that investors use those models, in addition to 

the DCF methodology, to inform their investment decisions. The Commission concluded 

that, under this approach, whether a change in the capital market conditions is anomalous 

or persistent is of less importance, because relying on multiple financial models makes it 

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

making their investment decisions. 

Nevertheless, the Commission noted that, in recent years, utility stock prices 

appear to have performed in a manner inconsistent with the theory underlying the DCF 

methodology.353 The Commission stated that, under that theory, increases in a 

company’s actual earnings or projected growth in earnings would ordinarily be required 

to justify an increase in the company’s stock price. However, the Commission stated 

that, although the Dow Jones Utility Average increased by almost 70 percent from 

October 1, 2012 through December 1, 2017, there was not an increase in either utility 

earnings or projected earnings during that period that would justify the substantial 

increase in stock prices. The Commission stated that this is an example of what MISO 

TOs have described as “model risk” —the risk that in some circumstances a model will 

produce results that do not reflect real world experience.354 The Commission stated that 

 352 Briefing Order, 165 FERC ¶ 61,118 at P 46. 

353 Id. P 47. 

354 Id. (citing Ex. MTO-16 (II) at 36) (“There is ‘model risk’ associated with the 

excessive reliance or mechanical application of a model when the surrounding conditions 

are outside of the normal range. ‘Model risk’ is the risk that a theoretical model that is 

used to value real-world transactions fails to predict or represent the real phenomenon 

that is being modeled. Although the concept of model risk was originally applied to 

derivative instruments and hedging transactions, it applies equally to models used to 

value companies, to manage investment portfolios, to assign credit ratings, or in this case, 

to determine the ROE that will provide a fair return and encourage investment in critical 

infrastructure.”). 
Docket Nos. EL14-12-003 and EL15-45-000 - 87 - 

it appears that, for whatever the reason, investors have seen greater value in utility stocks 

than the DCF methodology would predict. The Commission concluded that this suggests 

that the ROE estimated by that methodology may be correspondingly inaccurate. 

1. CAPs 

CAPs contest the Briefing Order’s suggestion that current capital market 

conditions, including low bond yields, have affected the reliability of the DCF Model.355 

They contend that the Commission failed to support its assertion that utility stock prices 

appear to have performed in a manner inconsistent with the theory underlying the DCF 

model. In particular, they state that the Commission’s statement that the DCF model 

assumes that stock prices increase only when there is an actual or projected increase in 

earnings/dividends is inaccurate. Rather, their witness, Mr. Bertram, explained that 

“[t]he theory underlying the DCF method is that stock prices can change not only as a 

result of expected changes in earnings/dividends (“g”), but also due to changes in 

investors’ required rate of return for investing in a company (“k”).”356 Mr. Solomon 

states that factors influencing the investor’s required rate of return include 

expected returns that might be earned on alternative 

investments, changes in risk perceptions, changes in risk 

tolerance, changes in a desire for current income versus 

longer-term capital gains, expectations about inflation, 

expectations about real interest rates, expectations about the 

U.S. economy in general and various sectors of the U.S. 

economy specifically as well as expectations about the global 

economy, among others.357 

CAPs also point out that, in Order No. 489, the Commission explained that the 

DCF model does not assume that stock prices are solely a function of current and 

projected future earnings, stating the DCF model “shows the relationship between stock 

prices and dividends, growth rate of dividends, and shareholders’ required rate of 

return.”358 Opinion No. 489 stated that the term “k” in the DCF model, representing 

 355 CAPs Initial Br. (I) at 18-21. 

356 Ex. JCI-100 at 22. 

357 Id. at 22-23. 

358 CAPs Initial Br. (I) at 20 (quoting Generic Determination of Rate or Return on 

Common Equity for Public Utilities, Order No. 489, FERC Stats. & Regs. ¶ 30,795 at 

30,990 (1988) (cross-referenced at 42 FERC ¶ 61,122)). Ex. JCI-100 at 22-25. 
Docket Nos. EL14-12-003 and EL15-45-000 - 88 - 

shareholders’ required rate of return, reflects a number of factors influencing stock prices, 

“including expectations about the real interest rates, the expected rate of inflation, and the 

‘risks’ associated with owning a particular stock.”359 

CAPs assert that the increase in utility stock prices from 2012 to 2017 likely 

reflected the historically low interest rates the Commission noted in the Briefing Order, 

as opposed to “model risk.” They contend that this conclusion is consistent with the 

Commission’s own statement, quoted by the D.C. Circuit in Tennessee v. FERC, that a 

“drastic drop in interest rates attract[s] capital away from bonds and into stocks, causing a 

rise in stock prices and a decline in dividend yields.”360 

2. MISO TOs 

MISO TOs contend that the Briefing Order properly determined that the 

limitations of the DCF model justify taking a broader perspective to the examination of 

ROE.361 For example, they state that the Briefing Order documented that utility stock 

prices have trended in a manner inconsistent with the basic theory of the DCF model. 

MISO TOs’ witness, Mr. McKenzie, states that the Briefing Order’s observation 

that utility stock prices rose by almost 70 percent without a corresponding increase in 

utility earnings during the period 2012 to 2017 is not critical to supporting the 

Commission’s proposal to use multiple financial models to determine ROE. However, 

Mr. McKenzie states that the Briefing Order’s observation illustrates that the behavior of 

investors in the financial markets can depart significantly from the underlying 

assumptions of the DCF model.362 He states that the DCF model assumes dividends, 

earnings, and stock price growth at the same constant rate to infinity, resulting in a 

constant price/earnings ratio. Mr. McKenzie states that the Briefing Order’s observation 

that utility stocks increased without a corresponding increase in earnings simply indicates 

that the price/earnings ratio was not constant, contrary to the DCF model’s assumptions. 

He argues that real-world experience contradicts the DCF assumptions, which he claims 

illustrates that there is no perfect way to estimate the cost of equity and therefore reliance 

on multiple modes is fully supported. 

 359 Id. at 20 (quoting Order No. 489, FERC Stats. & Regs. ¶ 30,795 at 30,990). 

360 926 F.2d 1206, 1209 (D.C. Cir. 1991) (quoting Tenn. Gas Pipeline Co., 

46 FERC ¶ 61,089, at 61,383 (1989)). 

361 MISO TOs Reply Br. (I) at 13-15. 

362 Id., App. 2 McKenzie Reply Aff. (I) at 17-18. 
Docket Nos. EL14-12-003 and EL15-45-000 - 89 - 

3. Other Parties 

RPGI contends that the Briefing Order failed to support its assertion that the 

increase in utility stock prices from 2012 to 2017 was not accompanied by a 

commensurate growth in earnings per share.363 RPGI states that, in support of this 

assertion, the Briefing Order cited the Coakley Briefing Order,364 and that order in turn 

cited only a single exhibit from the fourth complaint proceeding concerning the 

New England TOs’ ROE.365 RPGI states that the cited exhibit only contains information 

concerning utility stock prices and contains no information concerning earnings or 

projected earnings of any utilities.366 RPGI also states that the period 2012 to 2017 

extends beyond the 2015 test periods in the two MISO complaint proceedings and after 

the close of the records in these proceedings. 

4. Commission Determination 

As the Commission stated in the Briefing Order, the issue of whether the lowinterest rate capital market conditions during 2015 were “anomalous” or may have 

distorted the results of the DCF model are not relevant to our revised approach to 

determining just and reasonable ROEs. In Opinion Nos. 531 and 551, the Commission 

relied on its finding of anomalous capital market conditions to justify setting the 

New England TOs’ and MISO TOs’ ROEs at the midpoint of the upper half of the DCF 

zone of reasonableness, despite the fact that the transmission owners are of average risk 

and the Commission ordinarily sets the ROE of average risk utilities at the central 

tendency of the overall zone of reasonableness. Under our revised approach to 

determining just and reasonable ROEs, we are averaging the results of the DCF and 

CAPM models to determine a composite zone of reasonableness and setting the ROE of 

average risk utilities at the central tendency of that composite zone of reasonableness. 

We are not making an adjustment above the central tendency of the zone of 

reasonableness as we did in Opinion Nos. 531 and 551. There is thus no need to find that 

low-interest rate capital market conditions distort the results of a DCF analysis so as to 

justify increasing the ROE for average risk utilities above the central tendency, and we 

make no such finding in this order. 

 363 RPGI Initial Br. (I) at 18-20; RPGI Initial Br. (II) at 20-22. 

364 Briefing Order, 165 FERC ¶ 61,118 at P 47 (citing Coakley Briefing Order, 

165 FERC ¶ 61,030 at P 45). 

365 RPGI Initial Br. (I) at 19 (citing Ex. CAP-65 in Docket No. EL16-64-002); 

RPGI Initial Br. (II) at 22 (citing same). 

366 RPGI Initial Br. (I) at 19; RPGI Initial Br. (II) at 22. 
Docket Nos. EL14-12-003 and EL15-45-000 - 90 - 

Rather, our revised ROE policy rests on a finding that investors use the DCF and 

CAPM models to inform their investment decisions. Under this approach, whether a 

change in capital market conditions is anomalous or persistent is of little importance, 

because relying on multiple financial models makes it more likely that our decision will 

accurately reflect how investors are making their investment decisions. Moreover, to the 

extent that investors in fact rely on a financial model, the fact that that model may have 

defects does not invalidate its use in determining ROE. A key consideration in 

determining just and reasonable utility ROEs is determining what ROE a utility must 

offer in order to attract capital, i.e., induce investors to invest in the utility in light of its 

risk profile. For this purpose, we must look to the methods investors actually use to 

analyze and compare their investment opportunities, regardless of any flaws in those 

methods. As the Commission stated in Opinion No. 414-B, “the cost of common equity 

to a regulated enterprise depends upon what the market expects not upon precisely what 

is actually going to happen.”367 As we discuss elsewhere in this order, there is no serious 

dispute that investors use the DCF and CAPM models in making investment decisions. 

In any event, the application of the CAPM model mitigates some of the model risk that 

the DCF model may perform poorly in certain circumstances. 

VI. Expected Earnings Model 

A. Background 

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

expects to receive on the book value of a particular stock. 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.368 The latter 

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

methodology 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, excluding long-term debt). 

In Opinion No. 551, the Commission found that the results of MISO TOs’ 

Expected Earnings analysis corroborated its determination that MISO TOs should be 

awarded an ROE above the midpoint of the zone of reasonableness produced by the DCF 

analysis.369 In doing so, the Commission reversed the Presiding Judge’s rejection of 

 367 Opinion No. 414-B, 85 FERC at 62,268. 

368 See Opinion No. 531-B, 150 FERC ¶ 61,165 at P 125. 

369 Opinion No. 551, 156 FERC ¶ 61,234 at P 230. 
Docket Nos. EL14-12-003 and EL15-45-000 - 91 - 

MISO TOs’ Expected Earnings analysis. The Presiding Judge rejected the analysis 

because a critique by Dr. Morin took the position that the Expected Earnings analysis 

should be based on a sample of unregulated, rather than regulated companies, but MISO 

TOs’ Expected Earnings analysis relied on regulated companies in the proxy group and 

their expert, Dr. Avera, was unable to sufficiently address Dr. Morin’s critique.370 

In Opinion No. 551, the Commission pointed out that Dr. Morin’s critique was 

based on his concern that using the historical book ROE of regulated companies in the 

analysis would be based on past actions of regulatory commissions and would raise 

issues of circularity. The Commission found, however, that this concern was not present 

with respect to MISO TOs’ Expected Earnings analysis because it was forwardlooking.371 The Commission further explained that the Expected Earnings analysis was 

useful in corroborating the results produced by the DCF model because investors rely on 

both the market cost of equity and the book return on equity in determining whether to 

invest in a utility.372 CAPs, OMS, and RPGI request rehearing of Opinion No. 551’s 

decision to consider the MISO TOs’ Expected Earnings analysis.373 

In the Initial Decision in the Second Complaint proceeding, the Presiding Judge 

similarly found that “an expected earnings [analysis] serves as a useful guide to 

placement of the Base ROE within the DCF-calculated zone of reasonableness to the 

extent it calculates the earnings on book value investors can expect to earn.”374 CAPs, 

OMS and JCA, RPGI, and Trial Staff filed exceptions to the Presiding Judge’s decision 

to consider the MISO TOs’ Expected Earnings analysis.375

In the Briefing Order, the Commission proposed to give the Expected Earnings 

model equal weight, along with the DCF model and CAPM, in establishing a composite 

zone of reasonableness to be used under the first prong of section 206.376 For purposes of 

 370 See Initial Decision (I), 153 FERC ¶ 63,027 at P 325. 

371 Id. PP 231-232. 

372 Id. PP 234-236. 

373 See, e.g., CAPs Rehearing Request at 25-41; OMS Rehearing Request at 16-20; 

RPGI Rehearing Request at 12-15. 

374 Initial Decision (II), 155 FERC ¶ 63,030 at P 515. 

375 See, e.g., CAPs Br. on Exceptions at 79-85; OMS-JCA Br. on Exceptions at 5-

6, 47-49; RPGI Br. on Exceptions at 64; Trial Staff Br. on Exceptions at 26-32. 

376 See Briefing Order, 165 FERC ¶ 61,118 at P 17. 
Docket Nos. EL14-12-003 and EL15-45-000 - 92 - 

establishing a new just and reasonable ROE where the existing ROE has been shown to 

be unjust and unreasonable (i.e., the second prong of the FPA section 206 analysis), the 

Commission proposed to use the Expected Earnings model, DCF model, CAPM, and 

Risk Premium model to produce four separate cost of equity estimates and then average 

the four estimates to produce the just and reasonable ROE. 

In the briefs filed in response to the Briefing Order, the parties either generally 

opposed or supported the use of the Expected Earnings model in the Commission’s 

revised ROE methodology. Those arguments and other relevant arguments in the records 

of these proceedings are summarized and addressed below. 

B. Parties Opposing the Use of Expected Earnings 

CAPs, Trial Staff, LPSC, and Alliant oppose using the Expected Earnings model 

in the Commission’s revised ROE methodology. They all argue that the Expected 

Earnings model does not accurately reflect a utility’s cost of equity because it is an 

accounting-based measure that does not reflect the rate of return that investors require to 

invest in the market-priced common equity capital of a utility.377 CAPs assert that this is 

because an investor cannot purchase a utility's common stock at book value and must 

instead pay the prevailing market price for common equity, which means that expected 

earned return on book value is not indicative of what an investor can expect to earn on an 

investment in the utility's common stock nor what return an investor requires to invest in 

the utility's common stock.378 Similarly, Trial Staff notes precedent in which the 

Commission found that “[a]ccounting rates of return are not reliable measures of the 

current market cost of capital, since they do not reflect the current market prices that are 

determined in competitive capital markets.”379 

Trial Staff also argues that the Expected Earnings model is not widely used by 

investors.380 Trial Staff notes that Dr. Roger A. Morin’s book, New Regulatory Finance, 

addresses a generic comparable earnings method, which is a backward-looking measure 

that is not the same model as the Expected Earnings model used by the MISO TOs in 

 377 See, e.g., CAPs Initial Br. (I) at 40-44; CAPs Initial Br. (II) at 39-44; Trial Staff 

Initial Br. (I) at 8-9; Trial Staff Initial Br. (II) at 7-8; LPSC Initial Br. at 15-20; Alliant 

Reply Br. (I) at 5-6; Alliant Reply Br. (II) at 5-6. 

378 CAPs Initial Br. (I) at 41; CAPs Initial Br. (II) at 41. 

379 Trial Staff Initial Br. (I) at 8 (citing Generic Determination of Rate of Return in 

Common Equity for Pub. Utils., Order No. 420, FERC Stat. & Regs. at 31,344. 

380 Trial Staff Initial Br. (I) at 6-8; Trial Staff Initial Br. (II) at 5-7. 
Docket Nos. EL14-12-003 and EL15-45-000 - 93 - 

these proceedings. In addition, Trial Staff points to Dr. Morin’s explanation of why 

multiple models should be used to estimate the cost of equity and notes that he cites 

Professor Eugene Brigham as stating that the CAPM, DCF, and Risk Premium models 

“typically are used” but not mentioning the Expected Earnings model.381 Trial Staff 

further cites to an observation by Professor Brigham that the comparable earnings method 

has been “thoroughly discredited” and replaced by the market-oriented DCF, Risk 

Premium and CAPM models.382 In addition, Trial Staff cites to a Federal 

Communications Commission report which explains that the two most commonly used 

methods for estimating the cost of equity are the DCF and CAPM models.383 

Accordingly, Trial Staff contends that there is little support for the notion that the 

Expected Earnings approach is widely used by investors. 

LPSC similarly argues that evidence indicates that the Expected Earnings model is 

not used by investors. LPSC argues that the comparable earnings approach was grounded 

in the theory that the rate of return for utilities could be determined by examining the 

book returns of unregulated firms because their profitability would be limited by the 

forces of competition. LPSC asserts that, however, this analysis was made impractical 

because of differences in accounting between regulated and unregulated firms and the 

difficulty in measuring differences in risk between regulated and unregulated firms. 

LPSC argues that the alternative of using the comparable earnings of regulated utilities—

like the analysis that was accepted in Opinion No. 551—conflicts with the essential 

premise of the comparable earnings approach because utilities do not operate in 

competition and therefore such an Expected Earnings analysis is not reliable. LPSC 

asserts that, if investors consider returns on book value at all, they do not consider it as a 

direct indication of returns on their investments because they cannot purchase stock at 

book value unless market price and book value happen to be exactly equal. In addition, 

LPSC cites to various academic sources which it asserts indicate that the Expected 

Earnings model is not used because of its flaws.384 LPSC also asserts that, while 

 381 Trial Staff Initial Br. (I) at 6-7 (citing Morin at 430); Trial Staff Initial Br. (II) 

at 6 (citing same). 

382 Trial Staff Initial Br. (I) at 6-7 (citing Eugene F. Brigham, Dilip K. Shome & 

Steve R. Vinson, Cost of Capital Estimation, The Risk Premium Approach to Measuring 

a Utility’s Cost of Equity 33 (1985)); Trial Staff Initial Br. (II) at 7 (citing same); LPSC 

Initial Br. at 1-2 (citing Eugene F. Brigham et al., The Risk Premium Approach to 

Measuring a Utility's Cost of Equity, 14 Financial Management 33, 33 (1985)). 

383 Trial Staff Initial Br. (I) at 8 (citing In re Connect Am. Fund, 28 FCC Rcd. 

7123, 7148 (2013)); Trial Staff Initial Br. (II) at 7 (citing same). 

384 LPSC Initial Br. at 1-4; 13-24. 
Docket Nos. EL14-12-003 and EL15-45-000 - 94 - 

Dr. Morin’s academic text may explain the Expected Earnings model, he does not use it 

himself when presenting testimony concerning investor return requirements.385 LPSC 

also states that, in proposing to abandon the use of book return to determine carriers’ rate 

of return, the Federal Maritime Commission stated that a firm’s accounting rates of return 

are not equivalent to the firm’s true economic rate of return, because accounting and 

economic concepts of income and value are substantially different.386 LPSC states that 

the Federal Maritime Commission adopted a final rule using the DCF model to determine 

rate of return. 

CAPs argue that the Expected Earnings model produces an erroneously inflated 

measure of investors’ required level of return for stocks whose market value exceeds 

their book value. CAPs assert that only when investors bid the stock price of a company 

to at or near its book value (i.e., a market-to-book ratio at or near 1.0) can the expected 

earned rates of return on the company’s book value be considered a reasonable estimate 

of its cost of common equity capital, or investors’ required return. CAPs further contend 

that the Expected Earnings model does not measure opportunity cost because the only 

opportunity cost available to investors is the market price at which they can actually 

purchase stock.387 

CAPs also assert that the Expected Earnings model should not be used because it 

is inappropriately circular and potentially self-fulfilling. CAPs contend that this is the 

case because the Value Line projected earnings-to-book ratios are based on past allowed 

ROEs and therefore the Expected Earnings model’s reliance on them will merely serve to 

perpetuate existing ROEs.388 

RPGI argues that, if the Commission uses the Expected Earnings model in its 

revised methodology, it must consider market-to-book ratios in order to give the model 

an element of being a market-based approach. RPGI contends that, if the Commission 

 385 Id. at 16 (citing Okla. Gas and Elec. Co., Cause No. PUD201700496 (Okla. 

Corp. Comm’n), Reb. Test. of Roger A. Morin at 33 (May 29, 2018) (“Q. Do you agree 

with Mr. Parcell's Comparable Earnings Analysis? A. Although I myself do not rely on 

this accounting-based method, I agree with Mr. Parcell’s Comparable Earnings results.”) 

(emphasis added)). 

386 Id. at 18-19, citing Financial Reporting Requirements and Rate of Return 

Methodology in the Domestic Offshore Trades, Proposed Rule, 59 Fed. Reg. 16,592 

(1994). 

387 CAPs Initial Br. (I) at 41-43; CAPs Initial Br. (II) at 41-43. 

388 CAPs Reply Br. (I) at 37-38; CAPs Reply Br. (II) at 57-58. 
Docket Nos. EL14-12-003 and EL15-45-000 - 95 - 

does not consider market-to-book ratios then the Expected Earnings model should not be 

used.389 LPSC similarly asserts that, if the Commission decides to use the Expected 

Earnings model, then it should adjust the analysis for market-to-book ratios or screen the 

group of unregulated firms based on market-to-book ratios.390 

CAPs also argue that, if the Commission decides to use the Expected Earnings 

model, then it should implement certain adjustments. Specifically, CAPs argue that any 

Expected Earnings model should use the average of all available projected years’ returns 

on book common equity, rather than just using the Value Line projection that is furthest 

out in time (that for 2018-2020). CAPS state that using all three forward projections 

provided by Value Line, including those for 2015 and 2016 would better reflect long-term 

expectations of per-book earnings. CAPs further contend that the Expected Earnings 

model should incorporate actual, realized returns for all available years because this will 

incorporate a measure of historical realism which will mitigate the risk that projections 

could reflect only short-run economic conditions that fail to represent long-term 

expectations.391 CAPs also assert that an analysis of proxy company market-to-book 

ratios must be used in combination with the Expected Earnings model.392 In addition, as 

discussed further below in section XII, CAPs argue that if the Expected Earnings model 

is used, then it should be given the least weight among the different financial models.393 

Trial Staff witness, Mr. Keyton, asserts that, if the Commission uses the Expected 

Earnings model, then it should use the average of all three of the return on book value 

projections provided by Value Line rather than only the most distant projection, because 

this will moderate the impact of any irregular return on book value estimates that may be 

obtained from a single estimate.394 Trial Staff and CAPs also both criticize the fact that 

 389 RPGI Initial Br. (I), Ex. RPG-17 at 25-26; RPGI Initial Br. (II), Ex. RPG-38 

at 26. 

390 LPSC Initial Br. at 29. 

391 CAPs Initial Br. (I) at 44-46; CAPs Initial Br. (II) at 44-46; CAPs Reply Br. (I) 

at 38-39; CAPs Reply Br. (II) at 58-59. 

392 CAPs Reply Br. (I) at 39; CAPs Reply Br. (II) at 59. 

393 CAPs Initial Br. (I) at 46-48; CAPs Initial Br. (II) at 46-47; CAPs Reply Br. (I) 

at 40; CAPs Reply Br. (II) at 60. 

394 Trial Staff Initial Br. (I) at 18-19 and Keyton Aff. (I) ¶¶ 52-54; Trial Staff 

Initial Br. (II) at 18 and Keyton Aff. (II) ¶¶ 50-52. 
Docket Nos. EL14-12-003 and EL15-45-000 - 96 - 

the Expected Earnings model relies solely on Value Line growth estimates, which they 

contend are unreliable because they are made by a single analyst.395 

C. Parties Supporting the use of Expected Earnings 

MISO TOs argue that the Expected Earnings model is a useful tool for evaluating 

utilities’ cost of equity396 and that the Commission should reject all of the parties’ 

arguments against using the Expected Earnings model.397 MISO TOs note that CAPs cite 

to Order No. 461398 for the proposition that Hope and Bluefield require returns to reflect 

the market cost of equity and then argue that the Commission has not justified the use of 

the Expected Earnings model because it is based on accounting rates of return that do not 

estimate the market cost of capital. MISO TOs argue that CAPs overstate the importance 

of Order No. 461’s reference because the mere fact that the Commission previously 

found compelling reasons to focus on the market cost of equity does not tie the 

Commission’s hands today. MISO TOs assert that ratemaking is not a science and that 

the Commission uses models only to inform, not rigidly determine an appropriate ROE. 

MISO TOs further contend that, in the sentence immediately following CAPs’ selected 

passage in Order No. 461, the Commission stated that it will “take into account non-cost 

factors in setting an allowed rate of return in an individual case if circumstances 

warrant.”399 

MISO TOs also note CAPs’ citation to Opinion No. 429 but assert that, while the 

Commission declined to rely solely on the comparable earnings method to establish ROE 

in that case, it did not hold that the FPA forecloses non-market-based methods for 

developing just and reasonable returns. MISO TOs argue that the Commission only 

noted that it “currently favors market-oriented methodologies (the DCF methodology in 

 395 CAPs Initial Br. (I) at 43; CAPs Initial Br. (II) at 43; Trial Staff Initial Br. (I) 

at 9-10; Trial Staff Initial Br. (II) at 9. 

396 MISO TOs Initial Br. (I) at 4; MISO TOs Initial Br. (II) at 6; MISO TOs Reply 

Br. (I) at 

397 MISO TOs Reply Br. (I) at 35-36; MISO TOs Reply Br. (II) at 35-36. 

398 Generic Determination of Rate of Return on Common Equity for Pub. Utils., 

Order No. 461, 37 FERC ¶ 61,287, FERC Stats. & Regs., Regs Preambles ¶ 30,722 

(1986) (Order No. 461), reh’g denied, Order No. 461-A, 38 FERC ¶ 61,160 (1987). 

399 MISO TOs Reply Br. (I) at 37 (citing Order No. 461, FERC Stats. & Regs., 

Regs Preambles ¶ 30,722 at 30,499); MISO TOs Reply Br. (II) at 37 (citing same). 
Docket Nos. EL14-12-003 and EL15-45-000 - 97 - 

particular).”400 MISO TOs argue that the Commission is now merely proposing a 

different, equally legitimate, approach in light of different circumstances. 

In addition, MISO TOs take issue with LPSC’s citation to the Federal Maritime 

Commission’s proposal of a new rule as support for LPSC’s argument that the Expected 

Earnings model does not utilize accepted financial theory. MISO TOs argue that the 

statement that LPSC cites is irrelevant because courts had in fact previously upheld the 

Federal Maritime Commission’s use of a purely accounting-based, comparable earnings 

test to determine rates of return under a “just and reasonable” standard akin to that of the 

FPA.401 MISO TOs contend that, therefore, the Expected Earnings model’s reliance on 

accounting data does not preclude the Commission from using the model in its ROE 

methodology.402

MISO TOs’ witness, Mr. McKenzie, similarly asserts that the purpose of the 

Expected Earnings model is not to derive a market cost of equity. He contends that this is 

an advantage of the model because it avoids the complexities, controversies, and 

limitations of capital market methods and instead focuses on expected earned returns on 

book equity, which are readily available to investors. MISO TOs also assert that the fact 

that the Expected Earnings model does not rely on market data is, in fact, a sound reason 

for the Commission to include the model in its ROE determinations. MISO TOs argue 

that the market-based methods all involve complexities, controversies, and limitations 

that the Expected Earnings does not share. Mr. McKenzie asserts that, because no single 

approach can accurately reflect investors’ required return, the Commission correctly 

determined that considering the results of alternative methods provides a more accurate 

basis on which to determine a just and reasonable ROE and reliance on the Expected 

Earnings approach is consistent with this logic. Mr. McKenzie further contends that, 

because regulators establish the allowed return on the book value of a utility’s 

investment—not the return that investors earn in the capital markets—the Expected 

 400 MISO TOs Reply Br. (I) at 38 (citing Consumers Energy Co., Opinion No. 429, 

85 FERC ¶ 61,100, at 61,362 (1998) (Opinion No. 429) (emphasis added by MISO TOs)); 

MISO TOs Reply Br. (II) at 38 (citing same). 

401 MISO TOs Reply Br. (I) at 38-39 (citing Matson Navigation Co. v. Fed. Mar. 

Comm’n, 959 F.2d 1039, 1041, 1043 (D.C. Cir. 1992); MISO TOs Reply Br. (II) at 38-39 

(citing same). 

402 MISO TOs Reply Br. (I) at 38-39; MISO TOs Reply Br. (II) at 38-39. 
Docket Nos. EL14-12-003 and EL15-45-000 - 98 - 

Earnings model provides a direct guide to ensure that the allowed ROE is similar to what 

other utilities of comparable risk will earn on invested capital.403

MISO TOs also assert that the circularity criticisms of the Expected Earnings 

model are meritless. MISO TOs argue that the Expected Earnings model is not circular 

because it relies on forward-looking, expected returns on book equity, and circularity is 

an issue only with the comparable earnings model, which relies on historical earnings on 

book equity. MISO TOs also contend that Trial Staff and LPSC are mistaken in asserting 

that Dr. Morin does not support use of the Expected Earnings model. MISO TOs argue 

that they disregard his explanation that the comparable earnings model is highly 

meaningful. Moreover, MISO TOs contend that, while Trial Staff is correct that 

Dr. Morin does not explicitly mention “expected earnings,” the comparable earnings 

model that he does discuss is the forward-looking version of the Expected Earnings 

model. MISO TOs also state that Trial Staff and LPSC ignore the close relationship of 

the comparable earnings approach to the capital attraction standards of Hope and 

Bluefield.

404 Mr. McKenzie states that “virtually every measure of future financial 

performance—including cash flow measures, profitability, and dividend policies—is 

impacted by the ROE established by regulators”405 and concludes that, therefore the 

Expected Earnings model is no more susceptible to circularity concerns than the DCF. 

In addition, MISO TOs argue that evidence demonstrates that investors rely on the 

utilities’ expected earnings. MISO TOs assert that investors understand that regulators 

establish rates of return on book equity and they do not and cannot determine a rate of 

return on the market value of a utility’s equity. MISO TOs contend that the evidentiary 

records in these proceedings include numerous examples of investment advisories and 

other publications that provide estimates of utilities’ returns on equity, including returns 

on book value of utilities’ assets.406 They assert that Mr. McKenzie’s reply affidavit 

 403 MISO TOs Reply Br. (I), App. 2 McKenzie Reply Aff. (I) at 62-67; MISO TOs 

Reply Br. (II), App. 2 McKenzie Reply Aff. (II) at 62-67. 

404 MISO TOs Reply Br. (I) at 42-43; MISO TOs Reply Br. (II) at 42-43. 

405 MISO TOs Reply Br. (I), App. 2 McKenzie Reply Aff. (I) at 72; MISO TOs 

Reply Br. (II), App. 2 McKenzie Reply Aff. (II) at 72. 

406 MISO TOs Reply Br. (I) at 43-44; MISO TOs Reply Br. (II) at 43-44. 
Docket Nos. EL14-12-003 and EL15-45-000 - 99 - 

includes additional examples of the investment community’s recognition of the relevance 

of returns on book value.407

Mr. McKenzie cites an S&P report as demonstrating the relevance of earned 

returns on book value in highlighting the primary credit considerations in the utility 

industry. In particular, he points to a statement in the report that “‘required rate of 

return on equity investment is closely linked to a utility company’s profitability.’”408 

Mr. McKenzie points to the report’s statement that “‘the regulator ultimately bases its 

decision on an authorized ROE,’” but “different factors such as variances in costs and 

usage may influence the return a utility is actually able to earn, and consequently our 

analysis of profitability for cost-of- service-based utilities centers on the utility’s ability 

to consistently earn the authorized ROE.’”409 Mr. McKenzie contends that this 

demonstrates that S&P’s view is that earned return on book value may provide better 

insight into the financial health of the utility because it reflects the end-result of 

regulation, not the theoretical outcome implied by an authorized ROE.410

Mr. McKenzie argues that Moody’s also recognizes the relevance of returns on 

book value in its assessment of a utility’s future prospects. He cites a report in which 

Moody’s stated that, while “‘[t]he authorized ROE is a popular focal point in many 

regulatory rate case proceedings,’” it is the case that “‘earned ROEs, as reported by 

 407 MISO TOs Reply Br. (I) at 44 (citing MISO TOs Reply Br. (I), App. 2 

McKenzie Reply Aff. (I) at 69-70); MISO TOs Reply Br. (II) at 43-44 (citing MISO TOs 

Reply Br. (II), App. 2 McKenzie Reply Aff. (II) at 69-70). 

408 MISO TOs Reply Br. (I), App. 2 McKenzie Reply Aff. (I) at 69 (citing S&P 

Global, Utilities: Key Credit Factors For The Regulated Utilities Industry, Criteria 

Corporates (Nov. 19, 2013); 

https://www.standardandpoors.com/en_US/web/guest/article/-

/view/type/HTML/id/2189281); MISO TOs Reply Br. (II), App. 2 McKenzie Reply Aff. 

(II) at 69 (citing same). 

409 MISO TOs Reply Br. (I), App. 2 McKenzie Reply Aff. (I) at 69-70 (citing S&P 

Global, Utilities: Key Credit Factors For The Regulated Utilities Industry, Criteria 

Corporates (Nov. 19, 2013); 

https://www.standardandpoors.com/en_US/web/guest/article/-

/view/type/HTML/id/2189281); MISO TOs Reply Br. (II), App. 2 McKenzie Reply Aff. 

(II) at 69-70 (citing same). 

410 MISO TOs Reply Br. (I), App. 2 McKenzie Reply Aff. (I) at 70; MISO TOs 

Reply Br. (II), App. 2 McKenzie Reply Aff. (II) at 70. 
Docket Nos. EL14-12-003 and EL15-45-000 - 100 - 

utilities and adjusted by Moody’s,’ are a key gauge of financial performance.”411 In 

addition, Mr. McKenzie cites a CFRA publication which he contends “highlighted the 

relevance of returns on book equity to investors.” He cites the following portion of the 

publication as supporting this contention 

If a utility’s ROE is too low, the analyst must determine if it 

was caused by mild weather or the absence of a needed rate 

hike – or if the utility is poorly operated. Conversely, an 

ROE that is too high could cause regulators to seek a rate cut. 

For firms in the S&P Composite 1500 electric utilities index, 

the average ROE generally ranges between 10% and 13%, 

although the average has trended lower in the past few 

years.412

As additional evidence that the Expected Earnings model has been recognized as a 

meaningful ROE methodology, Mr. McKenzie cites to a 1991 survey by the National 

Association of Regulatory Commissioners (NARUC) in which it reported that 19 

regulatory jurisdictions cited the comparable earnings approach as a primary method 

favored in determining the allowed ROE, while an additional 16 jurisdictions reported 

that this approach was considered along with the results of other methods.413 He also 

notes that the Virginia State Corporation Commission is required by statute to consider 

the earned returns on book value of electric utilities in its region, which establish lower 

and upper boundaries for the allowed ROE.414 In addition, Mr. McKenzie points to a 

textbook prepared by Mr. Parcell for the Society of Utility and Regulatory Financial 

 411 MISO TOs Reply Br. (I), App. 2 McKenzie Reply Aff. (I) at 70 (citing 

Moody’s Investors Service, Lower Authorized Equity Returns Will Not Hurt Near-Term 

Credit Profiles, Sector In-Depth, at 5 (Mar. 10, 2015)); MISO TOs Reply Br. (II), App. 2 

McKenzie Reply Aff. (II) at 70 (citing same). 

412 MISO TOs Reply Br. (I), App. 2 McKenzie Reply Aff. (I) at 70-71 (citing 

CFRA, Electric Utilities, Industry Surveys 50 (Aug. 2018)); MISO TOs Reply Br. (II), 

App. 2 McKenzie Reply Aff. (II) at 70-71 (citing same). 

413 MISO TOs Reply Br. (I), App. 2 McKenzie Reply Aff. (I) at 67-68 (citing Nat’l 

Ass’n of Regulatory Util. Comm’rs, Utility Regulatory Policy in the U.S. and Canada, 

1995-1996 (Dec. 1996)); MISO TOs Reply Br. (II), App. 2 McKenzie Reply Aff. (II) at 

67-68 (citing same).

414 MISO TOs Reply Br. (I), App. 2 McKenzie Reply Aff. (I) at 68 (citing Virginia 

Code § 56-585.1.A.2.a)); MISO TOs Reply Br. (II), App. 2 McKenzie Reply Aff. (II) at 

68 (citing same). 
Docket Nos. EL14-12-003 and EL15-45-000 - 101 - 

Analysts which Mr. McKenzie asserts “observes that the amount of subjective judgment 

required to implement this method is ‘minimal,’ particularly when compared to the DCF 

and CAPM methods.”415

MISO TOs also disagree with LPSC’s contention that Dr. Morin says that the 

Expected Earnings model requires a proxy group of non-regulated companies. MISO 

TOs assert that, to the contrary, Dr. Morin only observed that the backward-looking, 

comparable earnings model “usually” uses a sample of unregulated companies. MISO 

TOs argue that, because Dr. Morin did not even explicitly address the Expected Earnings 

model, the “usual” application of a different methodology does not indicate any error in 

the Commission’s proposal.416

MISO TOs further assert that LPSC’s claim that the Expected Earnings model 

reflects the results of inconsistent accounting does not establish that the Expected 

Earnings model is unreliable. MISO TOs claim that LPSC provides no evidence that any 

of the data relied upon in the Expected Earnings analyses in these proceedings is 

inaccurate or unreliable in any way.417 

MISO TOs also dispute that the Expected Earnings model is unreliable when 

utilities’ market-to-book ratios are greater than one. MISO TOs argue that, in Opinion 

No. 551, the Commission explained that investors rely upon the return on book equity to 

determine the opportunity cost of investing in a particular company, and investors rely 

upon Expected Earnings analysis for this purpose without attempting to convert that 

opportunity cost into the current market cost of equity.418 MISO TOs further assert that 

LSPC fails to mention that Dr. Morin rejects the notion that regulators’ ROE decisions 

should consider market-to-book ratios.419 MISO TOs’ witness Mr. McKenzie contends 

that market-to-book ratios of greater than one are not unusual and that if, as CAPs and 

 415 MISO TOs Reply Br. (I), App. 2 McKenzie Reply Aff. (I) at 68 (citing David 

C. Parcell, The Cost of Capital: A Practitioner’s Guide 115-16 (1997)); MISO TOs 

Reply Br. (II), App. 2 McKenzie Reply Aff. (II) at 68 (citing same). 

416 MISO TOs Reply Br. (I) at 44; MISO TOs Reply Br. (II) at 44. 

417 MISO TOs Reply Br. (I) at 45-47; MISO TOs Reply Br. (II) at 45-47. 

418 MISO TOs Reply Br. (I) at 47-48 (citing Opinion No. 551, 156 FERC ¶ 61,234 

at P 234); MISO TOs Reply Br. (II) at 47-48 (citing same). 

419 MISO TOs Reply Br. (I) at 48; MISO TOs Reply Br. (II) at 48. 
Docket Nos. EL14-12-003 and EL15-45-000 - 102 - 

LPSC assert, an appropriate market-to-book ratio for utilities is at or near 1.0, then this 

would imply that MISO TOs should incur significant capital losses.420

MISO TOs support the use of Value Line estimates in the Commission’s proposed 

Expected Earnings model. MISO TOs dispute CAPs’ argument that, because the 

Commission has declined to use Value Line’s estimates in the DCF model, the 

Commission should not rely upon Value Line’s five-year average earnings estimates in 

the Expected Earnings model. MISO TOs state that the Commission has declined to 

accept Value Line earnings growth rates in its DCF model on the ground that such 

estimates are created by a single analyst. MISO TOs note that CAPs point to the 

Commission’s observation that its decision to abandon exclusive reliance on the DCF 

model was based in part on evidence that a single analyst is the source of many IBES 

earnings estimates. MISO TOs argue that the proper response to this is not to ignore all 

single-analyst estimates, but to consider additional, multiple estimates, to minimize the 

risk that unreliable data may distort the results of a particular model. MISO TOs also 

disagree with CAPs’ alternative contention that the Commission should require the 

Expected Earnings model to average Value Line’s shorter-term earnings estimates with 

the five-year estimates. MISO TOs assert that the Commission rejected this suggestion in 

Opinion No. 551 and no party has offered any basis for the Commission to revisit that 

conclusion.421

In addition, MISO TOs argue that the Commission should reject CAP’s proposal 

to use actual realized returns for all available years to incorporate historical realism in the 

Expected Earnings model. MISO TOs contend that using estimates of future earnings 

and book equity, rather than historical data, is what distinguishes the Expected Earnings 

model from the comparable earnings method and thus historical data should not be 

used.422 

D. Commission Determination 

In the Briefing Order, the Commission proposed to use the Expected Earnings 

model because the record in these proceedings included the Expected Earnings model as 

one of the methods that “investors may use to estimate the expected return from an 

 420 MISO TOs Reply Br. (I), App. 2 McKenzie Reply Aff. (I) at 78-89; MISO TOs 

Reply Br. (II), App. 2 McKenzie Reply Aff. (II) at 78-89. 

421 MISO TOs Reply Br. (I) at 48-50; MISO TOs Reply Br. (II) at 48-50. 

422 MISO TOs Reply Br. (I) at 50-51; MISO TOs Reply Br. (II) at 50-51. 
Docket Nos. EL14-12-003 and EL15-45-000 - 103 - 

investment in a company.”423 In Opinion No. 551, the Commission found that the 

Expected Earnings model was useful in corroborating the results produced by the DCF 

model424 and, in the Initial Decision in the Second Complaint proceeding, the Presiding 

Judge similarly found that the Expected Earnings model was a “useful guide to placement 

of the Base ROE within the DCF-calculated zone of reasonableness to the extent it 

calculates the earnings on book value investors can expect to earn.”425 However, we now 

find that, in light of the record as supplemented after issuance of the Briefing Order, it is 

not appropriate to use the Expected Earnings model in our new base ROE methodology. 

In particular, we find that the record does not support departing from our 

traditional use of market-based approaches to determine base ROE.426 Under the marketbased approach, the Commission sets a utility’s ROE to equal the estimated return that 

investors would require in order to purchase stock in the utility at its current market price. 

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

commensurate with returns on investments in other enterprises having corresponding 

risks.”427 In order to determine this, we must analyze the returns that are earned on 

“investments in other enterprises having corresponding risks,” but investors cannot invest 

in an enterprise at book value and must instead pay the prevailing market price for an 

enterprise’s equity. As a result, the expected return on a utility’s book value does not 

reflect “returns on investments in other enterprises” because book value does not reflect 

the value of any investment that is available to an investor in the market, outside of the 

unlikely situation in which market value and book value are exactly equal. Accordingly, 

we find that relying on the Expected Earnings model would not satisfy the requirements 

of Hope. 

The return on book value is also not indicative of what return an investor requires 

to invest in the utility’s equity or what return an investor receives on the equity 

 423 Briefing Order, 165 FERC ¶ 61,118 at P 36. 

424 Opinion No. 551, 156 FERC ¶ 61,234 at P 230. 

425 Initial Decision (II), 155 FERC ¶ 63,030 at P 515. 

426 Generic Determination of Rate of Return on Common Equity for Public 

Utilities, Order No. 489, FERC Stats. & Regs. ¶ 30,795 at 30,993, reh’g denied, Order 

No. 489-A, 42 FERC ¶ 61,390 (1988) (“There is compelling economic justification for 

relying on the market cost of capital as the standard for rate of return decisions. 

Furthermore, a market cost of capital approach addresses both the comparable earnings 

and attraction of capital standards of the Hope decision.”).

427 Hope, 320 U.S. at 603. 
Docket Nos. EL14-12-003 and EL15-45-000 - 104 - 

investment, because those returns are determined with respect to the current market price 

that an investor must pay in order to invest in the equity. As CAPs similarly explain, 

“Because an investor cannot purchase a utility’s common stock at book value and must 

instead pay the prevailing market price for common equity, the utility’s expected earned 

return on book value is indicative of neither what an investor can expect to earn on an 

investment in the utility’s common stock nor what return an investor requires to invest in 

the utility’s common stock.”428 Accordingly, return on book value does not reflect “the 

return to the equity owner” that we must ensure is “commensurate with returns on 

investments in other enterprises”; therefore we find that this model is not useful in 

ensuring that the standards of Hope are satisfied. 

MISO TOs argue that the fact that the Expected Earnings model does not rely on 

market data is a sound reason for the Commission to include the model in its ROE 

determinations. MISO TOs assert that the Expected Earnings model avoids the 

complexities and opportunities for controversy that are implicated by the market-based 

models. MISO TOs contend that the Expected Earnings model relies on the straightforward concept that when evaluating two investments of comparable risk, investors will 

choose the alternative with the higher expected return.429 To make a similar point, MISO 

TOs’ witness Mr. McKenzie points to a textbook prepared by Mr. Parcell for the Society 

of Utility and Regulatory Financial Analysts which Mr. McKenzie asserts “observes that 

the amount of subjective judgment required to implement this method is ‘minimal,’ 

particularly when compared to the DCF and CAPM methods.”430 

While it may be true that the Expected Earnings model does not involve the same 

complexities as the market-based approaches, we find that this is because it does not 

reflect a utility’s cost of equity. It is simpler because it does not consider the market 

price that an investor must pay to make its investment and other factors such as projected 

growth rates for the subject utility. Factors such as these—in particular the market price 

that an investor must pay for an investment, which is the basis for determining the return 

on that investment—are critical to determining a utility’s cost of equity. While it may be 

simpler to use a model that does not consider such factors, doing so renders that model 

unable to effectively estimate the rate of return that investors require to invest in the 

market-priced common equity capital of a utility, which is the utility's cost of equity 

 428 CAPs Initial Br. (I) at 41; CAPs Initial Br. (II) at 41. 

429 MISO TOs Reply Br. (I) at 39 and App. 2, McKenzie Reply Aff. (I) at 65; 

MISO TOs Reply Br. (II) at 39 and App. 2, McKenzie Reply Aff. (II) at 65. 

430 MISO TOs Reply Br. (I) App. 2, McKenzie Reply Aff. (I) at 68 (citing David 

C. Parcell, The Cost of Capital: A Practitioner’s Guide 115-16 (1997)); MISO TOs 

Reply Br. (II) App. 2, McKenzie Reply Aff. (II) at 68 (citing same). 
Docket Nos. EL14-12-003 and EL15-45-000 - 105 - 

capital. We find that it is not appropriate to use a model that does not accurately measure 

the “return to the equity owner” as required by Hope merely because it may be simpler to 

administer. We are cognizant of the administrative burden that is placed on parties to 

evaluate models that are used in analyzing ROEs, but the mere simplicity of one model as 

compared to others does not justify using that model if it does not assist us in ensuring 

that returns to equity owners are just and reasonable. 

Moreover, we find that the record demonstrates that the Expected Earnings model 

does not identify investments of comparable risk and which alternatives will have a 

higher expected return as MISO TOs’ witness Mr. McKenzie indicates.431 In particular, 

because the Expected Earnings model measures returns on book value, without 

consideration of what market price an investor would have to pay to invest in the relevant 

company, it does not accurately measure the investor’s expected returns on its 

investment. In order to assess what return investors will receive, they must know the 

market price of the equity that they are purchasing. For example, if two companies each 

have book value of $100 and expected returns on that book value of 10 percent, or $10, 

over the next year, then they would appear to be equally attractive investments to an 

investor based on the Expected Earnings model. However, if the market price to 

purchase the first company’s stock is $20 and the market price to purchase the second 

company’s stock is $40, then the first company would obviously be a more attractive 

investment. Thus, contrary to Mr. McKenzie’s characterization, investors in such a 

situation would not be able to determine what “the alternative with the higher expected 

return” is with the Expected Earnings model. 

MISO TOs also argue that the fact that the majority of stocks, including utility 

stocks, sell substantially above the company’s book value supports the use of the 

Expected Earnings Model.432 MISO TOs’ witness, Mr. McKenzie, points out that Value 

Line reports that approximately 1500 of the roughly 1700 stocks it follows have marketto-book ratios above one, and he cited evidence that utility stocks have an average 

market-to-book ratio of 2.1.433 Mr. McKenzie asserts that, in these circumstances, an 

ROE equal to the current market cost of equity as determined under the DCF model will 

not produce sufficient earnings to support the utility’s current stock price. Mr. McKenzie 

points out that the Commission calculates the dollar return included in a utility’s rate base 

by multiplying the book value of the rate base by the percentage ROE determined by the 

 431 MISO TOs Reply Br. (I) at 39 and App. 2, McKenzie Reply Aff. (I) at 65; 

MISO TOs Reply Br. (II) at 39 and App. 2, McKenzie Reply Aff. (II) at 65. 

432 MISO TOs Reply Br. (I) at 47-48; MISO TOs Reply Br. (I) at 47-48. 

433 MISO TOs Reply Br. (I) App. 2, McKenzie Reply Aff. (I) at 81-82; MISO TOs 

Reply Br. (II) App. 2, McKenzie Reply Aff. (II) at 81-82. 
Docket Nos. EL14-12-003 and EL15-45-000 - 106 - 

Commission. He then provides a numerical example that purports to show that, when a 

utility’s market-to-book ratio is above one, this calculation will not produce a sufficient 

dollar return to allow the utility to continue to pay the same level of dividends and retain 

the same level of earnings to fund growth as the investor assumed in performing its DCF 

analysis and evaluating whether to purchase the stock.434 As a result, according to 

Mr. McKenzie, the DCF model will not provide a return sufficient to support the utility’s 

current stock price.435 Mr. McKenzie asserts that, by contrast, the Expected Earnings 

model calculates the projected returns on the utility’s book equity that support the 

investors’ expectations underlying the current market price of the stock. As a result, 

Mr. McKenzie contends the Expected Earnings model provides a direct guide to ensure 

that the ROE allowed by the Commission is similar to the returns that investors expect 

other utilities of comparable risk will earn on the book value of their invested capital.436

The MISO TOs’ concerns about market-to-book ratios in excess of one and 

maintaining the current stock values of public utilities do not justify use of the Expected 

Earnings model. The Commission is not obligated to set ROEs so as to maintain current 

stock values.437 As the Supreme Court held in Hope, the “fair value” of a regulated 

enterprise “is the end product of the process of ratemaking, not the starting point . . . The 

heart of the matter is that rates cannot be made to depend on ‘fair value’ when the value 

of the going enterprise depends upon earnings under whatever rates are anticipated.”438 

Consistent with this holding in Hope, the Commission has stated, “The market value of 

an enterprise or its common stock depends upon its earnings or anticipated earnings, 

 434 MISO TOs Reply Br. (I) App. 2, McKenzie Reply Aff. (I) at 83; MISO TOs 

Reply Br. (II) App. 2, McKenzie Reply Aff. (II) at 83. 

435 Mr. McKenzie also cites a 1970 scholarly article raising similar concerns about 

the DCF model “in the early days before the DCF became a regulatory mainstay.” MISO 

TOs Reply Br. (I) App. 2, McKenzie Reply Aff. (I) at 84 (citing Walter A. Morton, The 

Investor Capitalization Theory of the Cost of Equity Capital, Land Econ. 248-63 (Aug. 

1970)); MISO TOs Reply Br. (II) App. 2, McKenzie Reply Aff. (II) at 84 (citing same). 

436 Id. at 83-84. 

437 Illinois Bell Telephone Co. v. FCC, 988 F.2d 1254 (D.C. Cir. 1993) (Illinois 

Bell) (affirming the FCC’s rejection of the same contention concerning use of the DCF 

model when market-to-book ratios are above one as the MISO TOs make here, and 

stating that the FCC “has no obligation to maintain the current market value on investors’ 

property.”). 

438 Hope, 320 U.S. at 601. 
Docket Nos. EL14-12-003 and EL15-45-000 - 107 - 

which in turn depend upon the rates allowed. Thus, market value is the result of the 

ratemaking process and may not properly be the beginning of that process as well.”439

In any event, there is no evidence that the Commission’s use of the DCF model to 

determine ROEs based on the current market cost of capital has provided insufficient 

returns to support proxy company stock values or had a tendency to drive market-to-book 

ratios down to one. In fact, market-to-book ratios of the proxy companies have been 

consistently above one since the 1980s, a period during which the Commission solely 

used the DCF model to determine ROEs.440 Moreover, the public utility companies for 

which the Commission sets rates are not publicly traded and thus do not have any marketdetermined stock values. Hence, there is no observable market-to-book ratio specifically 

applicable to the electric transmission business for which we are establishing an ROE. 

The publicly-traded companies in the proxy group are generally holding companies, 

which not only have regulated electric transmission business but also other businesses 

that are not subject to cost-based regulation.441 Therefore, the proxy company market-tobook ratios may exceed one primarily because of the value investors see in their nonelectric transmission businesses.442 We recognize that, in an environment where the 

market-to-book ratios of publicly-traded companies are generally above one, it would be 

unreasonable to adopt an ROE policy that resulted in capital losses for investors in order 

to drive market-to-book ratios that are currently above one down to one.443 However, the 

record before us does not contain evidence that our longstanding policy of determining 

ROE based on the current market cost of equity is having this effect. In these 

circumstances, we see no basis to change that policy in order to use the Expected 

Earnings model. 

 439 Order No. 489, FERC Stats. & Regs. ¶ 30,795 at 30,994; see also Orange and 

Rockland Utilities, Inc., Opinion No. 314, 44 FERC ¶ 61,253 at 61,952, reh’g, Opinion 

No. 314-A, 45 FERC ¶ 61,252 (1988). 

440 Morin at 377. The market-to-book ratios of the proxy group companies in the 

First Complaint proceeding range from 1.17 to 2.55. Ex. JCI-100 at 35. The market-tobook ratios of the proxy group companies in the Second Complaint proceeding range 

from 1.15 to 3.38. Ex. JCI-200 at 33 n. 47. 

441 CAPs Initial Br. (I), Ex. JCI-100 at 36; CAPs Initial Br. (II), Ex. JCI-200 at 35. 

442 See Illinois Bell, 988 F.2d at 1261 (stating that the telephone companies there at 

issue also had unregulated assets, and appreciations in the value of the unregulated assets 

could account for the market-to-book ratios above one). 

443 See Morin at 376-378. 
Docket Nos. EL14-12-003 and EL15-45-000 - 108 - 

We agree with MISO TOs that the Commission is not necessarily required to rely 

on only market-based methods to determine ROEs merely because it previously found 

that such an approach was appropriate. If, for example, facts and circumstances before 

the Commission change in a manner that would allow the Commission to provide a 

reasoned explanation for departing from this precedent, then the Commission could 

depart from this precedent. However, the mere fact that the Commission can depart from 

precedent such as Order No. 461 and Opinion No. 429 does not necessarily mean that it 

should. Here, we find that the record does not demonstrate that it is appropriate to rely 

on the Expected Earnings model in our ROE analysis and we find, consistent with our 

existing precedent, that it is appropriate to rely on market-based methods in our ROE 

determinations. Similarly, we agree with MISO TOs that the fact that the Federal 

Maritime Commission criticized using an accounting-based rate of return method does 

not preclude this Commission from using such a method. However, the fact that we are 

not precluded from using an accounting-based method does not mean that we must use 

such a method. As discussed herein, we find that, on balance, this evidence and the other 

record evidence in these proceedings demonstrates that the Expected Earnings approach 

is not appropriate for us to use in our ROE analysis. 

In the Briefing Order, the Commission noted that the returns on book equity that 

investors expect to receive “are relevant to determining that utility’s cost of equity, 

because those returns on book equity help investors determine the opportunity cost of 

investing in that particular utility instead of other companies of comparable risk.”444 The 

Commission further stated that “Because investors rely on Expected Earnings analyses to 

help estimate the opportunity cost of investing in a particular utility, we find this type of 

analysis useful in determining a utility’s ROE.”445 In light of the record in these 

proceedings as supplemented after issuance of the Briefing Order, we find that there is 

not sufficient record evidence to conclude that investors rely on the Expected Earnings 

analysis to estimate the opportunity cost of investing in a particular utility as compared to 

other companies. As parties have noted, investors cannot purchase equity at book 

value;446 therefore, although book value and returns on book equity may be useful 

data points for investors, they do not reflect an opportunity for investment that can be 

characterized as an opportunity cost. In addressing this point, CAPs’ witness 

Mr. Solomon cites to a similar explanation of the point made by Dr. Morin that 

“Accounting rates of return are not opportunity costs in the economic sense, but reflect 

 444 Briefing Order, 165 FERC ¶ 61,118 at App. 

445 Id. 

446 See, e.g., CAPs Initial Br. (I) at 41, Ex. JCI-100 at 30; CAPs Initial Br. (II) 

at 41, Ex. JCI-200 at 29. 
Docket Nos. EL14-12-003 and EL15-45-000 - 109 - 

the average returns earned on past investments and hence reflect past regulatory actions . 

. . Investors can only purchase new shares of common stock at current market prices and 

not at book value.”447 Moreover, as we discuss further below, there is insufficient record 

evidence to demonstrate that investors rely on the Expected Earnings model. 

Record evidence also provides an example of how returns on book equity fail to 

reflect the returns that investors require to invest in a given company and thus, fail to 

reflect the opportunity costs of investing in one company as opposed to others. As CAPs 

explain, when the market value of a company’s equity exceeds its book value—i.e., when 

its market-to-book ratio exceeds 1.0—this means that investors’ required rate of return 

for investing in the equity is less than the expected earnings on book value for that 

company.448 CAPs’ witness Mr. Solomon then details the market-to-book ratios for the 

proxy groups used by Dr. Avera in the First Complaint and Second Complaint 

proceedings, finding that the ratios ranged from 1.17 to 2.55 for the proxy groups in both 

proceedings, with 30 of the 39 companies in the First Complaint proxy group having 

ratios at or above 1.50 (with an average of 1.80) and 23 of the 32 companies in the 

Second Complaint proxy group having ratios at or above 1.50 (with an average of 

1.70).449 Accordingly, the record demonstrates that investors’ required rate of return for 

investing in the equity of all of the proxy group companies in both of these proceedings is 

less than the return on the book value of the equity of those companies. Therefore, the 

return on the book value measured by the Expected Earnings model overstates the 

investors’ required rate of return for investing in the proxy group companies and as a 

result it does not reflect investors’ opportunity cost of investing in one proxy group 

company as opposed to another. 

In the Briefing Order, the Commission stated that a primary reason for proposing 

to average the results of the DCF analysis with the results of the CAPM, Expected 

Earnings, and Risk Premium analyses is that investors use those models, in addition to 

 447 CAPs Initial Br. (I), Ex. JCI-100 at 31 (citing Morin at 393); CAPs Initial Br. 

(II), Ex. JCI-200 at 30. 

448 See CAPs Initial Br. (I) at 42-43, Ex. JCI-100 at 30-31; CAPs Initial Br. (II) 

at 42, Ex. JCI-200 at 29-30; Opinion No. 314, 44 FERC at 61,952 (“[W]hen the price-tobook ratio is greater than one, the rate of return investors expect O&R to earn on 

common equity is greater than the rate of return investors require from their investment in 

O&R’s common stock.”). 

449 CAPs Initial Br. (I) at 42-43, Ex. JCI-100 at 35; CAPs Initial Br. (II) at 42-43, 

Ex. JCI-200 at 34. 
Docket Nos. EL14-12-003 and EL15-45-000 - 110 - 

the DCF methodology, to inform their investment decisions.450 Upon review of the 

record, as supplemented after issuance of the Briefing Order, we find that this statement 

may not be true with respect to the Expected Earnings model. MISO TOs cite numerous 

pieces of evidence of “investment advisories and other publications that provide 

estimates of utilities’ returns on equity, including returns on book value of utilities’ 

assets.”451 This evidence cited by the MISO TOs shows that investors examine expected 

earnings (future profits). However, looking at the future earnings of a company is not the 

same as determining a company’s cost of capital or making investment decisions based 

on the earnings per book value calculations in the Expected Earnings model. 

Additionally, there is no evidence that such information is useful to investors in 

determining their required return from an investment in a particular company 

independent of the stock price, which the Expected Earnings model ignores. Below we 

examine the specific evidence that MISO TOs’ claim demonstrates that investors use the 

Expected Earnings model. 

Exhibit No. MTO-43 in the First Complaint proceeding, a Wolf Research report, 

discusses Commission and state regulated ROE determinations. Exhibit No. MTO-44 in 

the First Complaint proceeding, a UBS Global Research brief, also discusses 

Commission ROE policy without mentioning non-DCF approaches or book value. 

Exhibit No. MTO-45 in the First Complaint proceeding, another UBS Global Research 

brief, similarly merely discusses potential changes to the Commission’s ROE policy with 

no mention of use of earnings per book value or other approaches. Although investors 

are obviously interested in what ROE the Commission may approve in pending rate 

proceedings, that fact does not support a finding that investors use the Expected Earnings 

model to determine their required returns on investments in public utilities. 

Exhibit No. MTO-54 in the First Complaint proceeding, the Value Line portion of 

Exhibit No. S-3 cited by MISO TOs, and pages 41-85 of Exhibit No. JCI-3 in the Second 

Complaint proceeding—all Value Line summary PDFs for proxy group companies—

include dozens of financial metrics and brief discussions of major issues surrounding 

companies. Book value and book value per share are among the information provided, as 

well as return on total capital. However, total capital in this instance differs from net 

plant, which is listed separately and is more analogous to book value. In any event, the 

listing of a relevant metric among dozens does not indicate that investors use it 

independently to determine their required return on their investments in particular 

companies. The Barron’s report in Exhibit No. S-3 discusses key financial metrics 

including earnings per share and dividend yield, and explicitly discusses these metrics 

 450 Briefing Order, 165 FERC ¶ 61,118 at P 46. 

451 MISO TOs Reply Br. (I) at 43-44; MISO TOs Reply Br. (II) at 43-44. 
Docket Nos. EL14-12-003 and EL15-45-000 - 111 - 

with respect to the share price that investors see.452 It does not discuss book value or 

illustrate that investors determine the cost of equity or make purchase decisions using the 

Expected Earnings model. Pages 3-4 of Exhibit No. JCI-12 in the Second Complaint 

proceeding, a Moody’s report, examines the impact of Commission proceedings on 

American Transmission Company. It makes no mention of book value and merely opines 

on how changes in authorized ROEs could affect future earnings. The information in 

Exhibit No. JCI-13 in the Second Complaint provides a similar analysis for Ameren 

Illinois. 

MISO TOs’ witness Mr. McKenzie asserts that an S&P Global report in Exhibit 

No. MTO-74 in the Second Complaint proceeding indicates that the earned return on 

book value may provide better insight into the financial health of the utility because it 

reflects the end-result of regulation, not the theoretical outcome implied by an authorized 

ROE. He also maintains that Moody’s recognizes the relevance of returns on book value 

when it explains that earned ROEs, rather than authorized ROEs, are a “key gauge of 

financial performance.”453 However, we agree with Trial Staff that the record lacks 

evidence that S&P and Moody’s use this information to estimate the cost of equity.454 

First, we disagree with MISO TOs that S&P’s statement that “different factors [other than 

ROEs] such as variances in costs and usage may influence the return a utility is actually 

able to earn, and consequently our analysis of profitability for cost-of-service –based 

utilities centers on the utility’s ability to consistently earn the authorized ROE”455

indicates that S&P examines earnings per book value. Whether a utility actually earns 

the authorized ROE can be determined by comparing actual earnings with the earnings 

implied by the authorized ROE, which is independent of book value. In fact, the only 

mention of book value in the S&P article is, when explaining the usefulness of earnings 

before interest, tax, depreciation and amortization, the statement that “the book value of 

capital does not always reflect true earning potential.” Similarly, the Moody’s reference 

 452 Ex. S-3 at 1-3. 

453 MISO TOs Reply Br. (I), App. 2, McKenzie Reply Aff. (I) at 70; MISO TOs 

Reply Br. (II), App. 2, McKenzie Reply Aff. (II) at 70. 

454 See Trial Staff Reply Br. (I), Keyton Reply Aff. (I) at 5; Trial Staff Reply Br. 

(II), Keyton Reply Aff. (II) at 5. 

455 MISO TOs Reply Br. (I), App. 2, McKenzie Reply Aff. (I) at 69-70 (citing 

S&P Global, Utilities: Key Credit Factors For The Regulated Utilities Industry, Criteria 

Corporates (Nov. 19, 2013), 

https://www.standardandpoors.com/en_US/web/guest/article/-

/view/type/HTML/id/2189281)); MISO TOs Reply Br. (II), App. 2, McKenzie Reply Aff. 

(II) at 69-70 (citing same). 
Docket Nos. EL14-12-003 and EL15-45-000 - 112 - 

to the stability of “earned ROEs” as reported by utilities does not clearly indicate that it is 

earned returns on book value. 

Even if Mr. McKenzie’s inferences regarding the usefulness of earnings as related 

to book value to assess the financial health of a utility are correct, that fact is not 

indicative that such information is used by investors independently of price to determine 

their required returns. As discussed above, the Commission relies on the market cost of 

capital as the standard for its rate of return decisions. This approach requires us to 

estimate the return that investors would require in order to purchase stock in the utility at 

its current market price. We have determined that, for this purpose, we should look to the 

methods that investors use to determine their required return on an investment in public 

utilities, including the DCF and CAPM models. However, there is nothing in the S&P 

and Moody’s articles cited by Mr. McKenzie to indicate that investors look to earnings 

on book value to determine their required return on an investment. Credit rating 

agencies, who are not investors, may use such information to inform their assessment of 

utilities’ risk or financial strength. As Mr. McKenzie states, S&P uses this metric to 

assess utilities’ “financial health.”456 However, there is no evidence that they use such 

metrics to determine the cost of capital of utilities or to calculate return on an investment. 

Looking at earned return on book value is not the same as conducting an Expected 

Earnings analysis to determine the applicable cost of capital. Investors observe many 

financial metrics, including metrics such as price to earnings ratios and free cash flow, 

which are not independently bases for determining an entity’s cost of equity or 

investment decisions. When an investor makes an investment decision, a fundamental 

consideration is the cost to the investor to make the investment—i.e., the market price 

that the investor must pay for the investment. The Expected Earnings analysis does not 

take this fundamental consideration into account and thus it does not reflect how an 

investor would make an investment decision. MISO TOs’ citations to evidence that 

merely references book value or earnings on book value among various other financial 

metrics or in the context of credit rating analyses does not demonstrate that investors 

would use the earnings on book value results of an Expected Earnings analysis to make 

investment decisions without considering the market price of the investment. 

The academic literature and testimony by academics cited in the record also 

indicates that investors do not commonly use the Expected Earnings model to estimate 

utilities’ cost of equity. Trial Staff states that the Briefing Order cites Exhibit 

No. MTO-1 in the First Complaint proceeding as support for the proposition that 

investors base their decisions on models that include the Expected Earnings model. Trial 

Staff argues that, however, that exhibit, which in turn cites Dr. Morin’s New Regulatory 

 456 MISO TOs Reply Br. (I), App. 2, McKenzie Reply Aff. (I) at 70; MISO TOs 

Reply Br. (II), App. 2, McKenzie Reply Aff. (II) at 70. 
Docket Nos. EL14-12-003 and EL15-45-000 - 113 - 

Finance, does not support this proposition. Trial Staff asserts that Dr. Morin does not 

mention the Expected Earnings model used by MISO TOs in this proceeding. Trial Staff 

contends that, in fact, as support for his contention that financial literature supports the 

use of multiple methods to estimate the cost of equity, Dr. Morin cites Professor Eugene 

Brigham who identifies the DCF, CAPM, and Risk Premium models as the “[t]hree 

methods [that] typically are used . . . when . . . estimating a company’s cost of equity”457

and does not identify the Expected Earnings model. Trial Staff argues that, therefore, 

Dr. Morin’s own source of information on the use of multiple ROE methodologies 

excludes the Expected Earnings approach as one of the methods typically used. LPSC 

and CAPs’ expert Mr. Solomon also point to Dr. Morin’s discussion of the comparable 

earnings approach which states, among other things, that “Accounting rates of return are 

not opportunity costs in the economic sense . . . More simply, the Comparable Earnings 

standard ignores capital markets.”458 MISO TOs counter that these parties “cherry-pick” 

Dr. Morin’s treatise. MISO TOs assert that they disregard Dr. Morin’s explanation of the 

benefits of the approach, which states that “because the investment base for ratemaking 

purposes is expressed in book value terms, a rate of return on book value . . . is highly 

meaningful.”459 Trial Staff and LPSC also cite to recent testimony by Dr. Morin in other 

proceedings that they allege supports excluding the Expected Earnings model. In 

particular, LPSC cites the following testimony of Dr. Morin in an Oklahoma Corporation 

Commission proceeding:460 

Q. Do you agree with Mr. Parcell’s Comparable Earnings 

Analysis? 

A. Although I myself do not rely on this accounting-based 

method, I agree with Mr. Parcell’s Comparable 

Earnings results.461

 457 Trial Staff Initial Br. (I), Keyton Aff. (I) at 12-13 (citing Morin at 430); Trial 

Staff Initial Br. (II), Keyton Aff. (II) at 11 (citing same). 

458 LPSC Initial Br. at 17 (citing Morin at 393); CAPs Initial Br. (I), Ex. JCI-100 

at 31 (citing same); CAPs Initial Br. (II), Ex. JCI-200 at 30 (citing same). 

459 MISO TOs Reply Br. (I) at 42-43 and App. 2, McKenzie Reply Aff. (I) at 69; 

MISO TOs Reply Br. (II) at 42-43 and App. 2, McKenzie Reply Aff. (II) at 69. 

460 Okla. Gas and Elec. Co., Cause No. PUD201700496 (Okla. Corp. Comm’n). 

461 Okla. Gas and Elec. Co., Cause No. PUD201700496 (Okla. Corp. Comm’n), 

Reb. Test. of Roger A. Morin at 33 (May 29, 2018). 
Docket Nos. EL14-12-003 and EL15-45-000 - 114 - 

Trial Staff cites testimony by Dr. Morin in a Commission proceeding in which he 

identified the methods available to determine cost of equity and did not include the 

Expected Earnings model.462 

The evidence in the record regarding Dr. Morin’s views on the Expected Earnings 

model, if anything, indicates that the Expected Earnings model is inappropriate in this 

context. As LPSC and CAPs note, Dr. Morin’s New Regulatory Finance states that 

“[a]ccounting rates of return are not opportunity costs in the economic sense” and that the 

Expected Earnings model’s historical-looking analog, the comparable earnings standard, 

“ignores capital markets.” The fact that the accounting-based Expected Earnings 

approach does not represent opportunity costs and ignores capital markets undermines its 

ability to estimate “the return to the equity owner [that is] commensurate with returns on 

investments in other enterprises” because returns on investments depend on what price an 

investor must pay for the investment in the capital markets. In addition, the fact that 

Dr. Morin has testified that he does not use the accounting-based comparable earnings 

method and that the Expected Earnings model is not one of the “methods available to 

measure the cost of equity” further indicates that the Expected Earnings model is not 

appropriate to use to estimate cost of equity. MISO TOs’ citation to Dr. Morin’s 

statement that “rate of return on book value . . . is highly meaningful” is not sufficient to 

convince us that the Expected Earnings model is appropriate. The quoted language does 

not indicate that Dr. Morin believes that rate of return on book value “is highly 

meaningful” for purposes of determining cost of equity. Rate of return on book value 

could be highly meaningful for other purposes—e.g., for determining revenues because 

rate of return is applied to the book value of a utility’s rate base—but this does not mean 

that it is necessarily highly meaningful for determining cost of equity. In light of the 

other academic literature and testimony evidence in the record, we find that this evidence 

does not justify using the Expected Earnings model in our ROE analysis. 

Trial Staff also notes that Professor Brigham has stated that the Expected Earnings 

model’s historical-looking analog, the comparable earnings approach, “has now been 

thoroughly discredited . . . and it has been replaced by three market-oriented (as opposed 

to accounting-oriented) approaches: (i) the DCF method, (ii) the bond-yield-plus-risk-

 462 San Diego Gas & Electric Company, Prepared Direct Testimony of Dr. Roger 

A. Morin on behalf of San Diego Gas & Electric Company, Docket No. ER19-221-000, 

at 16-17 (filed Oct. 30, 2018) (“There are three broad generic methods available to 

measure the cost of equity: DCF, Risk Premium, and CAPM. All three of these methods 

are accepted and used by the financial community and firmly supported in financial 

literature.”). 
Docket Nos. EL14-12-003 and EL15-45-000 - 115 - 

premium method, and (iii) the CAPM.”463 LPSC cites another article that states that 

Investments in equity shares are made by the purchase of 

shares at market prices. Therefore, the fairness of the rate of 

return to the investor must be judged from the investor’s point 

of view in the market place and not on the basis of book 

value.464

LPSC also cites to studies that it claims demonstrate that accounting rates of return like 

those produced by the Expected Earnings model are unreliable as a measure of economic 

returns. In particular, LPSC cites a paper that concludes that “the accounting rate of 

return—after tax as well as before tax—is a misleading measure of the economic rate of 

return.”465 LPSC further cites an article which observed that, over a 15-year period “We 

see that the annual rates of return based on book value have fluctuated very little, while 

the annual rates of return to the investor in the market have fluctuated quite wildly.”466

We find that this evidence does not support using the Expected Earnings model in 

our ROE analysis. Trial Staff’s cited evidence indicates that the similar accounting-based 

comparable earnings approach has been “thoroughly discredited” and replaced by 

market-oriented rather than accounting-oriented approaches. As discussed above, this is 

logical given that the return an investor requires and the return an investor receives are 

dependent on the market price that investor must pay for the investment, not the 

accounting book value of the investment. Similarly, the evidence cited by the LPSC 

demonstrates that accounting rates of return do not reflect the economic rate of return 

actually received by an investor. Hope requires us to ensure that the return to a utility’s 

 463 Trial Staff Initial Br. (I) at 7 and Keyton Aff. (I) at 13-14 (citing Eugene F. 

Brigham, Dilip K. Shome & Steve R. Vinson, Cost of Capital Estimation, The Risk 

Premium Approach to Measuring a Utility’s Cost of Equity, Financial Management 

Spring 1985, at 33); Trial Staff Initial Br. (II) at 7 and Keyton Aff. (II) at 12 (citing 

same).

464 LPSC Initial Br. at 18 (citing Alexander A. Robichek, Regulation and Modern 

Finance Theory, 33 Journal of Finance 693, 701 (1978)). 

465 LPSC Initial Br. at 22 (citing Franklin M. Fisher & John J. McGowan, On the 

Misuse of Accounting Rates of Return to Infer Monopoly Profits, 73 American Economic 

Review 82, 89 (1983)). 

466 Id. at 23 (citing Alexander A. Robichek, Regulation and Modern Finance 

Theory, 33 Journal of Finance 693, 701-702 (1978)). 
Docket Nos. EL14-12-003 and EL15-45-000 - 116 - 

equity owner is “commensurate with returns on investments in other enterprises having 

corresponding risks” but if an accounting-based model like the Expected Earnings model 

does not take into account the market price of investments in other enterprises and thus 

the economic return rate of return on those investments, then it cannot accurately estimate 

the “returns on investments in other enterprises” that we must analyze in order to assess a 

utility’s ROE. Accordingly, we find that this evidence does not support using the 

Expected Earnings model in our ROE analysis. 

 

As support for using the Expected Earnings model, MISO TOs’ witness, 

Mr. McKenzie, cites to a 1991 NARUC survey in which it reported that 19 regulatory 

jurisdictions cited the comparable earnings approach as a primary method favored in 

determining the allowed ROE.467 He also notes that the Virginia State Corporation 

Commission is required by statute to consider the earned returns on book value of electric 

utilities in its region when making ROE determinations.468 This evidence is insufficient 

to persuade us that using the Expected Earnings model is appropriate. As an initial 

matter, the over 30-year old survey that MISO TOs cite addresses the use of the 

comparable earnings method, which is based on historical book returns and is not the 

Expected Earnings model that is at issue here.469 Similarly, the cited Virginia statute 

relates to past returns on book value, not expected returns like those considered in the 

Expected Earnings model. Moreover, this is evidence of what regulators consider in 

making ROE determinations, not necessarily what investors consider in making 

investment decisions and determining what return they will receive on their investment, 

which necessarily involves a consideration of the market price that must be paid to make 

the investment. Accordingly, this evidence does not persuade us that return on book 

value can be used to estimate the “return to the equity owner” that we must ensure is 

“commensurate with returns on investments in other enterprises having corresponding 

risks” under Hope. 

 

In addition, the application of the Expected Earnings model in the electric utility 

cost-of-service context could produce illogical results that render use of the model suboptimal. The simple math of the equation is that the higher the ratio of earnings to book 

value a given company features, the higher the resulting return from the model. Much of 

 467 MISO TOs Reply Br. (I) App. 2, McKenzie Reply Aff. (I) at 67-68 (citing Nat’l 

Ass’n of Regulatory Util. Comm’rs, Utility Regulatory Policy in the U.S. and Canada, 

1995-1996 (Dec. 1996)); MISO TOs Reply Br. (II) App. 2, McKenzie Reply Aff. (II) 

at 67-68 (citing same).

468 See Va. Code Ann. § 56-585.1.A.2.a (2019). 

469 See Trial Staff Reply Br. (I), Keyton Reply Aff. (I) at 4-5; Trial Staff Reply Br. 

(II), Keyton Reply Aff. (II) at 4-5. 
Docket Nos. EL14-12-003 and EL15-45-000 - 117 - 

the earnings from regulated utilities comes from the return earned in their cost-of-service 

rates. In such rates, the higher the percentage of equity in the capital structure, the higher 

the overall return, and thus earnings, would be, because the cost of equity is higher than 

the cost of debt. Consequently, holding all else equal, if a utility features an equity-rich 

capital structure, the Expected Earnings model would produce a higher return than if it 

featured a less equity-rich capital structure. This is illogical because the latter utility 

would be riskier than the former given its higher amount of leverage. Thus, the model 

would imply that less risky companies merit higher returns, when investors would require 

a lower return from those companies. 

In addition, book value in the expected earnings calculation, if it follows general 

accounting conventions, would take the initial value of assets and subtract depreciation 

(and include any subsequent adjustments like write-downs). This leads to higher returns 

from the model for utilities that feature older, more-depreciated, assets than newer ones. 

Again, all else being equal, utilities with more depreciated assets are generally of lower 

risk, because they have recovered more of their invested capital, and thus they would 

generally merit a lower return, than utilities with newer assets. 

Finally, we note that the MISO TOs’ Expected Earnings model, unlike the other 

market-based models, is based solely on projections and features data from a single Value 

Line analyst. Thus the data, even if reviewed by others at Value Line, is much less robust 

and more subject to error than the data underlying the CAPM and DCF models, most of 

which is historic, easily verifiable, and comes from more than the projections of a single 

analyst. 

We recognize that, in Opinion No. 551, the Commission reversed the Presiding 

Judge’s rejection of MISO TOs’ Expected Earnings analysis. However, in Opinion 

No. 551, the Commission only found that “MISO TOs’ expected earnings analysis is 

sufficiently reliable to be used as corroborative evidence that the midpoint of the zone of 

reasonableness produced by the mechanical application of the DCF methodology does 

not result in a return that satisfies the requirements of Hope and Bluefield.”470 The 

Commission stated that “The expected earnings analysis, like the other alternative 

methodologies accepted herein, is merely used as corroborative evidence . . . which at 

most can corroborate the Commission’s decision to place an ROE above the midpoint of 

the zone of reasonableness.”471 Here, the question before the Commission is whether to 

adopt the proposal in the Briefing Order to directly use the results of the Expected 

Earnings model in the ROE estimate calculations that are the foundation of our ROE 

analysis. We find that stronger evidence is required to support a decision to include the 

Expected Earnings model as a direct input in our ROE methodology than is required to 

 470 Opinion No. 551, 156 FERC ¶ 61,234 at P 239. 

471 Id. P 233. 
Docket Nos. EL14-12-003 and EL15-45-000 - 118 - 

merely use it as corroborative evidence for placing an ROE within the zone of 

reasonableness. We have directed the parties in these proceedings to address the Briefing 

Order’s proposal to use the Expected Earnings model as a direct input in our ROE 

methodology and, in light of the evidence that they have provided, we find that there is 

not sufficient support to use the Expected Earnings model as a direct input in our ROE 

methodology. The question in this proceeding regarding the Expected Earnings model 

differs from the question that was considered in Opinion No. 551. Accordingly, our 

decision to exclude the Expected Earnings model from our ROE methodology here is not 

inconsistent with our determination in Opinion No. 551. 

Some parties argue that, if the Expected Earnings model is used, the Commission 

should implement certain modifications to the model.472 MISO TOs argue against 

implementing these modifications.473 We find that these arguments are moot and that it is 

unnecessary to address them because we will not use the Expected Earnings model as 

part of our ROE methodology. For the same reason, we find it unnecessary to address the 

arguments that oppose using the Expected Earnings model on other grounds, such as the 

LPSC’s Daubert arguments,474 and the applicable counterarguments. 

Because we find that it is not appropriate to use the Expected Earnings model in 

our ROE methodology, we grant the requests for the rehearing of Opinion No. 551 in the 

First Complaint proceeding and the exceptions to the Initial Decision in the Second 

Complaint proceeding that ask the Commission to exclude the Expected Earnings model 

from its ROE determinations, to the extent those requests for rehearing and exceptions 

are based on our reasoning discussed above for excluding the Expected Earnings model. 

VII. CAPM 

A. Background 

Investors use CAPM analysis as a measure of the cost of equity relative to risk.475

The CAPM methodology 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 the specific 

 472 See, e.g., CAPs Initial Br. (I) at 44-46; CAPs Initial Br. (II) at 44-46; Trial Staff 

Initial Br. (I) at 18-19 and ; Trial Staff Initial Br. (II) at 18; RPGI Initial Br. (I), Ex. RPG17 at 25-26; RPGI Initial Br. (II), Ex. RPG-38 at 26; LPSC Initial Br. at 29. 

473 See, e.g., MISO TOs Reply Br. (I) at 47-51; MISO TOs Reply Br. (II) at 47-51. 

474 See, e.g., LPSC Initial Br. at 15-20. 

475 Opinion No. 551, 156 FERC ¶ 61,234 at P 138. 
Docket Nos. EL14-12-003 and EL15-45-000 - 119 - 

security. Specifically, the CAPM methodology estimates the cost of equity by taking the 

“risk-free rate” and adding to it the “market-risk premium” multiplied by “beta.”476 The 

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

bonds.477 Betas, which are published by several commercial sources, measure a specific 

stock’s risk relative to the market. The market risk premium is calculated by subtracting 

the risk-free rate from the expected return. The expected return can be estimated either 

using a backward-looking approach, a forward-looking approach, or a survey of 

academics and investment professionals. A CAPM analysis is backward-looking if the 

expected return is determined based on historical, realized returns. A CAPM analysis is 

forward-looking if the expected return is based on a DCF analysis of a large segment of 

the market. Thus, in a forward-looking CAPM analysis, the market risk premium is 

calculated by subtracting the risk-free rate from the result produced by the DCF 

analysis.478

In the First Complaint proceeding, MISO TOs submitted a forward-looking 

CAPM analysis of each company in the proxy group. MISO TOs used the 2.7 percent 

30-year U.S. Treasury average historical bond yield for November 2014 to April 2015 for 

the risk-free rate,479 beta values for each proxy company reported by Value Line, and a 

market risk premium based on a one-step DCF study of all dividend-paying companies in 

the S&P 500.480 In that DCF study, MISO TOs added the weighted average dividend of 

those companies (2.4 percent) to the average of the weighted average growth rates 

projected for the companies by IBES and Value Line (8.9 percent). MISO TOs did not 

include a long-term growth projection in its DCF study of the dividend-paying companies 

in the S&P 500. MISO TOs’ DCF study resulted in a uniform cost of equity for the 

dividend-paying companies in the S&P 500 of 11.3 percent. The MISO TOs then 

subtracted from that figure the 2.7 percent risk-free rate to obtain a risk premium of 8.6 

percent. The MISO TOs multiplied this risk premium by the beta listed for each proxy 

company by Value Line and added the risk-free rate to that product. This CAPM analysis 

 476 Id. (citing Morin at 150). 

477 Id. P 138. 

478 See id. PP 150, 155. 

479 Ex. MTO-30 at 1. MISO TOs also performed a CAPM study using the average 

projected 30-year U.S. Treasury bond yield for 2016-2020. Id. at 2. However, the 

Presiding Judge rejected that study, finding that projected bond yields are speculative and 

therefore less reliable for a CAPM study than current Treasury bond yields. Initial 

Decision (I), 153 FERC ¶ 63,027 at P 309. MISO TOs did not except to this ruling. 

480 Ex. MTO-1 at 97-98. 
Docket Nos. EL14-12-003 and EL15-45-000 - 120 - 

produces an unadjusted ROE range of 7.86 percent to 10.87 percent for the proxy group, 

with a midpoint value of 9.37 percent.481 

However, after adjusting for the effect of each proxy company’s size, MISO TOs’ 

CAPM analysis produced an ROE range of 7.50 percent to 12.61 percent, with a 

midpoint value of 10.06 percent.482 MISO TOs’ witness, Dr. Avera, explained that the 

“size adjustment reflects the fact that differences in investors’ required rate of return that 

are related to firm size are not fully captured by beta.”483 Dr. Avera based his size 

adjustments on data contained in a table published in Morningstar Inc.’s (Morningstar) 

“2015 Ibbotson SBBI Market Report.” The table adjusts each proxy company’s cost of 

equity based on its size, reducing the unadjusted cost of equity of larger companies, while 

increasing those of smaller companies.484

In Opinion No. 551, the Commission affirmed the Presiding Judge’s acceptance of 

MISO TOs’ CAPM analysis “to be used as corroborative evidence” in determining where 

to place MISO TOs’ ROE in the DCF zone of reasonableness.485 The Commission 

rejected challenges to MISO TOs’ calculation of the market risk premium and use of a 

size adjustment. In their requests for rehearing of Opinion No. 551, CAPs and OMS 

contend that the Commission erred in approving MISO TOs’ CAPM analysis, taking 

issue with how MISO TOs implemented their CAPM analysis.486 

In the Second Complaint proceeding, MISO TOs submitted a CAPM study using 

the identical methodology as the CAPM study they presented in the First Complaint 

proceeding.487 After the size adjustment, that study produced a zone of reasonableness of 

 481 Opinion No. 551, 156 FERC ¶ 61,234 at P 139. 

482 Id. P 140; Initial Decision (I), 153 FERC ¶ 63,027 at P 264 (citing Ex. MTO-30 

at 1). 

483 Opinion No. 551, 156 FERC ¶ 61,234 at P 140 (citing Ex. MTO-1 at 98). 

484 Id. (citing Ex. MTO-30 at 1). 

485 Id. PP 165-172. 

486 See CAPs Rehearing Request at 28-29, 49-58; OMS Rehearing Request at 5, 

26-34. 

487 See Ex. MTO-36. 
Docket Nos. EL14-12-003 and EL15-45-000 - 121 - 

7.97 percent to 12.12 percent with a midpoint of 10.05 percent.488 The Presiding Judge 

rejected most challenges to that study.489 However, the Presiding Judge found that MISO 

TOs erred in using both IBES and Value Line short-term growth projections in its DCF 

analysis of the dividend paying companies in the S&P 500, and should have only used 

IBES growth projections.490 The Presiding Judge found that revising MISO TOs’ CAPM 

study to use only the IBES growth projections reduced the midpoint from 10.05 percent 

to 9.67 percent, and he approved MISO TOs’ CAPM study with that modification.491 

Although MISO TOs’ excepted to the Presiding Judge’s rejection of their proposal 

to use only the Value Line short-term growth projections in their two-step DCF analysis 

of the proxy group,492 they did not except to the Presiding Judge’s rejection of the use of 

Value Line short-term growth projections as part of the DCF analysis of the dividendpaying companies in the S&P 500 for purposes of their CAPM study. However, CAPs, 

OMS and JCA, and RPGI filed exceptions to the Presiding Judge’s approval of MISO 

TOs’ CAPM study, as modified, objecting to the use of a one-step DCF analysis of the 

dividend-paying companies in the S&P 500 and the size adjustment.493 

In the Briefing Order, the Commission proposed to give the CAPM model equal 

weight, along with the DCF model and Expected Earnings model, in establishing a 

composite zone of reasonableness to be used under the first prong of section 206 to 

determine whether the existing ROE has become unjust and unreasonable.494 It also 

proposed to give the CAPM model equal weight, along with the DCF, Expected 

Earnings, and Risk Premium models, in determining a new just and reasonable ROE, 

when the existing ROE has been shown to be unjust and unreasonable under the second 

prong of section 206.495 The Commission also recognized that the fact it was no longer 

 488 Initial Decision (II), 155 FERC ¶ 63,030 at P 405. 

489 See id. PP 392-474. 

490 Id. P 412. 

491 Id. PP 409, 412, 474. 

492 See MISO TOs Br. on Exceptions at 12-30. 

493 See CAPs Br. on Exceptions at 69-79; OMS and JCA Br. on Exceptions at 5, 

48; RPGI Br. on Exceptions at 57-64. 

494 See Briefing Order, 165 FERC ¶ 61,118 at PP 13, 17. 

495 Id. P 18. 
Docket Nos. EL14-12-003 and EL15-45-000 - 122 - 

proposing to use the alternative methodologies only to corroborate setting the ROE above 

the midpoint of the DCF zone of reasonableness raises the issue of whether there should 

be any adjustments to how we implement the alternative methodologies, including the 

CAPM model.496

B. Use of CAPM Generally 

Parties generally do not oppose use of the CAPM in the Commission’s ROE 

methodology, with most parties generally agreeing that proper application of the CAPM 

model can produce reliable ROE results and that investors use the CAPM model.497 As 

noted above, some parties argue that the Commission should continue to exclusively rely 

the DCF model but those parties do not oppose the use of the CAPM model if the 

Commission does move to a multiple-model ROE methodology.498 However, the parties 

disagree on the proper application of the CAPM model. The record evidence 

demonstrates that this model is widely used by investors.499 Academic literature similarly 

indicates that investors rely on the CAPM.500 Moreover, the CAPM is directly relevant to 

 496 Id. P 41. 

497 See, e.g., CAPs Initial Br. (I) at 28 (“The CAPM analysis, as corrected by Mr. 

Gorman, produces reliable results.”) and Ex. JC-100 at 11; CAPs Initial Br. (II) at 27 and 

Ex. JC-200 at 10; Trial Staff Initial Br. (I), Keyton Aff. (I) at 11 (“the DCF, CAPM, and 

Risk Premium methods which are widely used by investors.”); Trial Staff Initial Br. (II), 

Keyton Aff. (II) at 10; LPSC Initial Br. at 8; MISO TOs Initial Br. (I) at 4; MISO TOs 

Initial Br. (II) at 6. Alliant and OMS neither explicitly support, nor oppose, the use of the 

CAPM. 

498 See, e.g., RPGI Initial Br. (I) at 11, 25-29; RPGI Initial Br. (II) at 14-15, 29-33; 

CAPs Initial Br. (I) at 12-25, 27-28; CAPs Initial Br. (II) at 11-25, 27-28. 

499 See, e.g., Trial Staff Initial Br. (I), Keyton Aff. (I) at 11 (“the DCF, CAPM, and 

Risk Premium methods which are widely used by investors.”); Trial Staff Reply Br. (I) 

at 5 (“‘There are three broad generic methods available to measure the cost of equity: 

DCF, Risk Premium, and CAPM. All three of these methods are accepted and used 

by the financial community and firmly supported in financial literature.’” (quoting 

San Diego Gas & Electric Company, Prepared Direct Testimony of Dr. Roger A. Morin 

on behalf of San Diego Gas & Electric Company, Docket No. ER19-221-000, at 16-17 

(filed Oct. 30, 2018))); MISO TOs Initial Br. (II) at 6 (explaining that the CAPM is 

“widely relied upon by investors.”). 

500 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 
Docket Nos. EL14-12-003 and EL15-45-000 - 123 - 

the Commission’s task in this context of assessing what rate of return on equity investors 

require to invest in a utility.501 John Graham and Campbell Harvey have explained that 

“the CAPM is by far the most popular method of estimating the cost of equity capital.”502 

Accordingly, we adopt the CAPM as one of the models that the Commission will use in 

its methodology for assessing whether an ROE is just and reasonable and determining 

just and reasonable ROEs when existing ROEs have been shown to be unjust and 

unreasonable. Below we address the parties’ arguments regarding how the CAPM model 

should be implemented. 

C. Calculation of Market Risk Premium 

1. Risk-Free Rate 

As noted above, the market risk premium in the CAPM model is calculated by 

subtracting the risk-free rate from the expected market return. Parties generally support 

the use of 30-year U.S. Treasury average historical bond yield over a six-month period as 

the risk-free rate.503 RPGI proposes using the 20-year U.S. Treasury average historical 

 

make their capital allocation decisions . . . investors appear to be using the CAPM to 

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.”). 

501 See, e.g., Michael C. Ehrhardt and Eugene F. Brigham, Financial Management: 

Theory and Practice 253 (13th ed. 2011) (“[T]he basic CAPM is still the most widely 

used method for thinking about required rates of return on stocks.”). 

502 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). 

503 See, e.g., CAPs Initial Br. (I) at 34 (“The components of a properly 

implemented forward-looking CAPM methodology include: (1) the use of the actual 30-

year U.S. Treasury bond yield during the six-month study period for the risk-free rate”) 

and Ex. JC-100 at 11, 26; Trial Staff Initial Br. (I) at 11 (“Mr. Keyton also accepts the use 

of the risk-free rate as the yield on the 30-year U.S. Treasury bonds.”); LPSC Initial Br. 

at 38; MISO TOs Reply Br. (I), App. 2 at 28 (“The CAPM applications presented in 

Mr. Gorman’s and Mr. Keyton’s affidavits all use an average yield on 30-year U.S. 

Treasury bonds for the risk-free rate and rely on Value Line beta values. I agree with 

these aspects of their analyses.”). 
Docket Nos. EL14-12-003 and EL15-45-000 - 124 - 

yield over a six-month period as the risk-free rate, but only supports this proposal with a 

footnote stating that “Use of 20-year Treasury bonds is appropriate as risk-free rate since 

this is the maturity of bonds used in Morningstar study as measurement of long-term 

government bonds.”504 We find that the evidence supporting the use of the 30-year U.S. 

Treasury average historical bond yield over a six-month period as the risk-free rate 

outweighs the evidence supporting the use of the 20-year U.S. Treasury yield. RPGI is 

the only party to propose using the 20-year U.S. Treasury yield and the other evidence 

and precedent provides greater support for using the 30-year U.S. Treasury yield.505 

Accordingly, we adopt use of the 30-year U.S. Treasury average historical bond yield 

over a six-month period as the risk-free rate. 

CAPs argue that the six-month period for purposes of determining the risk-free 

rate should be the same time period as used to produce the DCF study in the applicable 

proceeding.506 Other parties do not disagree with this argument and generally use the 

same time period as used to produce the DCF study or a time period as close as possible 

to that time period.507 Accordingly, we adopt the use of 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 as the risk-free rate. 

2. Expected Market Return 

a. Background 

As described above, in the CAPM model, the market risk premium is calculated 

by subtracting the risk-free rate from the expected market return. The expected market 

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

 504 RPGI Initial Br. (I), Ex. RPG-17 at 11 & n.29; RPGI Initial Br. (II), Ex. RPG 

38 at 11 & n.29. 

505 See, e.g., Morin at 151-152 (“[T]he yield on very long-term government bonds, 

namely, the yield on 30-year Treasury bonds, is the best measure of the risk-free rate 

for use in the CAPM and Risk Premium methods.”); Opinion No. 531-B, 150 FERC 

¶ 61,165 at P 114 (“30-year U.S. Treasury bond yields are a generally accepted proxy for 

the risk-free rate in a CAPM analysis, and are also considered superior to short- and 

intermediate-term bonds for this purpose.”). 

506 See CAPs Initial Br. (1), Ex. JC-100 at 26; CAPS Initial Br. (II), Ex. ICG-200 

at 25. 

507 See, e.g., MISO TOs Initial Br. (I) at 24-25; Trial Staff Initial Br. (I), 

Keyton Aff. (I) at 8; RPGI Initial Br. (I), Ex. RPG-38 at 11. 
Docket Nos. EL14-12-003 and EL15-45-000 - 125 - 

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

model to a representative market index, such as the S&P 500, or a survey of academics 

and investment professionals.508 

In Order No. 551, the Commission affirmed the Presiding Judge’s findings that the 

MISO TOs’ witness, Dr. Avera, properly calculated a forward-looking expected market 

return, using a one-step DCF analysis of the dividend-paying companies in the S&P 500. 

The Commission found that Dr. Avera’s use of an average of IBES and Value Line shortterm growth projections as his short-term growth projection and his decision to not 

include a long term growth projection were acceptable. The Commission stated that, 

while it has found that Value Line’s growth rate estimates are not acceptable for purposes 

of the two-step DCF model, the Commission has nevertheless found that Value Line is a 

valid source of general financial data.509 In his CAPM analysis, Dr. Avera uses the Value 

Line data in conjunction with IBES data and both are averaged over a 400-company data 

set. The Commission held that 

this use of growth rate data is fundamentally different from 

how growth rate data is used in the DCF model, because it is 

intended to provide a less precise cost of equity estimate than 

the DCF model. Although we require more precision from 

our DCF model—as the primary financial model that we use . 

. . to determine public utility ROEs—that same degree of 

precision is less essential in the CAPM analysis because that 

analysis is but one of multiple pieces of evidence 

corroborating the results of our DCF analysis.510 

Furthermore, the Commission stated that no party demonstrated that reliance on IBES 

growth rate estimates alone would produce a materially different CAPM result. 

The Commission also found that a long-term growth component is not required in 

the DCF study when developing a market risk premium for a CAPM analysis.511 The 

Commission stated that “the rationale for requiring a two-step DCF methodology that 

incorporates a long-term growth rate input when conducting a DCF study on a specific 

group of public utilities does not necessarily apply when conducting a DCF study of the 

 508 Morin at 155-162. 

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

510 Id. 

511 Id. P 170. 
Docket Nos. EL14-12-003 and EL15-45-000 - 126 - 

companies in the S&P 500.”512 Further, over protests from parties that MISO TOs did 

not use the S&P 500, the Commission explained that MISO TOs selected every dividendpaying stock included in the S&P 500, totaling approximately 400 companies, and that 

each company selected had a high market capitalization at that time. The Commission 

determined that, consistent with Opinion No. 531-B, the resulting DCF study of the 

approximately 400 dividend-paying stocks need not include a two-step DCF 

methodology that incorporates a long-term growth rate input.513 

In the Second Complaint proceeding, the Presiding Judge in his initial decision, 

issued before Opinion No. 551, held that MISO TOs erred in using both IBES and Value 

Line short-term growth projections in the DCF analysis of the dividend paying companies 

in the S&P 500. The Presiding Judge found that, because the Commission does not 

permit use of Value Line growth projections in its regular DCF analyses of public utility 

and pipeline proxy groups, those growth projections also should not be used as part of the 

DCF analysis of the dividend paying companies in the S&P 500 for purposes of a CAPM 

analysis.514 However, the Presiding Judge did, consistent with Opinion Nos. 531 and 

551, find that Dr. Avera properly used a one-step DCF analysis for this purpose. 

b. MISO TOs 

MISO TOs support the Commission’s holdings in Opinion No. 551 concerning the 

DCF analysis of the dividend paying members of the S&P 500 for purposes of 

determining the CAPM market risk premium. They argue that the Commission properly 

approved use of an average of Value Line and IBES short-term growth projections. 

MISO TOs state that in Opinion No. 551 the Commission found that “Value Line is a 

valid source of general financial data” and that the “use of growth rate data [in the 

CAPM] is fundamentally different from how growth rate data is used in our DCF 

model.”515 MISO TOs argue that Trial Staff does not confront this finding, but instead 

raises generalized arguments that do not invalidate the reliability of Value Line’s growth 

rate estimates. MISO TOs assert that the Commission has not ruled out consideration of 

Value Line in any and all contexts. MISO TOs add that Trial Staff’s claim that IBES 

growth rates are updated more frequently than Value Line’s lacks any empirical support, 

and in any event, there is no evidence that the frequency of updates has any bearing on 

 512 Id. (citing Opinion No. 531-B, 150 FERC ¶ 61,165 at P 113). 

513 Id.

514 Id. P 412. 

515 MISO TOs Reply Br. (I) at 27 (citing Opinion No. 551, 156 FERC ¶ 61,234 at 

P 169); MISO TOs Reply Br. (II) at 27. 
Docket Nos. EL14-12-003 and EL15-45-000 - 127 - 

investor reliance on either IBES or Value Line.

516 MISO TOs conclude that the 

Commission should continue to allow the use of Value Line data in CAPM analyses. 

MISO TOs also support the Commission’s determination in Order No. 551 to use 

a single stage DCF model to develop the market risk premium for the CAPM analysis, 

noting that the Commission has already twice rejected CAPs and other parties’ arguments 

that the two-step DCF is required.517 According to MISO TOs, it is appropriate to use a 

single stage DCF to evaluate the S&P 500 Index because the “growth rates used in the 

MISO TOs’ CAPM studies are representative of the consensus expectations for the 

dividend paying firms in the S&P 500 Index as a whole.”518 Mr. McKenzie asserts that 

concerns about the sustainability of such growth rates for a single firm miss the point 

because the growth rate represents the weighted average of investors’ expectations for the 

dividend paying firms in the S&P 500 Index, not a growth rate for a single firm that is 

assumed to be constant in perpetuity. MISO TOs’ witness Mr. McKenzie states that the 

S&P 500 includes a broad sample of corporations from widely varied and distinct 

industries. He states that growth expectations for some firms fall below expected trends 

in GDP, while projections for other firms are more optimistic. He also points out that the 

composition of the S&P 500 is not static. As a result, formerly successful firms are 

supplanted by new firms with potential for high growth, for example Sears is supplanted 

by Amazon or Blockbuster by Netflix.519 

Mr. McKenzie also asserts that academic research supports the use of a single-step 

DCF model when performing a DCF analysis of the S&P 500.520 For example, 

Mr. McKenzie points out that in Estimating Shareholder Risk Premia, Harris and 

Marston estimate the market-required rate of return by performing a DCF analysis of the 

 516 MISO TOs Reply Br. (I) at 28-29; MISO TOs Reply Br. (II) at 28-29. 

517 MISO TOs Reply Br. (I) at 23; MISO TOs Reply Br. (II) at 23. 

518 MISO TOs Reply Br. (I) at 24 and App. 2 at 26 (emphasis added by MISO 

TOs); MISO TOs Reply Br. (II) at 24 and App. 2 at 26. 

519 MISO TOs Reply Br. (I), App. 2 at 20 and 26; MISO TOs Reply Br. (II), 

App. 2 at 20 and 26. 

520 MISO TOs Reply Br. (I), App. 2 at 23-25 (citing Robert S. Harris, Using 

Analysts’ Growth Forecasts to Estimate Shareholder Required Rates of Return, Fin. 

Mgmt., Spring 1986; Robert S. Harris & Felicia C. Marston, Estimating Shareholder Risk 

Premia Using Analysts’ Growth Forecasts, Fin. Mgmt., Summer 1992; and Felicia 

Marston & Robert S. Harris, Risk and Return: A Revisit Using Expected Returns, Fin. 

Rev., Feb. 1993); MISO TOs Reply Br. (II), App. 2 at 23-25 (citing same). 
Docket Nos. EL14-12-003 and EL15-45-000 - 128 - 

dividend paying companies in the S&P 500. Consistent with the MISO TOs’ CAPM 

approach, Harris and Marston state that “[t]he mean value of the individual analysts’ 

forecasts of five-year growth rates in [earnings per share] will be used as a proxy for g in 

the DCF model.”521 In addition, Mr. McKenzie points out that Harris and Marston state 

that “[t]he five-year horizon is the longest horizon over which such forecasts are 

available from IBES and often is the longest horizon used by analysts.”522 Moreover, 

Harris and Marston emphasize that their use of a one-step DCF analysis to determine the 

market-required rate of return “is applied to portfolios of stocks [i.e., the S&P 500], 

rather than to individual securities, since future growth patterns may be expected to have 

drastic changes for some specific securities.”523 

MISO TOs state that the DCF analysis used to determine an input into the CAPM 

need not mimic the DCF model used to yield ROE estimates for individual public 

utilities. “It is a feature . . . that the CAPM and the Commission’s DCF rely on different 

approaches to estimate investors’ expected return on equity.”524 They state that reliance 

on the one-step DCF is consistent with the Briefing Order’s approach reducing the risk of 

misidentifying the ROE through the use of multiple models. Finally, MISO TOs argue 

that CAPs have not provided any reason for the Commission to revisit its findings on this 

matter.525 

c. CAPs 

In their request for rehearing of Opinion No. 551, brief on exceptions to the Initial 

Decision in the Second Complaint proceeding, and briefs in response to the Briefing 

Order, CAPs assert that the Commission’s two-step DCF methodology is required to 

accurately calculate the market risk premium of the CAPM,526 and assert the MISO TOs’ 

 521 MISO TOs Reply Br. (I), App. 2 at 23-24; MISO TOs Reply Br. (II), App. 2 

at 23-24. 

522 MISO TOs Reply Br. (I), App. 2 at 24; MISO TOs Reply Br. (II), App. 2 at 24. 

523 MISO TOs Reply Br. (I), App. 2 at 26; MISO TOs Reply Br. (II), App. 2 at 26. 

524 MISO TOs Reply Br. (I) at 24; MISO TOs Reply Br. (II) at 24. 

525 MISO TOs Reply Br. (I) at 24; MISO TOs Reply Br. (II) at 24. 

526 CAPs Initial Br (I) at 30-31; CAPs Initial Br. (II) at 30-31. 
Docket Nos. EL14-12-003 and EL15-45-000 - 129 - 

CAPM study improperly used the one-step DCF.527 CAPs assert that including only 

short-term growth rates in this DCF calculation implies that such growth will continue in 

perpetuity, and assumes that a company can grow faster than the economy for an 

indefinite period of time.528 They also comment that such an assumption is both 

unrealistic and inconsistent with the Commission’s prior determinations.529 CAPs assert 

that failure to include a second-stage growth rate in the CAPM portfolio DCF calculation 

runs counter to economic logic.530

In their request for rehearing of Opinion No. 551, CAPs assert that the record in 

the First Complaint proceeding shows that the investment community expects corporate 

earnings growth to track GDP growth.531 For example, they cite Pacific Investment 

Management Company (PIMCO’s) “Asset Allocation Secular Outlook 2015,” in which 

PIMCO projects a 10-year return on U.S. equities of 4.5 percent.532 They point out that 

this is well below the 11.3 percent market return estimated by the MISO TOs’ one-step 

DCF analysis of the dividend paying members of the S&P 500 in the MISO TOs’ CAPM 

study in the First Complaint proceeding. CAPs also observe that PIMCO states that its 

estimate of “[e]xpected earnings growth is based on per capita real GDP growth 

estimates.”533 CAPs also state that the PIMCO report calculates a forward-looking equity 

risk premium of 3.9 percent by comparing the projected 10 year return of the S&P 500 to 

 527 CAPs Initial Br. (I) at 30 (citing Ex. JC-100 at 11-13); CAPs Initial Br. (II) 

at 30-31 (citing Ex. ICG-200 at 11-13); CAPs Rehearing Request at 49-55; CAPs Br. on 

Exceptions at 74-78. 

528 CAPs Initial Br. (I) at 30; CAPs Initial Br. (II) at 30. 

529 CAPs Initial Br. (I) at 30 (citing Generic Determination of Rate of Return in 

Common Equity for Pub. Utils., Order No. 420, FERC Stat. & Regs. at 31,344 & n.39 

(finding that inflated equity cost estimates result when analysists estimate risk premiums 

using “DCF estimates of the investors’ required rate of return” on “common stock,” 

because “the use of analysts’ short-term forecasts overstate[s] investors’ long term 

growth expectations.”); CAPs Initial Br. (II) at 30 (citing same). 

530 CAPs Initial Br. (I) at 31 (citing Ex. JC-100 at 14); CAPs Initial Br. (II) at 31 

(citing Ex. ICG-200 at 14). 

531 CAPs Rehearing Request at 54. 

532 Id. (citing Ex. S-11 at 6). 

533 Id. (citing Ex. S-11 at 7). 
Docket Nos. EL14-12-003 and EL15-45-000 - 130 - 

inflation protected 10-year treasury bonds. CAPs state that this is less than half the 8.6 

percent equity risk premium calculated by the MISO TOs.534

In addition to the PIMCO report, CAPs state that the American Appraisal Risk 

Premium Quarterly calculated a forward-looking risk premium of 6.0 percent, and Duff 

& Phelps calculated a forward-looking risk premium of 5.0 percent.535 Also, according to 

CAPs, Value Line estimated “that the required equity premium above the yield on tenyear bonds in order to induce investment in corporate equity was about 5.5 percent.”536 

CAPs assert that these facts demonstrate that the 11.3 percent market return 

calculated by MISO TOs using the one-step DCF method, without any long-term GDP 

growth projection, is “way out of line with forward-looking (and historical) investmentcommunity sources.”537 CAPs conclude that a two-step DCF method must be used to 

calculate the market return. They state that using a two-step DCF analysis of the 

dividend paying members of the S&P 500 in the First Complaint proceeding would lower 

the equity risk premium from 8.6 percent to 7.1 percent and lower the midpoint of the 

CAPM zone of reasonableness to 8.89 percent.538 CAPs make similar arguments, relying 

on similar evidence, in their Brief on Exceptions to the Initial Decision in the Second 

Complaint proceeding.539 

CAPs challenge MISO TOs’ reliance upon three academic papers published 

between 1986 and 1993 that applied a one-stage DCF in constructing their CAPM 

models.540 CAPs explain that these studies estimated that the risk premium of a 

diversified equity portfolio over long-term U.S. bonds averaged well under seven percent, 

 534 Id. (citing Ex. S-11 at 10). 

535 Id. (citing Ex. JCI-4 at 46-47). 

536 Id. (citing Ex. S-1 at 15). 

537 Id. at 54-55. 

538 Id. at 55. 

539 CAPs Br. on Exceptions at 75-77. 

540 Robert S. Harris, Using Analysts’ Growth Forecasts to Estimate Shareholder 

Required Rates of Return, Fin. Mgmt., Spring 1986; Robert S. Harris & Felicia C. 

Marston, Estimating Shareholder Risk Premia Using Analysts’ Growth Forecasts, Fin. 

Mgmt., Summer 1992; and Felicia Marston and Robert S. Harris, Risk and Return: A 

Revisit Using Expected Returns, Fin. Rev., Feb. 1993. 
Docket Nos. EL14-12-003 and EL15-45-000 - 131 - 

less than the 8.6 percent and 8.2 percent that Mr. McKenzie applied in his CAPMs for the 

First Complaint and Second Complaint study periods. CAPs also assert that these studies 

are not relevant here because they tested whether the cost of equity varied over time and 

across company risks, not the absolute value of the cost of equity.541 CAPs posit that the 

authors did not use a two-stage DCF methodology because long-term growth “was 

tangential to what they sought to measure.”542

CAPs disagree with Mr. McKenzie’s argument that investors can expect long-term 

dividend growth that exceeds the growth rate of the U.S. economy because the 

composition of the S&P 500 Index is not static and firms with high growth potential 

replace firms with low growth potential.543 CAPs argue that regardless of index 

composition, the equity market as a whole cannot sustainably grow faster than the 

economy as a whole. Finally, CAPs assert that the S&P 500 Index does not grow through 

the substitution of firms, but instead when there is a substitution of firms, the index value 

is held constant.544 

CAPs contest Mr. McKenzie’s argument that the portfolio return must exceed the 

9.29 percent that Opinion No. 551 found insufficient for electric utilities.545 CAPs argue 

that because Opinion No. 551 is under reconsideration by the Commission, it should not 

be relied upon here. Further, CAPs argue that the decision in Opinion No. 551 to place 

the base ROE above the DCF midpoint was based on the fact that CAPM results, if 

premised on an unsustainable equity portfolio return, pointed above the DCF midpoint. 

CAPs assert that relying upon that decision to require an equity portfolio return above the 

DCF midpoint would be untenably circular. Also, they argue that the appropriate 

comparison would be between the average (or median) composite earnings growth rate 

used in the utility DCF and the composite earnings growth rate used in the CAPM’s 

portfolio DCF. CAPs explain that the earnings growth rate for the CAPM equity 

portfolio is substantially higher than that of the utility proxies. CAPs’ witness, 

Mr. Gorman recommended a modification of the DCF-based CAPM portfolio return, 

with an average composite earnings growth rate of 7.4 percent. CAPs argue that the 

 541 CAPs Reply Br. (I) at 17-18; CAPs Reply Br. (II) at 33-34. 

542 CAPs Reply Br. (I) at 18; CAPs Reply Br. (II) at 34. 

543 CAPs Reply Br. (I) at 19 (citing MISO TOs, McKenzie Reply Aff., Docket 

No. EL11-66, at 27-28 (filed Mar. 8, 2019)); CAPs Reply Br. (I) at 35-36 (citing same). 

544 CAPs Reply Br. (I) at 19; CAPs Reply Br. (II) at 35-36. 

545 CAPs Reply Br. (I) at 20 (citing MISO TOs, McKenzie Reply Aff., Docket 

No. EL11-66, at 31 (filed Mar. 8, 2019)); CAPs Reply Br. (II) at 36 (citing same). 
Docket Nos. EL14-12-003 and EL15-45-000 - 132 - 

earnings growth rate for the CAPM equity portfolio is substantially higher than that of the 

utility proxies, as expected given the utility proxies’ low risk. And, they argue that this 

difference contradicts the MISO TOs’ claim that the growth rate obtained by applying a 

second-stage growth constraint to portfolio earnings is too low when compared to utility 

stock financial data.546 

CAPs disagree with Mr. McKenzie’s assertion that other regulators rely on a onestage DCF to find CAPM portfolio returns.547 They comment that Mr. McKenzie’s 

assertion relied upon testimony that was filed 18 years ago in a state commission 

proceeding. According to CAPs, in the Coakley Briefing Order proceeding, a survey of 

electric transmission ROE regulation in Australia, Canada, the United Kingdom and 

Europe showed that when regulators apply CAPM models, they use equity market returns 

that are typically about 4.75 percent to 6.0 percent above the risk-free governmental 

security yield.548 

In their request for rehearing of Opinion No. 551, CAPs state that they are not 

seeking rehearing of the Commission’s acceptance of MISO TOs’ use of an average of 

IBES and Value Line growth projections as the short-term growth projection in their DCF 

analysis of the dividend paying members of the S&P 500 in the First Complaint 

proceeding. CAPs agree with Opinion No. 551’s finding that the record in the First 

Complaint proceeding is insufficient to show that removal of the Value Line growth 

projection would materially affect the results of the MISO TOs’ CAPM analysis. 

However, CAPs state that they support the Presiding Judge’s decision in the Second 

Complaint proceeding to eliminate the Value Line growth projection and use only IBES 

as the short-term growth projection.549 

 546 CAPs Reply Br. (I) at 20-21; CAPs Reply Br. (II) at 36-37. 

547 CAPs Reply Br. at 21 (citing MISO TOs, McKenzie Reply Aff., Docket 

No. EL11-66, at 28-29 (filed Mar. 8, 2019)). 

548 CAPS Reply Br. (I) at 21 (citing Docket No. EL11-66, Ex. CAP-600 at 37-46); 

CAPS Reply Br. (II) at 37 (citing same). 

549 CAPs Rehearing Request at 55-56 n.193. 
Docket Nos. EL14-12-003 and EL15-45-000 - 133 - 

d. Trial Staff 

Trial Staff argues that the DCF component of CAPM should be calculated 

following the Commission’s two-step DCF methodology.550 Trial Staff asserts that use 

of the one-step DCF model implies that a company can grow faster than the economy for 

an indefinite period of time.551 Trial Staff also comments that such an assumption is both 

unrealistic and inconsistent with the Commission’s prior determinations.552 

In its briefs in both the First and Second Complaint proceedings, Trial Staff also 

argues that only IBES growth rates should be used as the short-term growth projection in 

the DCF model employed in a CAPM analysis.553 Trial Staff states that Value Line does 

not represent consensus earnings growth estimates, but rather the estimate of a single 

analyst.554 Trial Staff alleges that IBES growth rates are updated more frequently. Trial 

Staff’s witness, Mr. Keyton, included in the workpapers attached to his affidavit in the 

First Complaint proceeding the IBES growth projections for the dividend-paying 

members of the S&P 500 necessary for calculating a short-term growth projection using 

only IBES growth projections.555 

Trial Staff proposes to remove companies from the CAPM whose short-term IBES 

growth rates or composite growth rates are less than or equal to zero, and those greater 

than or equal to 20 percent, as supported by Dr. Morin.556 Trial Staff argues that the 

Commission has previously found that zero or negative growth rates are either 

 550 Trial Staff Initial Br. (I) at 13-14; Trial Staff Initial Br. (I) at 12-13 Trial Staff 

Reply Br. (I) at 10-11; Trial Staff Reply Br. (II) at 11. 

551 Trial Staff Initial Br. (I) at 13-14; Trial Staff Initial Br. (II) at 12-13. 

552 Trial Staff Initial Br. (I) at 14 (citing Opinion No. 531, 147 FERC ¶ 61,234 at 

P 36 n.63 and Morin at 308); Trial Staff Initial Br. (II) at 13 (citing same). 

553 Trial Staff Initial Br. (I) at 11-12; Trial Staff Initial Br. (II) at 11. 

554 Trial Staff Initial Br. (I) at 12. Trial Staff Initial Br. (II) at 11. 

555 Trial Staff Initial Br. (I), Keyton Aff., (I) Attachment B at 8-14; Trial Staff 

Initial Br. (I), Keyton Aff. (II), Attachment B at 7-12. 

556 Trial Staff Initial Br. (I) at 16-18; Trial Staff Initial Br. (II) at 16-17. 
Docket Nos. EL14-12-003 and EL15-45-000 - 134 - 

economically illogical or unsustainable.557 Trial Staff states that, similarly, the 

Commission has also screened for high-end short-term growth rates.558 Trial Staff also 

reasons that employing growth rate screens in both the DCF and the CAPM provides for 

consistency among methods.559

e. Other Parties 

LPSC argues that the Commission should adopt the two-step DCF to determine 

the CAPM’s market risk premium. They argue that MISO TOs’ one-step approach 

“inflated the yield compared to what would be developed using the two-step 

approach.”560 LPSC continues that it is inconsistent to match the short-term DCF 

forecast with the yield on long-term bonds.561 RPGI argues that the 8.6 percent market 

risk premium component of the CAPM adopted in the Briefing Order exceeds long-term 

risk premiums by approximately 6 percent.562

f. Commission Determination 

We continue to find reasonable the MISO TOs’ proposal to estimate the CAPM 

expected market return using a forward-looking approach, based on applying the DCF 

model to the dividend paying members of the S&P 500. Using a DCF analysis of the 

dividend-paying members of the S&P 500 is a well-recognized method of estimating the 

expected market return for purposes of the CAPM model.563 The DCF analysis must be 

limited to the dividend-paying members of the S&P 500, rather than using all companies 

in the S&P 500, because a DCF analysis can only be performed on companies that pay 

dividends. 

 557 Trial Staff Initial Br. (I) at 17 (citing Opinion No. 531, 147 FERC ¶ 61,234 at 

PP 38-39); Trial Staff Initial Br. (II) at 16 (citing same). 

558 Trial Staff Initial Br. (I) at 17 (citing ISO New England, Inc., et al., 109 FERC 

¶ 61,147, at P 205 (2004) (indicating Commission removal of a company from the proxy 

group whose short-term growth rate was 13.3 percent)); Trial Staff Initial Br. (II) at 1617 

(citing same). 

559 Trial Staff Initial Br. (I) at 17; Trial Staff Initial Br. (II) at 17. 

560 LPSC Initial Br. at 37. 

561 Id. at 38. 

562 RPGI Initial Br. (I) at 27; RPGI Initial Br. (II) at 31. 

563 Morin at 160. 
Docket Nos. EL14-12-003 and EL15-45-000 - 135 - 

No participant opposes the use of a DCF analysis of the dividend-paying members 

of the S&P 500 to estimate the expected market return. However, CAPS, LPSC, and 

Trial Staff raise several issues with respect to the growth projection used by MISO TOs 

in their CAPM analyses in both complaint proceedings. These issues include: (1) the use 

of the one-step DCF model without any long-term growth projection based on GDP; 

(2) whether S&P 500 companies included in the DCF analysis should be screened for 

unrealistic growth projections; and (3) the use of an average of IBES and Value Line

growth projections as the short-term growth projection. For the reasons discussed below, 

we are not persuaded by CAPs and Trial Staff’s arguments in support of a two-step DCF 

analysis to calculate the CAPM expected market return. However, we agree with CAPs 

that the Value Line growth projections should not be included in the DCF analysis. 

Financial research supports using a one-step DCF analysis of the dividend paying 

members of the S&P 500 when determining a forward looking expected market return as 

part of the CAPM model. For example, in Estimating Shareholder Risk Premia, Harris 

and Marston present estimates of shareholder required rates of return and risk premiums 

using forward-looking analysts’ growth forecasts. They state that “a ‘market’ required 

rate of return is calculated using each dividend paying stock in the S&P 500 for which 

data is available.”564 In describing this process, the authors state, “This expectational 

approach employs the [DCF model] in which a consensus measure of financial analysts’ 

forecasts . . . of earnings is used as a proxy for investor expectations.”565 They continue 

that “[t]he mean value of individual analysts’ forecasts of five-year growth rate in 

[earnings per share (EPS)] will be used as a proxy for g in the DCF model,” and state that 

the “five-year horizon is the longest horizon over which such forecasts are available from 

IBES and often is the longest horizon used by analysts.”566 A second study cited by 

MISO TOs cautions against “the introduction of ad hoc assumptions about future 

growth” beyond the five-year time-frame used by IBES.567 That study also emphasizes, 

“[i]mportantly, however, the approach is applied to portfolios of stocks rather than 

to individual securities, since future growth patterns may be expected to have drastic 

changes for some specific securities.”568 Thus, these studies support Opinion 

No. 531-B’s holding that a long-term growth projection is not needed when performing a 

 564 Estimating Shareholder Risk Premia at 3. 

565 Id. at 2. 

566 Id.

567 Required Rates of Return at 61. 

568 Id. 
Docket Nos. EL14-12-003 and EL15-45-000 - 136 - 

DCF analysis of a portfolio of stocks, despite the fact such a growth projection is needed 

when doing a DCF analysis of a single utility.569 We note that the third study also relies 

solely upon analysts’ five-year IBES growth forecasts.570

As the Commission found in Opinion No. 531-B, we continue to find that the 

rationale for incorporating a long-term growth rate estimate 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 500.571 The Commission’s rationale for incorporating a 

long-term growth rate estimate in DCF analyses for public utilities is that it is often 

unrealistic and unsustainable for high short-term growth rates to continue in perpetuity 

for a particular utility or group of utilities.572 The purpose of the DCF analysis in the 

CAPM model differs from the purpose of using the DCF analysis to directly estimate a 

utility’s cost of equity. The purpose of the DCF analysis in the CAPM model is to 

determine the “required return on the overall market” that will be used to determine the 

market risk premium—which is based on the difference between the “required return on 

the overall market” and the risk-free rate.573 

As described above, the required return on the overall market is determined by 

conducting a DCF study of “a representative market index, such as the Standard & Poor’s 

500 Index.”574 We find that there are at least two reasons why it is not necessary to 

include a long-term growth projection based on GDP in a DCF analysis of the dividend 

paying companies in the S&P 500. First, the S&P 500 is regularly updated to ensure, 

among other things, that it only includes companies with high market capitalization575

and that it remain representative of the industries in the economy of the United States. 

Although the value of the S&P 500 index is held constant when one company is replaced 

 569 Opinion No. 531-B, 150 FERC ¶ 61,165 at P 113. 

570 Ex. EMC-0224 at 3-4. 

571 Opinion No. 531-B, 150 FERC ¶ 61,165 at P 113. 

572 See Opinion No. 531, 147 FERC ¶ 61,234 at P 36 n.63. 

573 See id. P 113. 

574 Morin at 159. 

575 Currently, in order to be included in the S&P 500, a company must have a 

market capitalization of at least $8.2 billion, calculated by multiplying outstanding shares 

of stock by stock price. 
Docket Nos. EL14-12-003 and EL15-45-000 - 137 - 

by another as CAPs state,576 the updating of the companies in the index has the general 

effect of substituting companies with declining stock values and market capitalization 

with companies with growing stock values and market capitalization. As Mr. McKenzie 

testified for the MISO TOs, “As a result formerly successful firms are supplanted by new 

firms with potential for high growth.”577 CAPs contest this reasoning on the ground that, 

although the companies in the S&P 500 are updated, the MISO TOs performed a DCF 

analysis of a specific group of about 400 companies, and there is no reason to expect that 

a group of stocks “will enjoy long-term growth at short-term rates without being affected 

by changes in the economy as a whole.”578 This argument misses the point. Although 

the MISO TOs’ applied their DCF analysis to the specific companies who happened to be 

the dividend paying members of the S&P 500 at that point in time, the purpose of the 

analysis was to determine a required return on the overall market as represented by an 

investment in the S&P 500, which is regularly updated. Thus, it is reasonable for the 

inputs used in the DCF analysis, including the growth projections, to be selected based on 

the assumption that the subject companies will be updated in the manner described above. 

Second, we find that, because the dividend paying members of the S&P 500 

constitute a large portfolio of stocks, they include companies at all stages of growth. 

Some are relatively young companies with new products that have not yet fully 

penetrated the markets and thus are likely to have quite high IBES growth rates. 

However, other companies are mature companies with limited growth potential which are 

likely to have quite low IBES growth rates. The inclusion of the IBES growth rates of 

such mature companies in the overall average IBES growth rate of all the dividend 

paying members of the S&P 500 performs the same role as the inclusion of the long-term 

GDP growth rate in the DCF analysis of a single utility: it reflects the fact that 

companies cannot maintain indefinitely the high growth rates of their early years. Thus, 

using the IBES growth rates of all dividend paying S&P 500 companies, without using a 

long-term GDP growth projection can reasonably reflect investors’ consensus 

expectations about the S&P 500 Index as a whole. 

In summary, while it may be unreasonable to expect an individual company to 

sustain high short-term growth rates in perpetuity, the same cannot be said for a broad 

representative market index that is regularly updated to include new companies. Put 

differently, a portfolio of companies behaves differently than an individual company. 

Accordingly, the rationale for incorporating a long-term growth rate estimate in 

conducting a two-step DCF analysis of a specific utility or group of utilities for purposes 

of directly estimating cost of equity does not apply to the DCF analysis of a broad 

 576 CAPs Reply Br. (I) at 19. 

577 MISO TOs Reply Br. (I), App. 2; McKenzie Reply Aff. (I) at 26. 

578 CAPs Rehearing Request at 51. 
Docket Nos. EL14-12-003 and EL15-45-000 - 138 - 

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

include new companies for purposes of determining the required return to the overall 

market. 

We also accept Trial Staff’s proposal to screen from the CAPM analysis S&P 500 

companies with growth rates that are negative or in excess of 20 percent. Such screening 

is consistent with the elimination of outliers elsewhere in our ROE methodology. Such 

high or low growth rates are highly unsustainable and non-representative of the growth 

rates of the electric utilities in the proxy groups. For instance, in the Second Complaint 

proceeding, Helmerich and Payne featured an IBES growth rate of negative 42 percent 

while Cabot Oil and Gas featured an IBES growth rate of 48.1 percent.579 Neither growth 

rate is sustainable for the intermediate, much less long, term and should thus be 

eliminated from the group of S&P 500 companies examined. 

Evidence indicates that the use of this growth rate screen is appropriate in the 

CAPM analysis. For example, in Principles of Corporate Finance, Richard A. Brealey 

and Stewart C. Myers explain that “No firm can continue growing at 20 percent per year 

forever, except possibly under extreme inflationary conditions.”580 Dr. Morin also 

separately states that growth rates less than or equal to zero and greater than or equal to 

20 percent should be removed from an analysis.581 In addition, in conducting a DCF 

analysis of the dividend-paying S&P 500 members to estimate ex ante expected returns in 

the CAPM analysis, Harris, et al. screened out companies “if the standard deviation 

around the mean [analyst] forecast exceeds 20%.”582 While this screen differs from the 

one Trial Staff has proposed in this proceeding, it nonetheless indicates that it is 

appropriate to screen out companies when conducting a DCF analysis of the dividend 

paying S&P 500 members in the CAPM analysis. The CAPM growth rate screen that is 

in record evidence before us is the screen proposed by Trial Staff and there is sufficient 

support to indicate that it will exclude companies with growth rates that are 

unsustainable. Accordingly, we find that S&P 500 companies with growth rates that are 

negative or in excess of 20 percent should be excluded from the CAPM analysis because 

their growth rates are not representative of sustainable growth rates. 

 579 Trial Staff Reply Br. (I) at App. C. 

580 Richard A. Brealey and Stewart C. Myers, Principles of Corporate Finance 68 

(7th ed. 2003). 

581 Trial Staff Initial Br. (I); Keyton Aff. (I) at 33 (citing Morin at 165). 

582 Robert S. Harris et al., Ex Ante Cost of Equity Estimates of S&P 500 Firms: 

The Choice between Global and Domestic CAPM, Fin. Mgmt., Autumn 2003, at 5. 
Docket Nos. EL14-12-003 and EL15-45-000 - 139 - 

CAPs assert that the Harris and Marston articles cited by the MISO TOs do not 

support use of the one-step DCF model to determine the market risk premium in these 

two proceedings. CAPs point out that those studies estimated that the risk premium of a 

diversified equity portfolio over long-term U.S. bonds averaged well under seven 

percent,583 less than the 8.6 percent and 8.2 percent market risk premiums that the MISO 

TOs used in their CAPM analyses for the First Complaint and Second Complaint study 

periods. Based upon our holdings in this order, we calculate market risk premiums in the 

First and Second Complaint proceedings of 9.12 percent and 8.85 percent respectively. 

The fact that the absolute market risk premiums calculated in the Harris and Marston 

articles for varying periods between 1982 and 1991 are lower than those we calculate 

based on financial information for the first and second halves of 2015 does not undercut 

our reliance on the Harris and Marston articles. In Estimating Shareholder Risk Premia 

Using Analysts’ Growth Forecasts, Harris and Marston found that the “market risk 

premium varies over time. In particular, the equity market premium over government 

bonds is higher in low interest rate environments.”584 Government bond interest rates 

were significantly lower during 2015 than during the 1982 to 1991 period.585 Therefore, 

the fact that we have found higher market risk premiums of 9.12 percent and 8.85 percent 

during the first and second halves of 2015, rather than the less than 7.0 percent risk 

premiums Harris and Marston found during 1982 to 1991 is consistent with the Harris 

and Marston articles. Indeed, Dr. Morin cites a subsequent 2003 article by Harris, 

Marston, Mishra, and O’Brien586 in which they estimate the market risk premium rising 

to just above 9 percent in 1998, using the same methodology as in the earlier Harris and 

Marston articles cited by the MISO TOs. 

CAPs also assert that the Harris and Marston articles are not relevant here because 

they tested whether the cost of equity varied over time and across company risks, not the 

 583 The first article estimated 1982 average annual risk premiums of 6.16 percent. 

The second article estimated 1982-1991 average annual risk premiums of 6.47 percent, 

and the third article estimated 1982-1987 average annual premiums of 5.66 percent. 

584 Robert S. Harris & Felicia C. Marston, Estimating Shareholder Risk Premia 

Using Analysts’ Growth Forecasts, Fin. Mgmt., Summer 1992, at 1. 

585 See, e.g. St. Louis Federal Reserve, Treasury Constant Maturity Rate Data, 

https://fred.stlouisfed.org/categories/115. 

586 Morin at 160 (citing Robert S. Harris et al., Ex Ante Cost of Equity Estimates of 

S&P 500 Firms: The Choice between Global and Domestic CAPM, Fin. Mgmt., Autumn 

2003, at 51-66). 
Docket Nos. EL14-12-003 and EL15-45-000 - 140 - 

absolute value of the cost of equity.587 CAPs posit that the authors did not use a twostage DCF because long-term growth “was tangential to what they sought to measure.”588 

However, as discussed above, in Using Analysts’ Growth Forecasts to Estimate 

Shareholder Required Rates of Return, Harris expressly supported using the one-step 

DCF model when performing a DCF analysis of a portfolio of stocks, such as the S&P 

500, as opposed to individual securities. The Harris and Marston articles discuss how the 

costs of equity calculated by their studies varied over time and across company risks for 

the purpose of confirming the accuracy of their analyses using a one-step DCF study of 

the dividend paying members of the S&P 500, not as a separate inquiry. 

We are not persuaded by Trial Staff’s arguments that Dr. Morin supports the twostep DCF analysis for a market risk premium used in a CAPM. In particular, Trial Staff 

argues that Dr. Morin supports the underlying theory of incorporating a long-term growth 

estimate in the DCF methodology, citing his statement that “eventually all company 

growth rates, especially utility service growth rates, converge to a level consistent with 

the growth rate of the aggregate economy.”589 However, Dr. Morin made this statement 

in the context of discussing the DCF analysis of a single company or utility, not the 

market risk premium used in a CAPM. As discussed above, in discussing the application 

of the DCF model to a representative market index for purposes of estimating a 

prospective market risk premium for the CAPM, Dr. Morin cited the studies by Marris 

and Marston and the study by Harris, Marston, Mishra, and O’Brien discussed above.590 

Finally, in their request for rehearing of Opinion No. 551, CAPs contend that the 

8.6 percent market risk premium calculated by MISO TOs in the First Complaint 

proceeding using a one-step DCF analysis to estimate the expected market return is 

substantially higher than forward-looking market risk premiums calculated by other 

financial analysts during the same time period. They cite a PIMCO report calculating a 

forward-looking equity risk premium of 3.9 percent calculated by comparing the 

projected 10-year return of the S&P 500 to inflation protected 10-year treasury bonds. 

They also state that the American Appraisal Risk Premium Quarterly calculated a 

forward-looking risk premium of 6.0 percent, Duff & Phelps calculated a forwardlooking risk premium of 5.0 percent, and Value Line estimated that the required equity 

 587 CAPs Reply Br. (I) at 17-18; CAPs Reply Br. (II) at 33-34. 

588 CAPs Reply Br. (I) at 18; CAPs Reply Br. (II) at 34. 

589 Morin at 308. 

590 Id. at 159-164. 
Docket Nos. EL14-12-003 and EL15-45-000 - 141 - 

premium above the yield on ten-year bonds in order to induce investment in corporate 

equity was about 5.5 percent. 

There are a variety of views as to the reasonable market risk premium to include in 

a CAPM study and what method to use to determine that premium, as is clear from 

Dr. Morin’s summary of academic studies of both historical and prospective market risk 

premiums. Dr. Morin concludes that “Faced with this myriad, and often conflicting, 

evidence on the magnitude of the risk premium, a regulator might very well be confused 

about the correct market risk premium.”591 Although the risk premiums we approve in 

this order exceed those of certain other analyses, we find that their determination is 

analytically sound and supported by the evidence in this proceeding. We find, on 

balance, that the MISO TOs’ use of a one-step DCF analysis of the dividend paying 

members of the S&P 500, in conjunction with Trial Staff’s outlier test, to determine the 

expected market return is reasonable. 

We now turn to the issue of what short-term growth projection sources to use in 

the one-step DCF analysis. For the reasons discussed below, we find that only the IBES 

three to five year consensus growth projections should be used. Thus, we find that MISO 

TOs erred in averaging the IBES growth projections with single analyst Value Line

growth projections. This determination is consistent with our determination above to 

utilize IBES data for the short-term growth projection in the two-step DCF model. In that 

determination, we held that the record suggests that IBES provides more stable and 

robust data than Value Line, because, among other reasons, the IBES growth projections 

are consensus projections generally based on projections from a number of independent 

analysts and brokerage and investment firms, whereas the Value Line growth projections 

are by a single analyst.592 Moreover, the Commission has rejected proposals to average 

IBES short-term growth projections with Value Line growth estimates, finding that Value 

Line projections are “projections from a single source” and their use would “dilute the 

industry consensus reflected in the IBES data.”593 

In addition, the Marston and Harris articles cited above in support of using a onestep DCF analysis of the dividend paying members of the S&P 500 as part of determining 

the market risk premium endorse the use of IBES projections as the single growth 

projection in that analysis. For example, Harris and Marston concluded in Estimating 

Shareholder Risk Premia Using Analysts’ Growth Forecasts that the use of IBES data 

 591 Id. at 163. 

592 See, e.g., supra PP 125-127. 

593 Nw. Pipeline Corp., 87 FERC at 62,058-59; Enbridge Pipelines (KPC), 100 

FERC ¶ 61,260 at P 234. 
Docket Nos. EL14-12-003 and EL15-45-000 - 142 - 

“offers a straightforward and powerful aid to establishing required rates of return either 

for corporate investment decisions or in the regulatory arena.” 594

 As MISO TOs point out, Opinion No. 551 accepted their proposal to average 

IBES and Value Line growth projections for purposes of the DCF analysis of the dividend 

paying members of the S&P 500 as part of implementing the CAPM model. However, in 

doing so, the Commission explained, “Although we require more precision from our DCF 

model—as the primary financial model that we use, and have used for decades, to 

determine public utility ROEs—that same degree of precision is less essential in the 

CAPM analysis because that analysis is but one of multiple pieces of evidence 

corroborating the results of our DCF analysis.”595 In this order, by contrast, we find that 

it is appropriate to give equal weight to the DCF and CAPM models in setting just and 

reasonable ROEs. Accordingly, the CAPM model must be implemented with the same 

degree of precision as the DCF model. Therefore, having found that use of the IBES 

growth projections is preferable to the Value Line growth projections, we require the sole 

use of IBES growth projections for the DCF component of the CAPM analysis. 

D. Betas and Size Premium 

1. CAPs 

In their initial briefs, CAPs argue that Dr. Avera’s CAPM approach improperly 

includes a size premium adjustment to the base CAPM ROE range. CAPs contend that 

Dr. Avera’s application of the size premium adjustment produces an inflated and 

unreliable CAPM result due to the use of mismatched betas. As explained below, CAPs 

assert that the betas used in Dr. Avera’s base CAPM are different from, and incompatible 

with, the betas in the size premium adjustment. Thus, CAPs argue that the adjusted 

CAPM results accurately reflect neither a security’s investment risk nor the marketrequired return on that investment risk level. CAPs assert that, as Mr. Gorman testifies, 

the CAPM model produces the most reliable results when it does not include a size 

premium adjustment.596 

CAPs note that in the base CAPM, Dr. Avera relied on Value Line’s adjusted 

betas. CAPs state that Value Line measures a “raw” beta based on a regression of the 

monthly returns of the individual companies, relative to the New York Stock Exchange 

 594 Robert S. Harris and Felicia C. Marston, Estimating Shareholder Risk Premia 

Using Analysts’ Growth Forecasts, Fin. Mgmt., Summer 1992, at 6. 

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

596 CAPs Initial Br. (I) 31-32; CAPs Initial Br. (II) 31-32. 
Docket Nos. EL14-12-003 and EL15-45-000 - 143 - 

(NYSE) average, over a five-year period. CAPs note that Value Line then adjusts the raw 

beta for the long-term tendency of beta to converge on the market beta of one over long 

periods of time. CAPs state that Value Line’s adjusted betas represent a raw beta 

estimate given two-thirds weight and the market beta of one given one-third weight.597 

CAPs also note that Value Line publishes its adjusted betas, not its raw betas.598

CAPs further state Dr. Avera’s size premium adjustment relies on Duff & Phelps 

unadjusted or “raw” betas. CAPs note that Duff & Phelps’ raw betas are produced by a 

regression study of the monthly returns on the stock index that are in excess of a 30-day 

U.S. Treasury yield over the period 1926 through the most recent period. CAPs state 

that, unlike Value Line, Duff & Phelps does not adjust raw betas for the long-term 

tendency of betas to converge on the market beta of one over time, and thus, the Value 

Line and Duff & Phelps betas are not measured in the same manner and are incompatible 

with each other. Additionally, CAPs argue that Duff & Phelps explicitly caution against 

the use of mismatched betas. CAPs assert that when these two betas are combined, as 

Dr. Avera has proposed, they do not accurately measure the risk or required return for a 

security and in fact, inflate the CAPM return estimate.599 

CAPs argue that Mr. Gorman corrects Dr. Avera’s CAPM to incorporate raw betas 

in both the base CAPM analysis and the size adjustment, which makes it evident that the 

use of mismatched betas inflates the CAPM results. CAPs contend that Mr. Gorman’s 

corrected version of Dr. Avera’s base CAPM produces a midpoint value of 8.40 percent 

and, after applying the size adjustment, a midpoint value of 9.09 percent. Further, CAPs 

assert that, when a consistent beta methodology is used to measure both the base CAPM 

and size adjustment, the resulting midpoint of 9.09 percent is reasonably comparable to a 

base CAPM return using a Value Line adjusted beta without a size premium. CAPs argue 

that the use of unrelated betas involves an apples-and-oranges measurement of risk and 

return, and therefore the CAPM should not include a size adjustment.600

 597 CAPs Initial Br. (I) at 32 (citing Ex. JC-100 at 17); CAPs Initial Br. (II) at 32 

(citing Ex. ICG-200 at 17). 

598 CAPs Initial Br. (I) at 32 (citing Ex. JC-100 at 18-19); CAPs Initial Br. (II) at 

32 (citing Ex. ICG-200 at 17). 

599 CAPs Initial Br. (I) at 32-33 (citing Ex. JC-100 at 18-19); CAPs Initial Br. (II) 

at 32-33 (citing Ex. ICG-200 at 18-19). 

600 CAPs Initial Br. (I) at 33-34; CAPs Initial Br. (II) at 33-34. 
Docket Nos. EL14-12-003 and EL15-45-000 - 144 - 

2. Trial Staff 

Trial Staff witness, Mr. Keyton, supports omitting the size premium adjustment. 

Trial Staff argues the three most important reasons the size premium adjustment should 

be removed are: (1) it is a questionable method with conflicting support among 

academics; (2) the data on which the Commission relied to support a size premium 

adjustment in Opinion No. 551 contradicts the Commission’s goal to use forward-looking 

methods for developing the cost of equity; and (3) Mr. Keyton’s regression analysis 

determined there is no meaningful relationship between forward-looking DCF results and 

current market capitalizations.601 Mr. Keyton also notes that several scholars disagree 

over the use of a size premium adjustment in numerous studies.602 Trial Staff also argues 

that in Opinion No. 551, the size premium adjustment was based on historical (rather than 

forward-looking) data that shows smaller market capitalization companies earn higher 

returns than larger market capitalization companies.603 

In reply briefs, Trial Staff agrees with CAPs and LPSC that the size premium 

adjustment is unsupported and may amount to double counting. Trial Staff agrees with 

LPSC that there is no empirical evidence suggesting the need for a size premium 

adjustment.604

3. Other Parties 

LPSC also criticizes the MISO TOs’ use of the raw beta for determining the size 

premium adjustment while using the Value Line adjusted beta for the CAPM calculation. 

LPSC also argues that the stock index used to derive beta should be the same as the index 

used to determine the required return on equity.605 LPSC states that in Opinion No. 551, 

the Commission accepted a CAPM analysis that forecasted equity returns and compared 

them with current long-term bond yields. LPSC argues that MISO TOs’ witness 

Dr. Avera, however, matched a short-term DCF equity return with long-term Treasury 

bond yields, contrary to the guidance in New Regulatory Finance. LPSC argues MISO 

TOs applied a beta developed by comparing utility stock volatility with that of the 

New York Stock Exchange, but then applied that beta to dividend-paying firms in the 

 601 Trial Staff Initial Br. (I) at 14; Trial Staff Initial Br. (II) at 13-14. 

602 Trial Staff Initial Br. (I) at 15; Trial Staff Initial Br. (II) at 14. 

603 Trial Staff Initial Br. (I) at 15; Trial Staff Initial Br. (II) at 14-15. 

604 Trial Staff Reply Br. (I) at 10; Trial Staff Reply Br. (II) at 10. 

605 LPSC Initial Br. at 8. 
Docket Nos. EL14-12-003 and EL15-45-000 - 145 - 

S&P 500, which created a mismatch that conflicts with advice in New Regulatory 

Finance.

606

LPSC argues that the MISO TOs’ method incorrectly applied a size premium 

adjustment to increase the return on equity, on the theory that beta does not fully account 

for risk differences resulting from the size of firms. LPSC argues that no empirical 

evidence suggesting the need for a size premium adjustment for utilities was cited and it 

appears that none exists. LPSC argues the empirical evidence in the record, 

capitalization amounts and DCF results for the proxy group, shows that size is completely 

unrelated to the required return on equity.607 LPSC also points to a regression analysis 

between company size and the DCF-calculated ROEs to argue that the size premium 

adjustment is inappropriate, citing the lack of apparent relationship between required 

return and company size.608

RPGI opposes the incorporation of a size premium adjustment in CAPM 

calculations and argues it has been shown through empirical studies to be invalid as 

applied to utilities. RPGI further notes that Mr. Parcell demonstrated in a study 

comparing the size of a utility with its risk factors, that there is no significant difference 

and there is no discernible pattern of increase among the risk indicators of publicly-traded 

electric utilities of different sizes.609

4. MISO TOs 

In reply briefs, MISO TOs argue there is no rational basis for Mr. Gorman’s 

argument that it is inappropriate to use Value Line’s adjusted betas in conjunction with 

size premium adjustments from Duff & Phelps and that his attempt to interject raw betas 

into the process simply biases his results downward.610 MISO TOs contend that Duff & 

Phelps neither recommends a specific source for beta, nor suggests that adjusted betas are 

incompatible with their size premia adjustments. MISO TOs argue that Duff & Phelps 

simply observed that, because there can be differences in the methodologies used by 

alternative reporting services, it is preferable to use the same, consistent source of betas 

 606 Id. at 36. 

607 Id.

608 Id. at 40-42. 

609 RPGI Initial Br. (I) at 28-29 (citing Parcell Aff. (I) at 11); RPGI Initial Br. (II) 

at 32 (citing Parcell Aff. (II) at 10). 

610 MISO TOs Reply Br. (I) at 29-30; MISO TOs Reply Br. (II) at 29-30. 
Docket Nos. EL14-12-003 and EL15-45-000 - 146 - 

for all companies included in the analysis.611 Further, MISO TOs argue that there is no 

inconsistency between the two betas because the beta values reported by Value Line are 

based on an ordinary least-squares analysis, as are the size premium adjustments reported 

by Duff & Phelps for the firm size deciles.612

MISO TOs oppose the “build-up method” presented by Mr. Gorman, which they 

argue is based on historical risk premiums that have been rejected by the Commission 

and found to be considerably downward-biased.613 MISO TOs argue that Mr. Gorman 

confuses the size premium adjustment required by the CAPM with aspects of the buildup method described in a Duff & Phelps publication and that the CAPM and build-up 

method are not synonymous and in fact are distinct methods for estimating the cost of 

equity. MISO TOs contend that the industry risk adjustment Mr. Gorman uses in the 

context of the build-up method is in lieu of the more precise beta risk measure for each 

firm in the proxy group that is employed in the CAPM. MISO TOs assert that 

Mr. Gorman’s observation that regulated utility companies’ industry risk is lower than 

companies in other industries does not support the use of a generic industry risk 

adjustment, as risk differences are already reflected in the CAPM through the use of beta. 

Further, MISO TOs argue the Commission has already rejected Mr. Gorman’s build-up 

method, as well as the related logical errors underlying his contentions regarding the 

CAPM size premium adjustment and the Commission should continue to do so.614

MISO TOs assert the Commission should continue to include a size premium 

adjustment when applying the CAPM. MISO TOs argue that Duff & Phelps conclude in 

the publication attached to Mr. Gorman’s affidavit that observation of the size effect is 

consistent with a modification of the pure CAPM, that studies have shown the limitations 

of beta as a sole measure of risk, and that the size premium adjustment is an empirically 

 611 MISO TOs Reply Br. (I) at 30; MISO TOs Reply Br. (II) at 30. 

612 MISO TOs Reply Br. (I) at 30 n.56; MISO TOs Reply Br. (II) at 30 n.56. 

613 MISO TOs Reply Br (I) at 32 (citing N.Y. Indep. Sys. Operator, Inc., 146 

FERC ¶ 61,043, at P 105, reh’g denied, 147 FERC ¶ 61,148 (2014), appeal denied sub 

nom. Cent. Hudson Gas & Elec. Corp. v. FERC, 783 F.3d 92 (2015)); MISO TOs Reply 

Br (II) at 32 (citing same). 

614 MISO TOs Reply Br. (I) at 33-34 (citing Opinion No. 551, 156 FERC ¶ 61,234 

at PP 142, 166); MISO TOs Reply Br. (II) at 33-34 (citing same). 
Docket Nos. EL14-12-003 and EL15-45-000 - 147 - 

derived correction to the pure CAPM.615 

MISO TOs argue Mr. Parcell and Mr. Keyton incorrectly place significant weight 

on a 1993 study by Annie Wong that refutes the need for a size premium adjustment 

when applying the CAPM to a utility. MISO TOs contend that a closer examination of 

this research reveals that it is largely inconclusive and inconsistent with CAPM and 

demonstrates no material difference between utilities and industrial firms with respect to 

size premiums. MISO TOs argue that her study also finds no significant relationship 

between beta and returns, which contradicts modern portfolio theory and the CAPM.616

MISO TOs assert that Mr. Parcell’s observation that the majority of publicly 

traded companies are unregulated and operate in industries that are much riskier than the 

utility industry says nothing at all about the relevance of a size premium adjustment. 

MISO TOs argue that the fact that the size premia reported by Duff & Phelps was 

estimated on an industry-by-industry basis provides no basis to ignore the relationship in 

estimating the cost of equity for utilities. MISO TOs contend that Mr. Gorman concluded 

that a size premium adjustment for a regulated utility company should only be considered 

along with recognizing the low-risk nature of the regulated utility industry and that that is 

exactly the effect of combining Value Line’s beta values for the proxy companies with 

beta adjusted size premiums reported by Duff & Phelps.617

 In response to Mr. Parcell’s claims that a comparison of risk measures for utilities 

of different size demonstrates that there is no need for a size premium adjustment, MISO 

TOs argue the size premium adjustment is narrowly tailored to address an inability of 

beta to fully account for the impact of firm size within the CAPM, and the CAPM did not 

even figure into Mr. Parcell’s simplistic comparison.618 

In response to Mr. Keyton’s claims that a regression between DCF estimates for 

the dividend-paying firms in the S&P 500 index and market capitalization demonstrates 

there is no need for a size premium adjustment, MISO TOs argue that the size premium 

does not relate to cost of equity estimates computed using the DCF model, which were 

the basis for Mr. Keyton’s regression. Rather, MISO TOs assert that they are solely 

intended to address an inability of beta to account for the impact of firm size, and beta did 

 615 MISO TOs Reply Br. (I) at 35-36 (citing Ex. JC-101 at 3); MISO TOs Reply 

Br. (II) at 35-36 (citing Ex. JC-101 at 3). 

616 MISO TOs Reply Br. (I) at 36; MISO TOs Reply Br. (II) at 36. 

617 MISO TOs Reply Br. (I) at 40; MISO TOs Reply Br. (II) at 40. 

618 MISO TOs Reply Br. (I) at 40; MISO TOs Reply Br. (II) at 40. 
Docket Nos. EL14-12-003 and EL15-45-000 - 148 - 

not even figure into Mr. Keyton’s regression. MISO TOs argue that Trial Staff’s 

calculations have nothing whatsoever to do with the CAPM and say nothing about the 

relevance of the size premium adjustment.619 MISO TOs assert that these observations 

apply equally to the LPSC’s regression between DCF estimates and size. Further, MISO 

TOs contend that the size premium adjustment relates to beta, not the DCF model, and 

the fact that DCF estimates may not be correlated with market capitalization is unrelated 

to the size premium adjustment, as applied in the CAPM.620 

MISO TOs argue that Mr. Parcell’s historic premium of 6.0 percent is too low and 

that he incorrectly calculated the equity risk premium using the total return for Duff & 

Phelps’ long-term government bond series. MISO TOs assert that, as a result, his 

historical equity risk premiums fall far below what his own source reports and 

Mr. Parcell’s CAPM analysis is further compromised. MISO TOs argue that using only 

the arithmetic mean income component of the long-term government bond return 

provides a more reliable estimate of the expected risk premium because investors do not 

anticipate capital losses for a risk-free security.621 

In response to LPSC’s arguments that Value Line betas cannot be applied to firms 

in the S&P 500 due to a mismatch, MISO TOs contend that application of the DCF 

approach to the dividend-paying firms in the S&P 500 Index provides a sound proxy for 

investors’ expected return on the market. MISO TOs assert that similarly, reference to 

Value Line’s published beta values also offer an objective proxy for an unobservable 

forward-looking beta and that there is no mismatch.622

MISO TOs argue that LPSC wrongly contends that the size premium adjustment is 

predicated on a finding that utilities are generally smaller than the companies in the S&P 

500 and that size premium adjustments correspond to market capitalization across the 

spectrum of publicly traded firms.623

 619 MISO TOs Reply Br. (I) at 41; MISO TOs Reply Br. (II) at 41. 

620 MISO TOs Reply Br. (I) at 42; MISO TOs Reply Br. (II) at 42. 

621 MISO TOs Initial Br. (I), App. 2 McKenzie Aff. (I) at 35; MISO TOs Initial Br. 

(II), App. 2McKenzie Aff. (II) at 35. 

622 MISO TOs Reply Br. (I) at 31; MISO TOs Reply Br. (II) at 31. 

623 MISO TOs Reply Br. (I) at 38 n.85; MISO TOs Reply Br. (II) at 38 n.85. 
Docket Nos. EL14-12-003 and EL15-45-000 - 149 - 

5. Commission Determination 

With regard to MISO TOs’ size premium adjustment, the Commission stated in 

Opinion No. 531-B that the use of such an adjustment was “a generally accepted 

approach to CAPM analyses.”624 We continue to find this to be the case. 

CAPs argue that it is inconsistent to apply the Ibbotson size adjustment, which is 

derived based on raw betas, to a CAPM analysis that uses adjusted betas. We continue to 

find that the Value Line adjusted betas are reasonable for use in the CAPM. There is 

substantial evidence in the record that investors rely on Value Line betas.625 No party 

objects to use of adjusted betas, which Dr. Morin supports, stating that “the regression 

tendency of betas to converge to 1.0 over time is very well known and discussed in the 

financial literature.”626 We acknowledge that there is imperfect correspondence between 

the size premia being developed with different betas. Nonetheless, we conclude that the 

size premium adjustments improve the accuracy of the CAPM results and cause it to 

better correspond to the costs of capital estimates employed by investors. 

We also find that the application of size premium adjustments based on the NYSE 

to dividend-paying members of the S&P 500 is acceptable. The use of the NYSE for the 

size premium calculations enabled Ibbotson to develop a rich data set. There is no 

evidence that the application to a CAPM methodology using S&P 500 growth rates and 

dividend yields with a size premium adjustment based on NYSE data is problematic. 

There is no evidence that companies in the S&P 500 feature different risk premiums than 

those in the NYSE. Furthermore, the betas and size premia are applied to the calculated 

cost of equity of individual utilities in the proxy group, regardless of what stock index 

they may be found in. 

We find that, though not uniform, a sufficient amount of academic literature exists 

to indicate that many investors rely on the size premia. Dr. Morin discusses the “size 

effect” finding that: 

Investment risk increases as company size diminishes, all else 

remaining constant. Small companies have very different 

returns than large ones, and on average they have been 

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

625 See, e.g., MISO TOs Reply Br. (I), App. 2 at 31-32; Robert S. Harris & Felicia 

C. Marston, Estimating Shareholder Risk Premia Using Analysts’ Growth Forecasts, 

Financial Management, Summer 1992 (using betas derived using Value Line method).

626 Morin at 72. 
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higher. The greater risk of small stocks does not fully 

account for their higher returns over many historical 

periods.627

Dr. Morin also avers that the higher returns required by investors in small 

companies than the CAPM would project is well documented in the financial literature.628 

Specifically, Dr. Morin cites to work by Rolf Banz showing that from 1936 to 1975 

stocks of small firms earned higher risk-adjusted abnormal returns than those of large 

firms.629 Eleswarapu Reinganum found a similar dynamic, looking at the relationship 

between firm size and PE ratio.630 Ibbotson Associates, now under Duff & Phelps, has 

long published a series quantifying this effect for various sizes of firms, pulling from data 

going back to 1926. 

We also agree with the Presiding Judge that the financial literature arguing against 

the continued existence of the size premium or its applicability to utilities is unavailing. 

Specifically, we do not find persuasive the article cited by Professor Annie Wong that 

utilities are less risky than industrial stocks and feature betas that do not decrease with 

firm size.631 Even if true, which the MISO TOs aver is not the case, the argument in 

favor of a size premium adjustment is that there are differences in risk and required 

returns between small and large companies that are not captured in the betas. 

Consequently, lack of substantial variance in the betas between large and small 

companies is not indicative that they feature differences in risk and corresponding returns 

that are the basis for the size premium adjustment. The subsequent endorsement of this 

phenomenon, by Dr. Morin, lends credence to the view that Professor Wong’s 

conclusions are no longer state of the art. Furthermore, an article reconsiders Professor 

Wong’s evidence and concludes that “new information... indicates that there is a small 

 627 Id. at 181. 

628 Id. at 181-183. 

629 Id. at 181-183 (citing Rolf Banz, The Relationship between Return and Market 

Value of Common Stocks (1981)). 

630 Eleswarapu Reinganum, Misspecification of Capital Asset Pricing Empirical 

Anomalies based on Earnings Yields and Market Values, Journal of Financial Economics, 

Vol. 9, 1981. 

631 Annie Wong, Utility Stocks and the Size Effect: an Empirical Analysis (1993). 
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firm effect in the utility sector.”632 A more recent article published in Business Valuation 

Review found that “none of the academic papers throughout the last three decades have 

qualified the [size premium] as a statistical error.”633 Finally, a 2019 National 

Association of Certified Valuators and Analysts publication supports the use of the size 

premium adjustment to the CAPM.634 We thus find that, based on the evidence of this 

dynamic and that many investors consider it when evaluating companies, it is appropriate 

to include it in CAPM determinations. 

We also find unconvincing Mr. Keyton and the LPSC’s regression analyses 

demonstrating that a size premium adjustment is not appropriate for the CAPM. 

Mr. Keyton and LPSC’s regression analyses examine the relationship between forwardlooking DCF results and company size. Although DCF results do reflect the cost of 

capital required by investors, the DCF model is fundamentally different than the CAPM 

model, which relies on a distinct set of assumptions, inputs, and calculations. This 

diversity is part of the reason that we are including the CAPM model. By the same 

rationale, a regression analyses on the reasonableness of CAPM model inputs using the 

DCF model is unpersuasive, since that model does not consider betas at all. 

We also find there to be insufficient reason to conclude that the utility industry is 

unique, as certain intervenors suggest, such that the size premium adjustment is 

inapplicable. The size premium adjustment is supported by a robust data set. Although 

the variations in the risk profiles of firms in any industry inevitably vary somewhat, we 

do not see sufficient evidence in the record to conclude that factors specific to the utility 

industry insulate smaller utilities from risks such that the CAPM betas sufficiently 

account for any increased risks and corresponding returns demanded by investors. 

 632 Thomas M. Zepp, Utility stocks and the size effect—revisited, 43 Quarterly 

Review of Economics and Finance 578–82 (2003). 

633 Roger A. Grabowski, The Size Effect Continues to be Relevant When 

Estimating the Cost of Capital, Business Valuation Review, Fall 2018, at 93–109 

(“Grabowski”). 

634 Roger G. Ibbotson & James P. Harrington, Using a Non-Beta-Adjusted Size 

Premium in the Context of the CAPM Will Likely Overstate Risk and Understate Value, 

Quick Read (Jan. 30, 2019), https://quickreadbuzz.com/2019/01/30/business-valuationgrabowski-harringtonsing-a-nonbeta-adjusted-size-premium/. 
Docket Nos. EL14-12-003 and EL15-45-000 - 152 - 

VIII. Risk Premium Model 

A. Background 

The risk premium methodology, in which interest rates are also a direct input, is 

“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.”635 

Multiple approaches have been advanced to determine the equity risk premium for 

a utility.636 For example, a risk premium can be developed directly, by conducting a risk 

premium analysis for the company at issue, or indirectly by conducting a risk premium 

analysis for the market as a whole and then adjusting that result to reflect the risk of the 

company at issue.637 Another approach for the utility context is to “examin[e] 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.”638

In Opinion No. 551, the Commission found that “it is appropriate to rely on risk 

premium analyses as corroborative evidence during periods of anomalous capital market 

conditions”639 and that “MISO TOs’ risk premium analysis is sufficiently reliable to 

corroborate the results of the DCF analysis in this proceeding.”640 The Commission 

concluded that “MISO TOs’ risk premium study is valid and supports awarding the 

MISO TOs a base ROE above the midpoint”641 and found that “We, therefore, affirm the 

Presiding Judge’s acceptance of the risk premium analysis to be used as corroborative 

evidence, in determining whether the midpoint of the zone of reasonableness produced by 

the Commission's DCF analysis provides a return that satisfies the requirements of Hope 

 635 Opinion No. 531, 147 FERC ¶ 61,234 at P 147 (citing Morin at 108). 

636 See generally Morin at 107-130. 

637 Id. at 110. 

638 Id. at 123. 

639 Opinion No. 551, 156 FERC ¶ 61,234 at P 191. 

640 Id. P 200. 

641 Id. P 191. 
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and Bluefield.”642 The Commission also made various determinations regarding specific 

aspects of how the Risk Premium analysis should be implemented.643 CAPs, RPGI, and 

OMS requested rehearing of certain of the Commission’s determinations regarding how 

the Risk Premium analysis was implemented. 

In the Initial Decision in the Second Complaint proceeding, the Presiding Judge 

similarly found that MISO TOs’ “historical risk premium analysis is valid and supports 

awarding the MISO TOs a Base ROE above the Midpoint.”644 The Presiding Judge also 

made various determinations regarding specific aspects of how the Risk Premium 

analysis should be implemented.645 CAPs, OMS and JCA, and RPGI took exception to 

the Presiding Judge’s determinations regarding how the Risk Premium analysis was 

implemented. 

In the Briefing Order, for purposes of establishing a new just and reasonable ROE 

where the existing ROE has been shown to be unjust and unreasonable (i.e., the second 

prong of the FPA section 206 analysis), the Commission proposed to use the Risk 

Premium model, DCF model, CAPM, and Expected Earnings model to produce four 

separate cost of equity estimates and then average the four estimates to produce the just 

and reasonable ROE. For each of the DCF, CAPM, and Expected Earnings models, the 

Commission proposed to use the central tendency of the respective zones of 

reasonableness as the cost of equity estimate for average risk utilities and then average 

those three midpoint/median figures with the sole numerical figure produced by the Risk 

Premium model to determine the ROE of average risk utilities. The Commission 

proposed to use the midpoint/medians of the resulting lower and upper halves of the 

zones of reasonableness to determine ROEs for below or above average risk utilities, 

respectively.646 The Commission proposed to omit the Risk Premium model from the 

analysis under the first prong of section 206 because it does not produce a range which 

can be used to determine a zone of reasonableness and instead only produces a numerical 

 642 Id. P 200. 

643 Id. PP 192-199. 

644 Initial Decision (II), 155 FERC ¶ 63,030 at P 391. 

645 See id. PP 353-390. 

646 See Briefing Order, 165 FERC ¶ 61,118 at P 18. 
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point. Accordingly, the Commission proposed to use the Risk Premium model output 

only in the second prong of the FPA section 206 analysis.647

B. CAPs 

CAPs contend that the Commission erred in relying on MISO TOs’ Risk Premium 

analysis, which CAPs argue should have been either rejected or adjusted.648 CAPs argue 

that, at a minimum, the Commission should correct MISO TOs’ Risk Premium analysis 

by refining the readings of, and dates attributed to the 81 Commission orders used as 

inputs in the Risk Premium analysis.649 CAPs state that the base ROE was not at issue in 

many of the 81 Commission orders, including those that approved settlements. 

According to CAPs, by taking appropriate account of the relied upon cases, the result of 

MISO TOs’ Risk Premium analysis would have been materially below the 10.32 percent 

DCF upper midpoint.650 

CAPs note that nearly all of the Commission outcomes relied upon in MISO TOs’ 

Risk Premium analysis were taken from a period when the Commission applied a onestep DCF methodology that it subsequently found to have been inappropriate. CAPs 

argue that such reliance unreasonably perpetuates that past error.651 CAPs also argue that 

many of these cases involved incentive adders and that previously-determined base ROEs 

were not at issue.652 

CAPs also explain that, because many of these cases involve Commission 

settlement and litigation, there is a meaningful disconnect between the dates of 

Commission orders and the period of time they reflect. CAPs argue that Opinion No. 551 

failed to consider that the core of MISO TOs’ Risk Premium methodology is the 

comparison between past findings as to the cost of equity and the contemporaneous cost 

of debt. CAPs point to the 12.38 percent utility cost of equity as an example. CAPs 

explain that the 12.38 percent base ROE was based on a study period from August 2001 

 647 Id. P 18 n.39. 

648 CAPs Rehearing Request at 41. CAPs state that, prior to Opinion No. 531, the 

Commission has repeatedly rejected risk premium analyses. Id. at 42. 

649 Id.at 28, 43. 

650 Id. at 41-43. 

651 Id. at 42 & n.153. 

652 Id. at 43. 
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through January 2002, and therefore argue that it is arbitrary and capricious for MISO 

TOs’ Risk Premium study to compare it to bond yields in 2011, 2012, and 2013.653

CAPs state that, with its corrections to MISO TOs Risk Premium study, the 

resulting cost of equity drops to 9.89 percent.654 CAPs assert that its 9.89 percent Risk 

Premium outcome or OMS’ 9.94 percent Risk Premium outcome can serve as the 

representative Risk Premium result for this case.655

CAPs argue that the Commission, in Opinion No. 551, adopted a deficient Risk 

Premium study prepared by MISO TOs’ witness, Dr. Avera. According to CAPs, MISO 

TOs’ Risk Premium study generates inaccurate and unreliable cost of equity indicators, 

and should be replaced by CAPs’ witness, Mr. Gorman’s, Risk Premium study.656 CAPs 

also contend that the Presiding Judge, in Initial Decision (II), accepted a flawed Risk 

Premium study prepared by MISO TOs’ witness, Mr. McKenzie.657 

CAPs assert that compiling past Commission findings and attempting to trend 

them to current market conditions is inferior to directly applying empirical techniques to 

current market information. CAPs claim that the data set of Commission cases used in 

MISO TOs’ Risk Premium studies consists largely of cases where the Commission 

expressly declined to make such a substantive cost of capital finding.658 CAPs assert that, 

therefore, the ROE in many of these cases do not reflect market costs at the time of the 

Commission order.659 CAPs argue that, therefore, the fundamental assumption 

underlying Dr. Avera’s Risk Premium analysis that was accepted in Opinion No. 551 and 

 653 Id. at 44-45. 

654 Id. at 47. CAPs propose modifications to MISO TOs’ Risk Premium study 

regarding its use of the 12.38 base ROE, as well as its use of several other base ROEs. 

Id. at 46-48. 

655 Id. at 48. CAPs also state that, despite being rejected in the Initial Decision, 

Trial Staff witness Keyton’s Risk Premium analysis was well-supported. Id. at 26-27. 

656 CAPs Initial Br. (I) at 35; CAPs Initial Br. (II) at 35. 

657 CAPs Initial Br. (II) at 37. 

658 CAPs Initial Br. (I) at 37 (citing Ex. JC-100 at 27-29); CAPs Initial Br. (II) 

at 37 (citing Ex. ICG-200 at 27, 28-29). 

659 CAPs Initial Br. (I) at 37-38; CAPs Initial Br. (II) at 37. 
Docket Nos. EL14-12-003 and EL15-45-000 - 156 - 

Mr. McKenzie’s Risk Premium analysis that was accepted in Initial Decision (II), is 

invalid. 

CAPs also argue that MISO TOs’ Risk Premium studies rely too heavily on the 

inverse relationship between interest rates and risk premiums. According to CAPs, over 

the last five to six years, the real yield spread between utility stocks and Baa bond yields 

has been nearly flat.660 CAPs assert that this shows that interest rate changes are not the 

sole driver of risk premium changes. Consequently, CAPs recommend applying the 

following parameters for risk premium determinations: (1) ROE determinations made by 

the Commission or state commissions at the time of the order; (2) observable market 

evidence of risk differential, including spreads between A-rated and Baa-rated utility 

bonds and long-term Treasury bonds; and (3) a comparison of utility stock yields to 

utility bond yields and Treasury bond yields. Applying such parameters, Mr. Gorman 

recommends a Risk Premium model ROE range of 8.98 to 9.12 percent in the First 

Complaint proceeding661 and of 9.09 to 9.76 percent in the Second Complaint 

proceeding.662

CAPs also argue that the risk premium model is inherently less accurate than a 

well-constructed DCF or CAPM model because it relies on results of market-based 

methods from past cases, where the DCF and CAPM model rely on primary data. CAPs 

aver that the Risk Premium model tends to replicate the regulatory lag and “inertial 

continuation of past returns” affecting past regulatory decisions.663 

In addition, CAPs contend that the MISO TOs’ Risk Premium analyses rely on 

bond yield projections that the Commission has found to be speculative. CAPs state that 

MISO TOs presented no reason for use of projected bond yields other than to say that this 

approach is “[c]onsistent with the approach adopted in the Coakley Briefing Order.”664

CAPs argue that, however, the Coakley Briefing Order used a Risk Premium result based 

on the actual bond yield. CAPs point out that Initial Decision (I) in the First Complaint 

 660 CAPs Initial Br. (I) at 38 (citing Ex. JC-100 at 31, 33); CAPs Initial Br. (II) 

at 38 (citing Ex. ICG-200 at 33). 

661 CAPs Initial Br. (I) at 39. 

662 CAPS Initial Br. (II) at 39. 

663 CAPs Reply Br. (I) at 26; CAPs Reply Br. (II) at 46. 

664 CAPs Reply Br. (I) at 27 (citing MISO TOs Initial Br. (I), App. 2 McKenzie 

Aff. (I) at 27); CAPs Reply Br. (II) at 47 (citing MISO TOs Initial Br. (II), App. 2 

McKenzie Aff. (II) at 26 n.46). 
Docket Nos. EL14-12-003 and EL15-45-000 - 157 - 

proceeding, which ROE the Briefing Order relies on for its Risk Premium figures, 

rejected use of a projected bond yields as “speculative,”665 a position affirmed in Opinion 

No. 551.666 CAPs contend that, in order to be internally consistent, a Risk Premium 

study must use projected bond yields to derive the risk premium as well as the yield to 

which it is added. Additionally, CAPs argue that the projected bond yields do not 

represent the known and measurable cost of capital and that projected bond yields have 

proven unreliable. 

CAPs further argue that MISO TOs’ Risk Premium approach includes ROEs from 

proceedings for which ROEs were not at issue. Consequently, according to CAPs, ROEs 

from such proceedings are not a valid basis for comparing the cost of equity and cost of 

debt. CAPs assert that these included two cases which the New England TOs recently 

admitted did not involve base ROEs.667

C. RPGI 

RPGI notes that MISO TOs’ Risk Premium analysis relied on ROEs authorized by 

the Commission from 2006 through 2014. RPGI questions why, if anomalous market 

conditions call into question the reliability of the DCF in this case, the same is not true 

for the Risk Premium analysis, which relies on DCF-produced returns after the onset of 

the Great Recession.668

RPGI contends that the MISO TOs have not demonstrated that the Risk Premium 

model addresses any of the supposed distortions in the DCF model, and thus has no 

demonstrated superiority over the DCF model.669

RPGI, in its Initial Brief, states that the Risk Premium methodology the 

Commission proposes to use is flawed due to: (1) a conceptual flaw in reasoning; (2) a 

misplaced reliance on research reflecting vastly different financial conditions; and 

 665 CAPs Reply Br. (I) at 27-28 (citing Initial Decision (I) at P 257); CAPs Reply 

Br. (II) at 47 (citing same). 

666 CAPs Reply Br. (I) at 28 (citing Opinion No. 551, 156 FERC ¶ 61,234 at 

P 194); CAPs Reply Br. (II) at 47 (citing same). 

667 See CAPs Reply Br. (I) at 31 (citing New England TOs, Initial Paper Hearing 

Brief, at 60 n.222, Docket No. EL11-66-001, et al. (filed Jan. 11, 2019)). 

668 RPGI Rehearing Request at 13-14. 

669 RPGI Reply Br. (I) at 9. 
Docket Nos. EL14-12-003 and EL15-45-000 - 158 - 

(3) flaws in the model’s inputs. In order to correct these deficiencies, RPGI recommends 

an overhaul to the Risk Premium methodology.670 RPGI states that its Risk Premium 

model, which corrects the various flaws in the proposed Risk Premium model, results in 

an 8.68 percent ROE.671

First, RPGI argues that the Risk Premium model incorporates the same distortions 

that the Commission has found to warrant a departure from full reliance on the DCF 

model. RPGI explains that the Risk Premium model uses the same financial data (i.e., 

interest rates) that the Commission found to be abnormal and unique. According to 

RPGI, it makes no sense to “carry forward” the same financial market conditions 

identified as distorting DCF inputs into an alternative model. RPGI states that, unless 

cured, this case-specific flaw serves as a reason for not using the Risk Premium model at 

all. RPGI contends that he Commission’s stated rational for using other models (i.e., 

concerns over unusual market capital conditions) is inconsistent with relying on those 

same capital market conditions on a going-forward basis.672

Second, RPGI argues that the upward adjustment based on low interest rates 

contradicts the reasoning used to critique the DCF. RPGI explains that, according to 

MISO TOs witness, Ms. Lapson, artificially low interest rates have caused investors to 

migrate from utility bonds to utility stocks.673 RPGI contrasts this claim with the theory 

underlying the adjustment included in MISO TOs’ Risk Premium study, which is that 

lower interest rates correlate with an increase in equity risk premiums. RPGI asserts 

investors cannot be driven to stocks in search of higher returns and simultaneously 

demand a higher premium than had previously been offered. RPGI states that such 

investors would not migrate to stocks and take on the additional risk while 

simultaneously demanding an increase in the risk premium of holding stocks. RPGI 

contends that, if anything, MISO TOs witness Ms. Lapson’s theory would suggest a 

narrower risk premium than under normal conditions.674

 670 RPGI Initial Br. (I) at 29; RPGI Initial Br. (II) at 33. 

671 RPGI Initial Br. (I) at 37; RPGI Initial Br. (II) at 40. 

672 RPGI Initial Br. (I) at 30-31 (citing Parcell Aff. (I) at 14); RPGI Initial Br. (II) 

at 34 (citing Parcell Aff. (II) at 14). 

673 RPGI Initial Br. (I) at 31-32 (citing Initial Decision (I) at PP 123-136, 142-

158); RPGI Initial Br. (II) at 35 (citing same). 

674 RPGI Initial Br. (I) at 32; RPGI Initial Br. (II) at 35-36. 
Docket Nos. EL14-12-003 and EL15-45-000 - 159 - 

Third, RPGI disputes the reliance on the research from 1985 relied upon to support 

the adjustment to the Risk Premium model to reflect the inverse relationship between risk 

premiums and interest rates.675 RPGI explains that the authors actually found the 

relationship between interest rates and risk premiums to be volatile. RPGI notes that the 

statistical correlation between interest rates and risk premiums were actually positive 

over the time period from 1970 through 1979. RPGI argues that the financial conditions 

during the article’s five-year study period from 1980 through 1984 (i.e., increasing 

inflationary expectations) have nothing to do with the financial conditions at issue in 

these proceedings. RPGI asserts that inflation is not a major investment risk, and that no 

meaningful conclusion can be draw from the 34-year old research.676

Fourth, RPGI argues that the MISO TOs’ Risk Premium model is flawed because 

it measures risk premiums over a short-term period. Although RPGI concedes that 

Opinion No. 531 supported the use of a shortened time-period beginning with the 

enactment of the Energy Policy Act of 2005, RPGI notes that the Risk Premium approach 

was merely used as a benchmark in Opinion No. 531. RPGI states that the proposal in 

the Briefing Order faces a higher standard of scrutiny because it is proposed as a source 

of data for computing a just and reasonable return.677

Fifth, RPGI argues that the proposed Risk Premium model incorporates a number 

of dubious choices. RPGI states that input-related flaws include the mismatch between 

the time period to which the data is attributed and the utility bond yields to which they 

are compared. RPGI points to the instant proceedings as an example. According to 

RPGI, the final orders in these proceedings may be issued as many as seven or eight 

years after the complaints were filed and the relevant data were generated.678 RPGI also 

argues that settlements should not be used in the Risk Premium Study. According to 

RPGI, no meaningful precedent can be drawn from a settlement because the Commission 

 675 RPGI Initial Br. (I) at 33 (citing Eugene F. Brigham et al., The Risk Premium 

Approach to Measuring a Utility's Cost of Equity, 14 Fin. Mgmt. 33, 33-45 (1985)); 

RPGI Initial Br. (II) at 36. 

676 RPGI Initial Br. (I) at 34-35; RPGI Initial Br. (II) at 37-38. 

677 RPGI Initial Br. (I) at 35-36; RPGI Initial Br. (II) at 38-39. 

678 RPGI Initial Br. (I) at 36. RPGI also appears to question Midwest TDUs’ 

sorting and combining of all ROE-related orders by calendar year. Id.
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does not approve individual components of a settlement but rather the overall 

settlement.679

D. LPSC 

LPSC states that risk premiums vary substantially over time, but—in theory—

measuring risk premiums over a long period will even out fluctuations and reflect a 

normal risk premium. LPSC asserts that the nine-year period used by MISO TOs was far 

too short to reflect a normal risk premium. LPSC argues that a historic risk premium 

analysis should use the actualized returns on market equity and debt over a long period 

(i.e., using decades of data).680 According to LPSC, it is circular and inaccurate to use 

returns allowed by regulators to determine the risk premium.681 LPSC states that, in 

Opinion No. 551, the Commission used its own past allowed returns on equity to reach a 

decision. LPSC asserts that this methodology is completely circular, and that the 

circularity concerns cannot be dismissed on the basis that allowed returns presumably 

reflect market data, because this only mitigates the circularity problem.682 

LPSC argues that the 77 basis point offset for every percentage change in the cost 

of debt means that the required return on equity is largely unrelated to the cost of debt. 

LPSC contends that there is no statistically-significant relationship between the cost of 

debt and investors’ return on equity requirements.683 LPSC acknowledges that MISO 

TOs’ witness, Dr. Avera, found a strong statistical correlation between interest rates and 

risk premiums. However, LPSC asserts that this simply proved that Commission-allowed 

ROEs barely changed as bond yields fluctuated, and therefore – because the risk premium 

is defined as the difference between the ROE and bond yields – risk premiums of course 

 679 RPGI Initial Br. (I) at 36; RPGI Initial Br. (II) at 40. 

680 LPSC Initial Br. at 5-7, 29-31 (citing Morin at 115 (stating that the use of a 

short period would be defective)). 

681 Id at 5. 

682 Id. at 6-7 (citing Morin at 125). LPSC notes that Dr. Morin offers the opposite 

advice with respect to the comparable earnings approach: “[t]he historical book return on 

equity for regulated firms is not determined by competitive forces but instead reflects the 

past actions of regulatory commissions.” Id. at 7, 32 (quoting Morin at 383). 

683 Id. at 6. LPSC also note that the 77 basis point offset conflicts with empirical 

research, which has found an approximately 50 basis point offset. Id.
Docket Nos. EL14-12-003 and EL15-45-000 - 161 - 

changed in relation to changing bond yields.684 LPSC argues that a regression of ROEs 

and bond yields, on the other hand, would show that there is no statistically significant 

relationship between the two.685

LPSC asserts that the Risk Premium methodology accepted in Opinion No. 551 

substantially mirrors the past. LPSC notes that the returns allowed from 2006 through 

2014 are mostly non-litigated cases, many of which involved the settlement of multiple 

issues, and closely mirrored prior results despite a significant reduction in interest rates. 

LPSC argues that, given the significant changes in capital markets, this mirror image 

could not have accurately depicted investor return requirements.686

E. OMS 

OMS argues that the Commission, in Opinion No. 551, erred by relying on MISO 

TOs’ Risk Premium analysis to justify a base ROE of 10.32 percent. OMS argues that a 

Risk Premium study that assumes a linear relationship between bond yields and cost of 

equity is incompatible with anomalous market conditions.687 OMS argues that an 

analysis that incorporates ROE determinations from a period when the Commission was 

applying the single-stage DCF methodology, which the Commission no longer accepts, 

unreasonably perpetuates erroneous results.688

OMS asserts that, if the Commission nonetheless chooses to rely on a Risk 

Premium analysis, MISO TOs’ Risk Premium analysis should not be used because it is 

flawed. First, OMS argues that the analysis included 15 cases involving incentive adders 

that merely reiterated a set of existing base ROEs between 11.14 percent and 12.38 

 684 Id. at 32-33. LPSC explains that he results would be even more statistically 

significant (in fact, the fit would be perfect) if the ROE did not change at all. Id. at 33. 

685 Id. at 34. 

686 Id. at 6. LPSC explains that parties settle for many reasons, such as trade-offs 

on other issues, cost of litigation, and competing objectives. LPSC asserts that the use of 

the results of settlements would require objective evidence linking allowed returns to 

market evidence. Id. at 31, 35, 42 (citing Daubert v. Merrell Dow Pharmaceuticals, Inc., 

43 F.3d 1311, 1317-19 (9th Cir. 1995)). 

687 OMS Rehearing Request at 20-21. OMS notes that Opinion No. 531 found that 

the relationship between cost of equity and Treasury bond yields has become unreliability 

in both magnitude. Id. at 21 (citing Opinion No. 531, 147 FERC ¶ 61,234 at P 159). 

688 Id. at 21-22. 
Docket Nos. EL14-12-003 and EL15-45-000 - 162 - 

percent that had already been approved. According to OMS, relying on these high base 

ROEs multiple times artificially inflates the results of the analysis. Second, OMS 

contends that it is improper to include Commission decisions that were the product of 

settlement or simply mentioned in the context of deciding whether to allow an ROE 

incentive adder. Third, OMS states that it is particularly troublesome for the Commission 

to use a Risk Premium analysis that includes the very 12.38 percent base ROE that 

Opinion No. 551 finds to be unjust and unreasonable. Fourth, OMS points to the lack of 

synchronism between ROE decisions and the bond yields to which they are compared. 

OMS explains that synchronizing the data points, by merely correcting the dates to reflect 

contemporaneous bond yields, has a significant effect on the results of the Risk Premium 

analysis.689 

F. Trial Staff 

Trial Staff explains that its witness Mr. Keyton made adjustments to improve the 

proposed Risk Premium analysis to ensure that the results are more timely and 

accurate.690First, Trial Staff explains that its witness, Mr. Keyton, removed any 

Commission-authorized ROE that was not developed using market data contemporaneous 

with the applicable bond yields. Trial Staff states that, in some cases, the market analysis 

had taken place years prior to a Commission order assigning an ROE to a utility. Trial 

Staff notes that, when utilities join an RTO, they are simply given the currently-effective 

RTO-wide ROE, which is not tied to the risks or cost of equity faced by the utilities at 

that time. Trial Staff argues that such ROEs do not reflect a cost of equity estimate that is 

contemporaneous with the bond yields used to calculate the risk premium. Trial Staff 

explains that, consequently, Mr. Keyton removed observations that were merely 

reapplication of existing ROEs.691 

Mr. Keyton also contends that using past-authorized ROEs generate erroneous 

equity risk premiums since their inclusion results in overstated equity risk premiums for 

more recent years because the vintage ROEs do not reflect the fact that equity costs have 

fallen as bond yields have fallen. He posits that this contradicts prior Commission 

findings recognizing the relationship between the cost of equity and bond yields.692 

 689 Id. at 22-25 (citing App. 1). 

690 Trial Staff Initial Br. (I) at 20-24; Trial Staff Initial Br. (II) at 19-24. 

691 Trial Staff Initial Br. (I) at 22-23 (citing Keyton Aff. (I) at 43-45); Trial Staff 

Initial Br. (II) at 21-22 (citing Keyton Aff. (II) at 42-43). 

692 Trial Staff Reply Br. (I), Keyton Reply Aff. (I) at 29 (citing Opinion No. 314, 

44 FERC at 61,952 n.11, order on reh’g, Opinion No. 314-A, 45 FERC ¶ 61,252, reh’g 

denied, 46 FERC ¶ 61,036 (1989) and Order No. 489, FERC Stats. & Regs. ¶ 30,795 at 
Docket Nos. EL14-12-003 and EL15-45-000 - 163 - 

Mr. Keyton also states that Dr. Morin and Dr. Eugene F. Brigham have both noted the 

general relationship between interest rates and the cost of equity, which move in the same 

direction.693

Second, Trial Staff argues that that the MISO TOs’ Risk Premium approach 

should have removed equity risk premiums between 2008 and 2009 that were impacted 

by bond yield spikes corresponding to the financial crisis.694 According to Trial Staff, 

Mr. Keyton removed the six-month average Moody’s Baa bond yields for the months 

from October to December 2008 and January to August 2009. Trial Staff explains that 

Mr. Keyton removed the bond yields from October to December 2008 because the yields 

suddenly rose by 143 basis points, and that he removed the bond yields from January to 

August 2009 because those yields were in steady decline until they stabilized in 

September 2009. Trial Staff explains that these removal adjustments were made because 

a risk premium calculated during a time of bond yield spikes will understate the actual 

risk premium required by investors.695 Mr. Keyton notes that Mr. McKenzie 

acknowledged that there was no indication that a particular Commission-authorized ROE 

was derived to account for these spikes in bond yields.696 

Trial Staff notes that MISO TOs now support use of a Risk Premium analysis 

based on both historical and projected bond yields, as apparently supported in the 

Coakley Briefing Order.697 Trial Staff posits that the use of projected bond yields in the 

Risk Premium analysis referenced in the Coakley Briefing Order was inadvertent. Trial 

Staff notes that Opinion No. 551 clearly articulated why use of projected bond yields in 

 

30,993, reh’g denied, Order No. 489-A, 42 FERC ¶ 61,390); Trial Staff Reply Br. (II), 

Keyton Reply Aff. (II) at 24 (citing same). 

693 Trial Staff Reply Br. (I), Keyton Reply Aff. (I) at 29-30 (citing Morin at 383 

and Eugene F. Brigham, Financial Management: Theory and Practice 21-22 (1979)); 

Trial Staff Reply Br. (II), Keyton Reply Aff. (II) at 24-25 (citing same). 

694 Trial Staff Initial Br. (I) at 23-24; Trial Staff Initial Br. (II) at 22-23; Trial Staff 

Reply Br. (I), Keyton Reply Aff. (I) at 28; Trial Staff Reply Br. (II), Keyton Aff. (II) at 

23. 

695 Trial Staff Initial Br. (I) at 23-24 (citing Keyton Aff. (I) at ¶¶ 69-72); Trial Staff 

Initial Br. (II) at 22-23 (citing Keyton Aff. (II) at ¶¶ 69-70). 

696 Trial Staff Reply Br. (I), Keyton Reply Aff. (I) at 28. 

697 Trial Staff Reply Br. (I) at 12 (citing MISO TOs Initial Br. (I) at 24); Trial Staff 

Reply Br. (II) at 12 (citing MISO TOs Initial Br. (II) at 39-40). 
Docket Nos. EL14-12-003 and EL15-45-000 - 164 - 

the Risk Premium analysis is inappropriate, finding that “projected yields used in risk 

premium analyses are speculative and less reliable than historical yields.”698 Trial Staff 

adds that, for the fluctuations in the cost of equity to be captured by the Risk Premium 

model, the Commission must eliminate inputs that are speculative, inaccurate, or 

unreliable. 

G. MISO TOs 

In response to briefs opposing implementation of the MISO TOs’ Risk Premium 

model, MISO TOs observe that the Commission accepted similar use of the Risk 

Premium analyses in Opinion No. 551 and found it to be similar to the analysis that it 

accepted in Opinion No. 531-B.699 MISO TOs aver that opposing parties fail to raise new 

arguments that were not considered in those orders. Additionally, in response to 

arguments that their Risk Premium methodology inappropriately relies on settlement 

agreements, MISO TOs observe that the Commission, in Opinion No. 531-B, found that 

the use of settlements “do[] not affect that reliability of the risk premium analysis,”700 and 

MISO TOs explain that, just as with litigated ROE outcomes, settling parties “rely upon 

the same market-based methodologies in determining the rates they are willing to 

accept.”701 MISO TOs further argue that, in each of the cases that other parties criticize, 

the Commission nonetheless ruled that the ROE at issue resulted in rates that were just 

and reasonable.702 MISO TOs also reject arguments that the ROE inputs should align 

more closely with contemporary bond yields, noting that the Commission already found 

such precision to be overly difficult.703

MISO TOs also disagree with criticisms of the inverse relationship between equity 

risk premiums and interest rates. They note that the Commission, consistent with 

 698 Trial Staff Reply Br. (I) at 13 (citing Opinion No. 551 at P 194); Trial Staff 

Reply Br. (II) at 13 (citing same). 

699 MISO TOs Reply Br. (I) at 30-31 (citing Opinion No. 551, 156 FERC ¶ 61,234 

at PP 191-200); MISO TOs Reply Br. (II) at 30-31 (citing same). 

700 Opinion No. 531-B, 150 FERC ¶ 61,165 at P 98. 

701 MISO TOs Reply Br. (I) at 31-32 (citing Opinion No. 531-B, 150 FERC 

¶ 61,165 at P 98); MISO TOs Reply Br. (II) at 31-32 (citing same). 

702 MISO TOs Reply Br. (I), App. 2 at 45; MISO TOs Reply Br. (II), App. 2 at 45. 

703 MISO TOs Reply Br. (I) at 32 (citing Opinion No. 531-B, 150 FERC ¶ 61,165 

at P 98); MISO TOs Reply Br. (II) at 32 (citing same). 
Docket Nos. EL14-12-003 and EL15-45-000 - 165 - 

financial literature, has recognized this relationship.704 MISO TOs aver that the CAPs 

offer no empirical evidence or academic literature to support their argument that 

investment risk differentials reflected in yield spreads have a material effect on the 

behavior of equity risk premiums. With respect to the LPSC’s assertions of the 

circulatory of this approach, MISO TOs state that Dr. Morin, who the LPSC cites, found 

that such circulatory concerns are mitigated in the risk premium context because the 

Commission-approved ROs are “presumably based on the results of market-based 

methodologies.”705 

MISO TOs disagree with Trial Staff’s recommendation to remove bond yields 

associated with periods of volatility. They aver that doing so would ignore relevant 

observations and undermine the integrity of the risk premium model by enabling analysts 

to selectively parse monthly bond yield average data. MISO TOs also contend that using 

annual, averaged Baa utility bond yields, as they propose, washes out some of the 

monthly volatility.706

MISO TOs also assert that the Risk Premium model is a traditional method that 

investors use to estimate the expected return from an investment in a company707 and that 

approved ROEs, which are inputs in the Risk Premium model, are closely followed by 

investors, and provide a direct signal that influences their expectations and required rates 

of return.708

H. Commission Determination 

Based on full consideration of the record in this proceeding, we will not use the 

Risk Premium model, as proposed by the MISO TOs, in the Commission’s ROE 

methodology, either for determining the justness of and reasonableness of existing ROEs 

under the first prong of section 206 or for determining new just and reasonable base 

ROEs under the second prong of section 206. In light of the evidence in the record 

regarding the Risk Premium model and the other models that we proposed to use in the 

 704 MISO TOs Reply Br. (I) at 33 (citing Opinion No. 531-B, 150 FERC ¶ 61,165 

at P 99; Opinion No. 551, 156 FERC ¶ 61,234 at P 197; Morin at 128); MISO TOs Reply 

Br. (II) at 33 (citing same). 

705 MISO TOs Reply Br. (I) at 34 (citing Morin at 125); MISO TOs Reply Br. (II) 

at 34 (citing same). 

706 MISO TOs Reply Br. (I) at 34-35; MISO TOs Reply Br. (II) at 34-35. 

707 MISO TOs Reply Br. (I) at 30; MISO TOs Reply Br. (II) at 30. 

708 MISO TOs Reply Br. (I), App. 2 at 44; MISO TOs Reply Br. (II), App. 2 at 44. 
Docket Nos. EL14-12-003 and EL15-45-000 - 166 - 

Briefing Order, we conclude that the additional robustness that the Risk Premium model 

adds to the ROE determination is outweighed by the disadvantages of its deficiencies, as 

discussed below. Furthermore, we find that the model requires methodological decisions 

that would likely undermine transparency and predictability in Commission outcomes, 

which are valued by both investors and customers. 

As an initial matter, the Risk Premium model is largely redundant with the CAPM. 

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 riskfree rate of return. We find that using the Risk Premium model in conjunction with the 

CAPM model would confer too much weight towards risk premium methodologies. The 

Commission has long used and, over time, refined the DCF model and we find that it 

would be inappropriate for variations of the risk premium model to receive twice its 

weight. In light of the disadvantages of the Risk Premium model discussed below and 

the similarity of the CAPM and Risk Premium models, we find that it is more appropriate 

to use only the CAPM to provide a risk premium-based cost of equity estimate. 

In addition, we agree with CAPs that the Risk Premium model is likely to provide 

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

relies on previous ROE determinations, whose resulting ROE may not necessarily be 

directly determined by a market-based method, whereas the DCF and CAPM methods 

apply a market-based method to primary data.709 For example, previous ROE 

determinations may not involve an explicit determination as to whether an ROE is just 

and reasonable, but instead focused on whether to allow an ROE incentive adder or were 

approving a preexisting RTO-wide ROE for a new RTO member. Similarly, many 

previous ROE determinations used in the Risk Premium model were the product of rate 

case settlements. Such settlements often involve compromises on a variety of issues 

present in a rate case, of which the appropriate ROE is only one. Consequently, such 

settlements could include ROEs that are not representative of the market cost of equity 

because the ROEs were negotiated above or below that market cost of equity in order to 

form an overall settlement package, together with negotiated outcomes on other issues, 

that were acceptable to the parties. 

While all models, including the DCF, feature some circularity, such circularity is 

particularly direct and acute with the Risk Premium model because it directly relies on 

past Commission ROE decisions. MISO TOs’ regression analysis, discussed below, 

accentuates such circularity by largely offsetting the effects of changes in interest rates. 

As a result, we share the concerns expressed by various parties that the circularity 

inherent in the Risk Premium model’s use of prior ROE determinations would largely 

 709 See CAPs Reply Br. (I) at 26; CAPs Reply Br. (II) at 46. 
Docket Nos. EL14-12-003 and EL15-45-000 - 167 - 

continue previously-approved ROEs and reflect past circumstances that influenced the 

previous ROE decisions.710 

We also question the application of the regression analyses used by MISO TOs in 

their Risk Premium model. These regressions, which have the impact of increasing the 

risk premium by 75 basis points for every 100 basis point decline in interest rates,711

contrast starkly with Dr. Morin’s analysis, which made that adjustment 48 basis points. 

This could be due to the length of time examined by the MISO TOs being less than half 

of the 18 years of regulatory decisions analyzed by Dr. Morin.712 We note that, unlike for 

DCF and CAPM calculations, MISO TOs did not update and add to the data set for ROE 

proceedings through the end of the test period in June of 2015, further reducing the 

robustness of the data set. MISO TOs’ regression in the first proceeding, by using the 

average of ROEs from each year, only has nine observations in its regression analysis, 

which is a low figure for a regression analysis, and therefore could impact the reliability 

of the results. Regardless of the reason for the high regression results, the MISO TOs’ 

regression creates a dynamic where, regardless of the capital market conditions, the Risk 

Premium analysis will keep the ROE essentially stable. This defies general financial 

logic that lower interest rates make it easier to raise capital based on the reduced 

opportunity cost of bonds and greater availability of revenue to invest due to the 

opportunity for carry trades where borrowing low-cost debt is used to finance equity 

purchases. This relationship is evident when the stock market increases or decreases 

inversely with news regarding Federal Reserve interest rate activity. Additionally, the 

results of MISO TOs’ regression analyses imply that the Federal Reserve’s activities 

following the financial crisis in terms of reducing interest rates and open market 

operations had virtually no effect on the underlying required return on equity. 

Additionally, the record contains insufficient evidence to conclude that investors 

rely on risk premium analyses utilizing historic Commission ROE determinations or 

settlement approvals to determine the cost of capital and make investment decisions. 

Investors certainly observe regulatory ROEs and how changes in authorized ROE levels 

could affect utility earnings, but such considerations differ from the type of analyses 

employed by the MISO TOs looking back at past decisions to determine the current cost 

 710 See, e.g., CAPs Reply Br. (I) at 26 (“[A] Risk Premium-based finding will tend 

to replicate the regulatory lag and inertial continuation of past returns that affected past 

regulatory decisions.”); CAPs Reply Br. (II) at 46; LPSC Initial Br. at 6-7; OMS 

Rehearing Request at 20-21. 

711 MISO TOs Initial Br. (I), App. 2 McKenzie Aff. (I), Attachment 6, at 6. 

712 Morin at 123. 
Docket Nos. EL14-12-003 and EL15-45-000 - 168 - 

of capital. We recognize that academic literature discusses this methodology, but the 

record indicates the greater prevalence of other methods. 

The Risk Premium methodology also entails numerous judgement calls and 

corresponding points of dispute among parties that would render the model results less 

predictable and transparent than other models. First, as illustrated in this proceeding, 

there would likely be vigorous debate on which past ROE determinations the analysis 

should include. First, there is the issue of how far back such data should go. MISO TOs 

propose to start their analysis after the Energy Policy Act of 2005. This creates, at least 

for the time being, a much smaller data set than that which was used by Dr. Morin. We 

find unpersuasive MISO TOs’ arguments that the nature of the industry and the resulting 

risk premiums changed due to this legislation sufficiently to ignore prior data. FPA 

section 219 requiring the Commission to provide transmission incentives is not germane 

to the base ROE determinations, nor are changes to the Public Utility Regulatory Policies 

Act, Commission enforcement authority, federal citing authority, or other elements of the 

2005 Energy Policy Act. With that said, there is no clear initial starting point, which 

could be subject to debate. 

In Opinion No. 531, the Commission found that “whether the regulatory decision 

involved a settlement agreement or the application of a cost of equity that was calculated 

in the past, e.g., the 12.38 percent ROE established for the MISO region, does not affect 

the reliability of a risk premium analysis.”713 Upon further review, we find that such 

application of past ROEs and settlements are not in all cases appropriate. In certain 

proceedings involving the admittance of new members to RTOs, the pleadings and 

resulting Commission orders did not reexamine the justness and reasonableness of the 

existing ROEs. Consequently, it is not reasonable to infer that the ROEs applied in these 

proceedings are the result of contemporary Commission analysis and representative of 

the cost of capital at that time. The same rationale applies to certain proceedings 

involving transmission incentives. In some cases, the Commission has explicitly 

examined the base ROEs or zones of reasonableness,714 while in others the Commission 

has stated that the base ROE is beyond the scope of the proceeding, rendering it hard to 

argue that the resulting ROEs reflected contemporary risk premiums.715 Consequently, it 

is highly debatable, as illustrated in this proceeding, which ROE proceedings the 

Commission should include in a Risk Premium analysis. 

 713 Opinion No. 531-B, 150 FERC ¶ 61,165 at P 98. 

714 See Dusqesne Light, 125 FERC ¶ 61,028 (2008). 

715 See Pub. Serv. Elec. and Gas Co., 147 ¶ FERC 61,142, at P 48 (2014). 
Docket Nos. EL14-12-003 and EL15-45-000 - 169 - 

Order No. 531-B also found that “[g]iven the varying duration of regulatory 

proceedings, it is difficult, if not impossible, to ensure precise contemporaneity between 

long-term Treasury bond yields and the cost of equity allowed by a regulator.”716 

Although an analysis with such imprecision may have been sufficient for using the Risk 

Premium model for corroborative purposes, we find that direct use of the model would 

require actual alignment of the test periods and the dates assigned for purposes of 

comparing the ROE to the risk free rate of return to determine the risk premium. In 

particular, orders on initial decision often occur more than a year following the updated 

test period.717 It is unclear what test period should be assumed for orders in other types 

of proceedings, such as those approving transmission incentives. If the Commission were 

to adopt a precise timing in this proceeding, as a practical matter, such a decision would 

likely require the Commission to exclude certain proceedings whose test periods predate 

2006 and include others, as well as potentially change the dates assigned to yet other 

proceedings. 

Other debatable input decisions also bedevil the Risk Premium methodology, such 

that the Commission would need to resolve numerous implementation questions to enable 

its use. For instance, what is the risk premium resulting from proceedings resolved by 

settlements with different ROEs for different parties or time periods? Should multiple 

ROEs from the same proceeding be given more weight than individual ROEs from other 

proceedings? Where different ROEs apply to different time periods, should the ROEs be 

assigned to different times for purposes of the risk premium analysis? Should ROEs 

from settlements resolving multiple proceedings with the same ROE be counted once or 

twice? Other methodological decisions include whether to look at the annual average of 

ROEs and corresponding risk-free rates of return or look at them individually. The 

former avoids overweighting proceedings from years with many proceedings but greatly 

reduces precision by muting changes in ROEs and risk free rates of returns within years. 

Other points of disagreement include the appropriateness of using risk premiums from 

periods of high bond volatility, and whether to include state ROEs. 

Such questions illustrate the inherent imprecision and complexity of this approach. 

We find that, although certain elements of the CAPM and DCF are subject to debate, as 

discussed above, the Risk Premium model features far more ambiguity and potential for 

dispute. Although the Commission could provide guidance on some of these matters, 

others would require ongoing adjudication. As a result, the Risk Premium model would 

lead to higher costs for participation by interested parties and reduced predictability of 

results, which both investors and customers value. Additionally, as discussed above, in 

 716 Opinion No. 531-B, 150 FERC ¶ 61,165 at P 98.

717 See Opinion No. 551 which was issued 13 months following the end of the test 

period. 
Docket Nos. EL14-12-003 and EL15-45-000 - 170 - 

both proceedings before us here, the parties make numerous arguments supporting and 

opposing various specific aspects of how the Risk Premium model is implemented. For 

example, parties dispute whether or not to use settlements as inputs to the Risk Premium 

model,718 how the time periods that are used for the comparison of bond yields and 

allowed ROEs should align,719 whether to exclude bond yields from periods of high 

volatility,720 and whether to use real or nominal bond yields in the Risk Premium 

analysis.721 

Moreover, as noted in the Briefing Order, the output that the Risk Premium model 

produces is a single numerical point, and therefore, it does not produce a range which can 

be used to determine a zone of reasonableness. Accordingly, the Briefing Order 

proposed to only use the Risk Premium model in the second prong of the section 206 

analysis where we determine a specific just and reasonable ROE, but not in the first 

prong of the analysis, which requires models that produce a range that can be used to 

determine a zone of reasonableness. This asymmetry in the potential use of the Risk 

Premium is not ideal and is another disadvantage of the Risk Premium model that weighs 

in favor of excluding it from the Commission’s ROE methodology. We would prefer to 

use the same models in the prong one and prong two analyses to ensure that our ROE 

determinations under each prong are based on the same data and models. It would not be 

logical to use different models and data sources to apply this same standard under the two 

prongs unless there is some compelling justification for the difference. We find that there 

is no such compelling justification. We initially proposed to use the Risk Premium 

model, despite it only being appropriate for use in the second prong analysis, because our 

initial analysis of the model indicated that it could potentially provide benefits to our 

ROE methodology that outweighed the disadvantages of only having the model available 

for use in the second prong analysis. However, in light of the full record in these 

proceedings before us now, we find that the Risk Premium model does not provide 

benefits to our ROE methodology that would outweigh the model’s disadvantages, such 

as the disadvantage of only having the model available for use in the second prong 

analysis. 

 718 See, e.g., CAPs Br. on Exceptions at 65-59; MISO TOs Br. Opposing 

Exceptions at 57-58; MISO TOs Reply Br. (I) at 31-32. 

719 See, e.g., OMS Rehearing Request at 23-25; RPGI Initial Br. (I) at 36–37; Trial 

Staff Initial Br. (I) at 21–23; MISO TOs Reply Br. (I) at 32. 

720 See, e.g., Trial Staff Initial Br. (I) at 23-24; MISO TOs Reply Br. (I) at 34-35. 

721 See, e.g., CAPs Br. on Exceptions at 50-52; OMS-JCA Br. on Exceptions at 47-

48; MISO TOs Br. Opposing Exceptions at 58-59. 
Docket Nos. EL14-12-003 and EL15-45-000 - 171 - 

As discussed above, we will not use the Risk Premium model in our ROE 

methodology. Accordingly, we find that the parties’ arguments regarding how the Risk 

Premium model should be implemented are moot and we will not address any such 

arguments raised in the briefs on and opposing exceptions to Initial Decision (II), 

requests for rehearing of Opinion No. 551, the initial and reply briefs issued in response 

to the Briefing Order, or any pleadings in these proceedings. We address some of these 

implementation issues in the context of discussing our decision to not use the Risk 

Premium model above, but in light of our decision not to use the model, we find that it is 

unnecessary to reach determinations on how the model should be implemented. 

Accordingly, we find that arguments in these proceedings regarding how the Risk 

Premium model should be implemented are moot. 

IX. Potential Consideration of State ROEs 

A. Briefing Order Proposal 

In the Briefing Order, the Commission proposed to not consider the level of state 

ROEs when determining the composite zone of reasonableness under the first prong of 

section 206, nor to weight state ROEs equally with the financial models in establishing a 

new just and reasonable ROE under the second prong of section 206. However, the 

Commission proposed to consider evidence of state ROEs to the extent that the record 

adequately demonstrates that investors are using them to inform their investment 

decisions.722

B. CAPs 

 CAPs argue that the Commission’s proposal is arbitrary and capricious for 

several reasons.723 CAPs contend that the proposal departs from precedent rejecting 

direct use of state-authorized ROEs in establishing the Commission-jurisdictional return 

of utilities.724 They assert that “Commission precedent rejects the direct use of state 

commissions’ return determinations in setting [Commission]-jurisdictional ROEs.”725 

 722 Briefing Order, 165 FERC ¶ 61,118 at P 37 n.67. 

723 CAPs Initial Br. (I) at 48; CAPs Initial Br. (II) at 48. 

724 CAPs Initial Br. (I) at 49; CAPs Initial Br. (II) at 49. 

725 CAPs Initial Br. (I) at 49 (citing, e.g., Middle South Services, Inc., Opinion 

No. 124, 16 FERC ¶ 61,101 (1981); Boston Edison Co., Opinion No. 411, 77 FERC 

¶ 61,272 (1996); Jersey Cent. Power & Light Co., Opinion No. 408, 77 FERC ¶ 61,001 

(1996); Appalachian Power Co., Opinion No. 423, 83 FERC ¶ 61,335 (1998); Midwest 
Docket Nos. EL14-12-003 and EL15-45-000 - 172 - 

CAPs contend that in Opinion Nos. 531 and 531-B the Commission acknowledged and 

reaffirmed this precedent. They argue that the Commission has not explained “how its 

proposed use of state-authorized ROEs would be consistent with precedent, or why 

departure from its precedent would be appropriate.”726 CAPs further assert that “[i]n 

Emera Maine, the D.C. Circuit found it arbitrary and capricious to use state-allowed 

ROEs to support placement of the New England TOs’ ROE at the upper midpoint 

because state-authorized ROE data pointed to a level below the DCF upper midpoint.”727 

CAPs also contend that the Commission does not explain why it may be appropriate to 

use state-authorized ROEs in the second prong of section 206 proceedings (i.e., to 

establish the new just and reasonable ROE), but that it is never appropriate to use such 

data in the first prong of section 206 (i.e., to determine whether the existing ROE of 

utilities is unjust and unreasonable).728

CAPs assert that the Commission proposes to disregard considering stateauthorized ROEs in the formation of the composite zone of reasonableness at the same 

time that it is proposing to consider such data in the calculation of a replacement ROE. 

CAPs argue that, if evidence in the record shows that investors rely on state-authorized 

ROE data, it follows that investors’ return expectations based on this data is as relevant to 

determining whether the existing ROE is unjust and unreasonable as it is to determining 

the replacement ROE and the total ROE cap.729 Hence, CAPs contend that the 

Commission is proposing an inconsistent application of state-authorized ROE evidence 

without providing a reasonable explanation for doing so.730 Further, CAPs argue that the 

Commission has not explained what weight state-authorized ROEs will be given or what 

type of evidence could show that investors rely on these ROEs.731 

CAPs comment that the use of state-authorized ROEs by the Commission would 

not satisfy the comparability standard of Hope and Bluefield, which requires that a 

 

Independent Transmission System Operator, Inc., 98 FERC ¶ 61,356, at 62,525 n.15 

(2002)); CAPs Initial Br. (II) at 49 (citing same). 

726 CAPs Initial Br. (I) at 50; CAPs Initial Br. (II) at 50. 

727 CAPs Initial Br. (I) at 50; CAPs Initial Br. (II) at 50. 

728 CAPs Initial Br. (I) at 48; CAPs Initial Br. (II) at 48. 

729 CAPs Initial Br. (I) at 51; CAPs Initial Br. (II) at 51. 

730 CAPs Initial Br. (I) at 52; CAPs Initial Br. (II) at 51. 

731 CAPs Initial Br. (I) at 52; CAPs Initial Br. (II) at 51. 
Docket Nos. EL14-12-003 and EL15-45-000 - 173 - 

utility’s return on equity must be “equal to that generally being made at the same time 

and in the same general part of the country on investments in other business undertakings 

which are attended by corresponding risks and uncertainties.”732 CAPs argue that state 

commissions establish ROEs having taken into account a wide range of risk factors that 

are unique to each state, vary across jurisdictions and change over time. According to 

CAPs, state ROEs reflect considerations that are completely unrelated to the transmission 

risks that the base ROE in this case sees to account for.733 

Finally, CAPs assert that, to the extent that the Commission decides to use stateauthorized ROE data in its ROE determinations, it should establish generic, transparent 

criteria to ensure appropriate comparability, and that the state-authorized ROE data 

should be used in a consistent manner, regardless of whether the data increases or lowers 

the base ROE.734 

C. Alliant 

Alliant argues that the Commission should compare the base ROE resulting from 

its proposed methodology to retail utility ROEs allowed in states in which transmission 

facilities owned by each of the MISO TOs are located. Alliant contends that the ROE 

established by the Commission for unbundled transmission service within a state should 

be consistent with the ROE permitted by state regulators for retail rates because state 

regulators also have the obligation to ensure that charges for bundled electric service by 

retail electric service customers are just and reasonable.735

D. MISO TOs 

In their reply brief, the MISO TOs assert that, contrary to arguments presented by 

CAPs, the Commission has ample justification in the record of the First and Second 

Complaint proceedings for considering state-authorized ROEs as evidence of expected 

investor returns.736 Further, they endorse the Commission considering state-authorized 

ROEs in the context of how the risk profile of a state-regulated utility compares to the 

 732 CAPs Initial Br. (I) at 52 (quoting Bluefield, 262 U.S. at 692); CAPs Initial Br. 

(II) at 52 (quoting same). 

733 CAPs Initial Br. (I) at 53; CAPs Initial Br. (II) at 52. 

734 CAPs Initial Br. (I) at 53; CAPs Initial Br. (II) at 53. 

735 Alliant Initial Br. at 10-11. 

736 See MISO TOs Reply Br. (I) at 82. 
Docket Nos. EL14-12-003 and EL15-45-000 - 174 - 

risk profile of the MISO Transmission Owners, and argue that consideration of stateauthorized ROEs is consistent with Opinion No. 531-B. MISO TOs also assert that CAPs 

incorrectly characterizes the ruling in Emera Maine regarding the Commission’s 

consideration of data for state-authorized ROEs. MISO TOs argue that the Court did not 

find error with the Commission’s consideration of state ROE data. Rather, the Court 

determined that the Commission erred when it failed to provide a reasoned explanation 

relative to the cited state-authorized ROEs and other evidence.737 

In response to CAPs’ assertion that the Commission in the First Complaint 

proceeding did not find that investors had relied upon state-authorized ROE, MISO TOs 

argue that it is illogical to conclude that there was not a showing that investors relied on 

such data. MISO TOs argue that the Commission did not need to specifically rely on 

evidence of state-authorized ROEs in order to present the methodology and findings it 

proposed in the Briefing Order.738 

MISO TOs comment that CAPs misread the Commission’s Briefing Order when 

they conclude that state-authorized ROEs will not be used in evaluating an existing ROE 

for justness and reasonableness under prong one of the FPA section 206 analysis.739 

Instead, MISO TOs assert that the Commission explains in the Briefing Order that it will 

not use state-authorized ROEs in the composition of the composite zone of 

reasonableness in prong one of PFA section 206, nor as one of the four financial models 

used to establish a new base ROE in prong two of FPA section 206. Nonetheless, MISO 

TOs assert that in the Briefing Order the Commission leaves open other purposes for 

which the Commission could consider state-authorized ROEs in both prongs of the FPA 

section 206.740 MISO TOs argue that, contrary to CAP comments, the state ROE data 

cannot be used to calculate a composite zone of reasonableness because there are material 

risk differences between utilities regulated at the state level and the transmission utilities 

regulated at the federal level.741 Rather, MISO TOs assert that state-authorized ROE data 

 737 Id. at 83-84. 

738 Id. at 84. 

739 Id. at 85 (citing Briefing Order, 165 FERC ¶ 61,118 at P 37 n.67). 

740 Id. at 85-86. 

741 Id. at 86. 
Docket Nos. EL14-12-003 and EL15-45-000 - 175 - 

has been and can be a useful tool as a benchmark in reviewing investor expectations and 

evaluations cost of equity estimates within the larger market context.742 

Finally, MISO TOs respond to CAPs request that the Commission adopt a generic 

and transparent criteria when using data on state-authorized ROEs by asserting that this 

request seeks a superfluous legal standard that is unnecessary, outside of the scope of this 

proceeding and would have no discernable benefit.743 

E. Commission Determination 

We continue to find that our ROE determination in these proceedings need not 

consider state-authorized ROEs. As MISO TOs point out, there are material differences 

between state and Commission ROEs. As an initial matter, state-authorized ROEs may 

apply to distribution companies, which feature lower risks than transmission companies 

subject to Commission ROEs. Also, certain states include shared savings, decoupling, or 

performance-based rates, rendering comparisons between Commission and state ROEs 

less precise. As a result, we will only consider state-authorized ROEs on a case-by-case 

basis to the extent that they demonstrate that the results of the Commission’s CAPM and 

DCF analyses are substantially excessive or deficient. We do not expect that the 

Commission will regularly consider state-authorized ROEs. Rather, they serve as a check 

given the model risk as we formulate our ROE determinations. 

We also clarify that state ROE information could inform both prongs of the 

section 206 ROE analysis. For the first prong, such information could be used to rebut 

the presumption that a given base ROE is or is not just and reasonable. Such information 

could also be used to demonstrate, for instance, that the base ROE established under the 

second prong is substantially excessive or deficient. We also reject Alliant’s proposal to 

use state ROEs where the utility is located. Doing so would potentially tie Commission 

ROE determinations to state determinations, which could be methodologically very 

different or apply to utilities featuring different risk profiles than Commissionjurisdictional transmission owners. 

X. Proxy Group Construction 

Both the DCF and CAPM models use proxy groups to determine a range of 

reasonable returns. In the Briefing Order,744 the Commission stated that it intends to 

 742 Id. at 86. 

743 Id. at 86-87. 

744 Coakley Briefing Order, 165 FERC ¶ 61,030 at P 51. 
Docket Nos. EL14-12-003 and EL15-45-000 - 176 - 

continue to use the same screens for developing a proxy group as the Commission has 

used in recent cases, including Opinion Nos. 531745 and 551.746 Those five screens are: 

(1) the use of a national group of companies considered electric utilities by Value Line;

747

(2) the inclusion of companies with credit ratings no more than one notch above or below 

the utility or utilities whose ROE is at issue;748 (3) the inclusion of companies that pay 

dividends and have neither made nor announced a dividend cut during the six month 

study period;749 (4) the inclusion of companies with no merger activity during the sixmonth study period that is significant enough to distort the study inputs;750 and 

(5) companies whose ROE results pass threshold tests of economic logic, including both 

a low-end outlier test and a revised high-end outlier test proposed in the Briefing Order. 

The first four screens listed above evaluate particular characteristics potential 

proxy group companies. They do not vary depending upon the results of the DCF or 

CAPM analyses. Accordingly, those screens may be used to develop a starting group of 

proxy companies eligible for inclusion in the proxy group to be used for the purposes of 

both the DCF and CAPM analyses. However, the high-end outlier test part of the last 

screen—whether the company’s cost of equity estimate passes threshold tests of 

economic logic—depends upon the median cost of equity estimate each of the two 

models produces. Thus, in determining the zone of reasonableness produced by each of 

these models, the high-end outlier test must be applied separately to each model. Below, 

we discuss issues raised by the participants with respect to the high-end and low-end 

outlier tests. By contrast, the low-end outlier test for both models is derived, in part from, 

the CAPM’s risk premium. 

A. High End Outlier Test 

1. Briefing Order 

In the Briefing Orders, the Commission recognized that the CAPM model can 

produce unsustainably high results for a particular proxy company, because, unlike the 

 745 Opinion No. 531, 147 FERC ¶ 61,234 at P 97. 

746 Opinion No. 551, 156 FERC ¶ 61,234 at P 20. 

747 Opinion No. 531, 147 FERC ¶ 61,234 at PP 96, 100-102. 

748 The Commission requires use of both Standard and Poor’s corporate credit 

ratings and Moody’s issuer ratings when both are available. Id. P 107. 

749 Id. P 112. 

750 Id. P 114; Opinion No. 551, 156 FERC ¶ 61,234 at PP 37-43. 
Docket Nos. EL14-12-003 and EL15-45-000 - 177 - 

two-step DCF analysis, it does not include a long-term growth projection based on GDP 

that would normalize the ROEs produced by the model, similar to that used in the twostep DCF analysis. Moreover, the Commission recognized that in unusual circumstances, 

the two-step DCF analysis could also produce unsustainably high results. Therefore, the 

Commission proposed to apply a high-end outlier test to the results of both these models. 

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 percent of the 

median result of all of the potential proxy group members in that model before any high 

or low-end outlier test is applied, subject to a “natural break” analysis similar to the 

approach the Commission uses for low-end DCF analysis results. The Commission 

stated that this test should identify those companies whose cost of equity under the model 

in question is so far above the cost of equity of a typical proxy company as to suggest that 

it is the result of atypical circumstances that are not representative of the risk profile of a 

more normal utility. 

2. CAPs 

MISO CAPs contend that a high-end outlier test should be used, particularly if the 

Commission sets the base ROE based mainly on the midpoint rather than the median of 

the zone of reasonableness. However, CAPs contend that the Commission’s proposed 

high-end outlier test lacks a statistically sound basis and does not appropriately consider 

information inherent in the underlying array of ROEs produced by each financial model. 

MISO CAPs recommend the Commission should, instead, exclude as high-end outliers 

any ROEs produced by each model that are more than two standard deviations751 above 

the median of the ROEs produced by that model.752 MISO CAPs state that MISO TOs’ 

 751 In statistics, a standard deviation is a measure that is used to quantify the 

amount of variation or dispersion on a set of values. The smaller the standard deviation, 

the more values that are expected to be closer to the mean. Conversely, a large standard 

deviation implies that the data is more widely distributed. Under a normal distribution, 

only 2.5 percent of observations are expected to be more than two standard deviations 

above the mean. 

752 CAPS Initial Br. (I) at 60-63, Ex. JCI-100 (Solomon Testimony) at 13-14, 

CAPS Initial Br. (II) at 60-63, Ex. JCI-200 at 12-13. In reply briefs, MISO CAPS also 

alternatively endorse use of the Grubbs test, another statistical method for identifying 

outliers, over MISO TOs’ proposals. See CAPS Reply Br. (I) at 60. 
Docket Nos. EL14-12-003 and EL15-45-000 - 178 - 

proposed alternative threshold, which is 150 percent of the highest median return on 

equity from all three models, has no economic basis.753 

3. MISO TOs 

MISO TOs oppose the use of any high-end outlier test.754 MISO TOs contend that 

the 150 percent threshold test is arbitrary and not tied to previous Commission policy. 

MISO TOs specifically assert that there is no support for the contention that an estimate 

greater than 1.5 times the median of a model’s range of estimates must be the result of 

“atypical circumstances.” MISO TOs also contend that there has been no showing that 

investors generally disregard high-end estimates from any model or rely on the proposed 

150 percent test to eliminate high-end results. 

MISO TOs also oppose CAPs’ alternative statistical tests based on a standard 

deviation. They assert that those tests relate to the practice of sampling, i.e., the selection 

of a subset of data from within a larger population that allows the researcher to make 

statistical inferences about unknown qualities of the population. MISO TOs assert that 

the CAPs’ proposed tests are used to determine whether the sampling data represent a 

random sample from a single normal population. However, MISO TOs contend that, 

when the Commission selects a proxy group, it is not sampling. Rather, the Commission 

has identified all of the utilities deemed to be of comparable risk to the MISO TOs. 

Thus, the array of cost of equity estimates of the proxy companies represent a population, 

not a sample of the population. As a result, the dispersion of individual values around the 

population mean is not a valid test of how well a specific estimate reflects investors’ 

expectations.755 However, MISO TOs contend that, if the Commission does use a highend outlier test, then it should apply that test to the highest median of the CAPM, 

Expected Earnings, and DCF models, and apply it only as a rebuttable presumption. 

Further, MISO TOs contend that the high-end outlier test should not apply to the 

DCF model.756 MISO TOs note that, in Opinion No. 531, the Commission stated that 

including long-term GDP growth in the two-step DCF eliminates the need to screen the 

results for high-end outliers. MISO TOs also assert that the median of the DCF results 

does not constitute a meaningful guide to investors’ required returns given that the 

Commission has determined that the central tendency of the DCF zone of reasonableness 

 753 Ex. JCI-107 at 29-30 (Solomon Testimony). 

754 MISO TOs Initial Br. (I) at 12-16. 

755 MISO TOs Initial Br. (I), App. 2 McKenzie Reply Aff. (I) at 100-102. 

756 MISO TOs Initial Br. (I) at 16-18. 
Docket Nos. EL14-12-003 and EL15-45-000 - 179 - 

may be distorted by anomalous capital market conditions as the Commission found in 

Opinion Nos. 531 and 551. MISO TOs contend that, if the Commission does apply the 

high-end outlier test to the DCF model, then it should employ the one-step DCF model 

without any long-term growth projection. 

4. Trial Staff 

In its reply brief, Trial Staff supports the high-end outlier test proposed in the 

Briefing Order and opposes the MISO TOs’ contention that a high-end outlier test is 

unnecessary.757 

5. Other Parties 

RPGI supports the high-end outlier test proposed by the Briefing Order.758

6. Commission Determination 

We adopt the high-end outlier test proposed in the Briefing Order. Although we 

have decided not to use the Expected Earnings model, which is more subject to high-end 

outliers than the other models, or the Risk Premium Model, the other models may 

produce unsustainably high results for a particular proxy company in unusual situations. 

Therefore, we find it necessary to apply a high-end outlier test to the results of these 

methods. As shown with TECO,759 whose IBES growth estimates changed from 6.43 to 

9.2 and back to 7.68 percent during the course of the First Complaint proceeding, 

financial metrics for individual utilities can fluctuate dramatically, potentially affecting 

the resulting ROE. Particularly given that the Commission will continue to use the 

midpoint as the measure of central tendency for region-wide ROEs, as discussed below, 

we find it appropriate that there be a high-end outlier test to eliminate members of the 

proxy group whose ROEs are unreasonably high. 

While parties have proposed alternative high-end outlier tests as being superior 

because they have a firmer statistical basis, we do not find these arguments persuasive. 

Statistical methodologies, like the proposed alternative outlier test methodologies, may be 

based on assumptions such as the distribution of the underlying population being 

 757 Trial Staff Reply Br. (I) at 6-7. 

758 RPGI Reply Br. (I) at 13-18. 

759 As noted above, in the First Complaint proceeding, TECO set the top of the 

zone of reasonableness. 
Docket Nos. EL14-12-003 and EL15-45-000 - 180 - 

normal.760 These underlying assumptions may not always hold for a given proxy group, 

especially a small proxy group.761 As stated in the article by Frank Grubbs cited by 

CAPs, “the rejection of ‘outlying’ observations may be just as much a practical (or 

common sense) problem as a statistical one and sometimes the practical or experimental 

viewpoint may naturally outweigh any statistical contributions in a sample . . . [A]ny test 

which requires an inordinate amount of calculation seems hardly to be worthwhile.”762 

The high-end outlier test proposed in the Briefing Orders has the advantage that it is 

relatively easy to carry out and places a well-defined upper bound on the proxy group. In 

addition, because this test only utilizes a percentage differential compared to the median, 

it can be used with small proxy groups. 

We also reject MISO TOs’ proposal to use 150 percent of the highest median ROE 

produced by either the DCF or the CAPM model as the high-end outlier test for both 

models. As Mr. Solomon testified for CAPs, each model is based on different 

assumptions and thus estimates the cost of equity in different ways. Therefore, the 

determination of whether each model produces one or more extreme or illogical results is 

best determined by examining the dispersion of the ROE estimates produced by that 

model.763 

MISO TOs also assert that, if the Commission applies a high-end outlier test to the 

DCF model, it should use a one-step DCF model without any long-term growth 

projection, instead of the two-step DCF model. However, the Commission has already 

discussed earlier in this order why a DCF analysis of a single utility should include a 

long-term growth projection. We recognize that the inclusion of a long-term growth 

projection based on GDP tends to normalize the ROEs produced by the model, and that 

this minimizes the likelihood that there will be any high-end outlier. Indeed, the high-end 

outlier test adopted in this order does not exclude any proxy company’s DCF ROE in 

either the First Complaint or Second Complaint proceeding. Nonetheless, it is possible 

that unusual circumstances with respect to a particular company, if for example, there is 

an unusually high IBES growth projection as a company bounces back from a unique 

 760 See, e.g., MISO TOs Reply Br. (I), App. 2 McKenzie Reply Aff. (I) at 107 

(“Under Mr. Solomon’s paradigm, where the standard deviation serves as a relevant 

measure of dispersion, the distribution is assumed to be perfectly normal.”). 

761 See, e.g., Northwest Pipeline Corp., 99 FERC ¶ 61,305, at 62,276 (2002) 

(addressing a case where “the distribution of figures used to calculate Northwest’s ROE 

is negatively skewed.”). 

762 Frank Grubbs, Sample Criteria for Testing Outlying Observations, at 30. 

763 Ex. JCI-107 at 29. 
Docket Nos. EL14-12-003 and EL15-45-000 - 181 - 

setback, could cause the two-step DCF model to produce an illogically high ROE. The 

high-end outlier test adopted in this order allows such an illogical ROE to be excluded 

from the proxy group. 

B. Low-End Outlier Test 

1. Briefing Order 

Under the Commission’s existing low-end outlier test, companies whose ROE 

fails to exceed the average 10-year bond yield by approximately 100 basis points are 

excluded from the proxy group 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.764 In the Briefing Order, the Commission proposed 

to continue to use this test for purposes of the CAPM and Expected Earnings analyses as 

well as the DCF analysis.765

2. MISO TOs 

MISO TOs assert that the Commission adopted its current low-end outlier test in 

four ROE cases which used financial data for the six months ending November 2007 or 

the six months ending September 2008.766 MISO TOs state that Baa bond yields over 

those two six-month periods averaged 6.69 percent.767 However, Baa bond yields during 

the study period for the First Complaint proceeding (the six months ending June 2015) 

declined by 204 basis points to 4.65 percent,768 and during the study period for the 

 764 Pioneer Transmission, LLC, 126 FERC ¶ 61,281, at P 94 (2009) (Pioneer), 

reh’g denied, 130 FERC ¶ 61,044 (2010). S. Cal. Edison Co., 131 FERC ¶ 61,020, at 

PP 54-56 (2010) (SoCal Edison). In SoCal Edison, the Commission stated that it also 

eliminated companies whose ROEs were less than 100 basis points above the Moody’s 

bond yield for that particular rating in Atlantic PATH 15, 122 FERC ¶ 61,135 (2008) 

(Atlantic PATH) and in Startrans IO. L.L.C., 122 FERC ¶ 61,306 (2008) (Startrans). Id.

P 54. 

765 Briefing Order, 165 FERC ¶ 61,118 at P 52. 

766 MISO TOs Initial br. (I) App. 2 McKenzie Aff. (I) at 29 (citing Pioneer, 126 

FERC ¶ 61,281; SoCal Edison, 131 FERC ¶ 61,020; Atlantic PATH, 122 FERC ¶ 61,135; 

and Startrans, 122 FERC ¶ 61,306). 

767 MISO TOs Initial Br. (I), App. 2 McKenzie Aff. (I) at 29-30. 

768 Id. at 31. 
Docket Nos. EL14-12-003 and EL15-45-000 - 182 - 

Second Complaint study period (the six months ending December 2015) declined by 128 

basis points to 5.41 percent.769 Accordingly, MISO TOs contend that the 100 basis point 

low-end threshold should be adjusted upwards to account for the inverse relationship 

between risk premiums and bond yields shown by their risk premium analysis in each 

case.770 Under the MISO TOs’ proposed method, the low end threshold would be 

adjusted upwards by 154 basis points771 from 100 basis points to 254 basis points in the 

First Complaint proceeding, and by 91 basis points772 to 191 basis points in the Second 

Complaint proceeding. Thus, in the First Complaint Proceeding the low-end outlier test 

would exclude from the proxy group any companies with ROEs of 7.19 percent or less 

and in the Second Complaint Proceeding the test would exclude companies with ROEs of 

7.32 percent or less. MISO TOs contend that this revised test would justify excluding 

additional companies from the proxy groups used for the DCF analysis. The MISO TOs 

state that the revised low-end outlier test would not affect the proxy group used for the 

CAPM analysis. 

Further, MISO TOs argue that the Commission’s practice has been to compare 

every proxy company’s ROE to Baa bond index yields. MISO TOs argue the 

Commission should continue to use Baa bond index yields for the low-end outlier test 

because that is the bond rating category closest to the risks of common stock.773

3. CAPs 

CAPs oppose MISO TOs’ proposed revision to the low-end outlier test.774 CAPs 

point out that the Commission used the 100 basis point low-end outlier test in Opinion 

No. 551 in the First Complaint Proceeding, and the MISO TOs did not seek rehearing on 

 769 MISO TOs Initial Br. (II), App. 2 McKenzie Aff. (II) at 27. 

770 MISO TOs Initial Br. (I), App. 2 McKenzie Aff. (I) at 28-31; MISO TOs Initial 

Br. (II), App. 2 McKenzie Aff. (II) at 24-27. 

771 MISO TOs calculate this adjustment by multiplying the 204 basis point decline 

in interest rate by the 75.34 percent increase in the risk premium determined by its risk 

premium study in the First Complaint proceeding. 

772 MISO TOs calculate this adjustment by multiplying the 128 basis point decline 

in interest rate by the 71.56 percent increase in the risk premium determined by its risk 

premium study in the Second Complaint proceeding. 

773 MISO TOs Reply Br. (I) at 57-58. 

774 CAPs Reply Br. (I) at 48-59; Ex. JC-108 at 29. 
Docket Nos. EL14-12-003 and EL15-45-000 - 183 - 

that issue. Also, the Presiding Judge in the Second Complaint Proceeding used the 100 

basis point low-end outlier test, and the MISO TOs did not file an exception on that issue. 

CAPs assert that the Commission has explained that the “the purpose of the lowend outlier test is to exclude from the proxy group those companies whose ROE estimates 

are below the average bond yield or are above the average bond yield but are sufficiently 

low that an investor would consider the stock to yield essentially the same return as 

debt.”775 CAPs argue that, for purposes of determining whether a stock would be 

considered to yield essentially the same return as debt, the 100 basis point threshold is 

appropriate regardless of changes in interest rates. They assert that yield spreads of 

utility stock dividends over utility bond yields are relatively stable during most markets. 

The only notable exception would be during distressed markets when the market 

demands abnormal risk premiums to invest in securities of greater risk.776 

CAPs also disagree with the MISO TOs’ contention that, in applying the low-end 

outlier test, the ROE of every proxy company should be compared to the Baa bond yield. 

CAPs argue that the ROE of each proxy company should be compared to the yields of 

bonds with the same credit rating as the proxy company in question. Thus, if the proxy 

company has a credit rating of A, its ROE would be compared to A bond yields.777 

4. Trial Staff 

Trial Staff argues that MISO TOs’ proposed modification to the low-end outlier 

test, which would require exclusion of companies with ROEs of 7.19 percent or less in 

the First Complaint Proceeding and companies with ROEs of 7.32 percent or less in the 

Second Complaint Proceeding, is illogical. Trial Staff contends that no rational investor 

would consider ROEs of 7.19 percent and 7.32 percent as “essentially the same return” as 

the contemporary Baa bond yields of 4.65 percent and 5.41 percent respectively.778 Trial 

Staff also asserts that the adjustments proposed by MISO TOs rely on an arbitrary choice 

of time periods for a comparison of interest rates. Trial Staff states that the baseline 6.69 

percent Baa bond yield staff used based on study periods in 2007 and 2008 was higher 

 775 CAPs Reply Br. (I) at 53-54 (citing Opinion No. 531, 147 FERC ¶ 61,234 at 

P 122). 

776 Ex. JC-108 at 30-32. 

777 Ex. JCI-100 at 12; Ex. JCI-107 at 8. 

778 Trial Staff Reply Br. (I) at 6 (citing Trial Staff Reply Br. (I), Keyton Reply Aff. 

(I) at 10-11). See also Trial Staff Reply Br. (II) at 5-6 (citing Trial Staff Reply Br. (II), 

Keyton Reply Aff. (II) at 10-11). 
Docket Nos. EL14-12-003 and EL15-45-000 - 184 - 

than the calendar year average Baa bond yields for every year since 2002, except for the 

bond yield spike period of 2008 and 2009.779 Trial Staff asserts that it is arbitrary to 

assume that the baseline for the change in interest rates should be constrained to a 

comparison between the 2007 and 2008 study periods and the study periods for the First 

and Second Complaint Proceedings. 

Trial Staff also states that, in applying the low-end outlier test, the ROE of each 

proxy company should be compared to the yields of bonds with the same credit rating as 

the proxy company in question.780

5. Commission Determination 

We will adjust the low-end outlier test to include a risk premium instead of the 

generic 100 basis points proposed in the Briefing Order, as discussed below. In 

particular, we will adopt a revised low-end outlier test that eliminates proxy group ROE 

results that are less than the yields of generic corporate Baa bonds plus 20 percent of the 

CAPM risk premium. The purpose of the low-end outlier test is to eliminate from the 

proxy group companies with ROEs that are so low that they should not be considered in 

determining the low end of the zone of reasonableness. Thus, the mere fact a potential 

proxy company’s ROE may be lower than what would be considered reasonable for an 

average risk, or even a below average risk, utility is not a sufficient reason to exclude the 

company from the proxy group. Instead, the Commission’s standard has been to exclude 

companies whose ROEs yield “essentially the same expected return” as debt. As MISO 

TOs have argued, and the Commission has acknowledged, as bond yields decline, the 

ROE that investors would consider to yield “essentially the same expected return” as a 

bond is increasingly higher than the corresponding bond yield.781 Thus, to ensure that the 

low-end outlier test properly excludes companies whose ROE is indistinguishable from 

debt, an adjustment accounting for this risk premium is necessary. 

We find that 20 percent of the risk premium from the CAPM analysis described 

above is a reasonable risk premium to apply to the low-end outlier test. Because the risk 

premium that investors demand changes over time, it is imprecise to simply add 100 basis 

 779 Trial Staff Reply Br. (I), Keyton Reply Aff. (I) at 11. 

780 Id. at 11-12 (citing Bangor Hydro-Electric Co., Opinion No. 489, 117 FERC 

¶ 61,129, at PP 56-60 (2006) and Opinion No. 445, 92 FERC at 61,266). 

781 See Morin at 128-129, summarizing empirical research showing that as interest 

rates decline, the risk premium required by equity investors increases. Morin concludes 

that the gist of this research is that for every 100 basis point decline in government bond 

yields, the equity risk premium increases by about 50 basis points. 
Docket Nos. EL14-12-003 and EL15-45-000 - 185 - 

points to the bond yield. The methodology that we are adopting in this order captures 

such changes because the risk premium from the CAPM analysis reflects investors’ 

required risk premium under the prevailing market conditions. We find that the 20 

percent portion of the risk premium strikes a proper balance by being sufficiently large to 

account for the additional risk of equities over bonds, but not so large as to 

inappropriately exclude proxy group members whose return on equity is distinguishable 

from debt. This raises the low-end outlier threshold in the First Complaint proceeding 

from 5.65 to 6.47 percent, and it raises the low-end outlier threshold in the Second 

Complaint proceeding from 6.41 to 7.18 percent.782 This revision does not result in the 

exclusion of any additional companies from the proxy group when applied to either the 

DCF or CAPM analyses in the First Complaint proceeding. However, in the Second 

Complaint proceeding, the revised low-end outlier test excludes one additional company 

from the DCF analysis. 

MISO TOs argue that the low-end outlier test has been and should be based on the 

average Baa yield, while CAPs argue that the application of the low-end outlier test 

should be dependent on the bond rating of each company in the proxy group. We note 

that the Commission has applied this test differently in the past, with the most recent 

application being to apply the test based on the average Baa yield.783 Conversely, CAPs 

contend that the Commission should base the low-end outlier test on Moody’s Public 

Utility Bond index yield for the same rating category proxy utility under consideration. 

While CAPs argue that this application would be more precise, we find that using the Baa 

bond yields as the low-end test is consistent with the Commission seeking the proxy 

group for a diverse group of utilities to be representative of the cost of capital for all of 

those utilities. Further, using the specific bond yield for each company, in addition to 

adding complexity to the calculations, renders them (and the resulting ROE) less 

predictable, as the credit ratings for individual companies are likely more volatile than the 

generic corporate rate baa credit rating due to company-specific credit rating 

considerations. As discussed elsewhere in this order, where possible, we seek to provide 

predictability and transparency to ROE determinations, which is best accomplished by 

using a single outlier test. We find no reason to adjust the low-end outlier test to be 

applied to Moody’s Public Utility Bond index yield for the same rating category proxy 

utility under consideration at this time. 

 782 See Appendix C. See also Opinion No. 551, 156 FERC ¶ 61,234 at P 20; Initial 

Decision (II), 155 FERC ¶ 63,030 at P 171 and P 174 n.75. 

783 Opinion No. 531, 147 FERC ¶ 61,234 at P 123. 
Docket Nos. EL14-12-003 and EL15-45-000 - 186 - 

C. Natural Break Analysis 

1. Briefing Order 

In the Briefing Orders, the Commission proposes to apply its low-end and highend outlier screens, subject to a “natural break” analysis. The natural break analysis 

determines whether certain proxy group companies screened as outliers, or those almost 

screened as outliers, truly represent outliers and should thus be removed from the proxy 

group. 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.784

In the Briefing Orders, the Commission did not explicitly define how large of a 

difference constitutes a natural break, nor did it set forth a specific methodology for 

determining what constitutes a natural break. In Opinion No. 531, the Commission stated 

that there was a natural break where an excluded proxy group company had a cost of 

equity estimate that was 101 basis points above the applicable bond yield and the lowest 

cost of equity estimate of the included proxy group companies was 242 basis points 

above the applicable bond yield—or a 141 basis point break between the excluded and 

lowest included companies.785 In Opinion 531-B, the Commission indicated that the 

same natural break analysis need not apply to both the low- and high-end outlier tests 

because those tests serve different purposes,786 but did not otherwise define the numerical 

difference that would constitute a natural break or provide a methodology for determining 

what constitutes a natural break. 

2. CAPs 

CAPS contend that the natural break analysis should apply to low-end and highend outliers.787 However, CAPS argue that the natural break analysis is vague and 

subjective, and contend the Commission should use a more objective test. Specifically, 

CAPS propose the Commission use a two-part test that examines whether a proxy value 

is: (1) close to the threshold level that applies prior to considering natural breaks; and 

 784 See, e.g., SoCal Edison, 131 FERC ¶ 61,020 at P 56, applying a natural break 

analysis to exclude from the proxy group a company whose ROE was 102 basis points 

above the applicable bond yield. 

785 Opinion No. 531, 147 FERC ¶ 61,234 at P 123. 

786 Opinion No. 531-B, 150 FERC ¶ 61,165 at P 79. 

787 CAPS Initial Br. (I) at 61. 
Docket Nos. EL14-12-003 and EL15-45-000 - 187 - 

(2) far from the neighboring proxy value that would be retained.788 MISO CAPS contend 

that the population argument raised by MISO TOs is undermined by, among other things, 

the Commission’s proxy group selection criteria having changed over time.789

3. MISO TOs 

MISO TOs contend the Commission should not use the natural break analysis. 

Specifically, MISO TOs contend the test has no economic basis, is illogical, unnecessary, 

arbitrary, and highly subjective. MISO TOs contend the use of the natural break analysis 

is based on a false premise that evaluating cost of equity estimates is akin to sampling. 

Instead, MISO TOs contend that the Commission’s proxy group criteria are designed to 

identify the entire relevant population. Further, the MISO TOs contend that the goal is 

not to exclude outliers, but to exclude estimates that are illogical for use as a basis for 

establishing the zone of reasonableness.790 MISO TOs contend that, if the Commission 

elects to use a natural break analysis, it only be used on the low end of a cost-of-equity 

estimate range to determine whether the low-end outlier test may have failed to exclude 

illogical results.791

4. Trial Staff 

Trial Staff contends a natural break test should be used, and argues that dispersion 

must be taken into consideration for the midpoint to pass the test of economic logic.792

5. Commission Determination 

We will continue to apply the natural break analysis to our outlier screens. We do 

not find the arguments raised by MISO TOs against its use availing. As has been noted, 

 788 CAPS Initial Br. (I) at 61-64. The specific test CAPS proposes is detailed in 

Exhibit JCI-100 at 14-16. Specifically, this test first identifies whether the distance 

between the outlier threshold and the adjacent proxy value is less than the average jump, 

or the width of the distribution’s range divided by the number of proxies. The test then 

identifies whether the distance between that lowest or highest proxy value and its 

neighbor is more than twice the jump separating that neighbor from the next neighbor. 

789 CAPS Reply Br. (I) at 75. 

790 MISO TOs Initial Br. (I) at 9-11. 

791 Id. at 11-12. 

792 Trial Staff Reply Br. (I), Keyton Reply Aff. (I) at 29. 
Docket Nos. EL14-12-003 and EL15-45-000 - 188 - 

the purpose of both the high and low-end outlier tests is to screen for outliers whose 

inclusion in the proxy group would lead to economically illogical results. Under both 

tests, as outlined in this order, the Commission will use a formula to calculate a specific 

numerical guideline for determining whether a particular company’s DCF or CAPM ROE 

should be treated as a high or low-end outlier. However, any such specific numerical 

guideline must, of necessity, be somewhat arbitrary, given the insignificance of a few 

basis points difference in ROE. The natural break analysis gives the Commission the 

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. This is illustrated by the natural break analysis 

that the Commission performed in both SoCal Edison793 and Opinion No. 531,794 where 

the Commission excluded companies whose ROEs were only one and two basis points 

above the then applicable low-end outlier test, because there was a natural break between 

those companies’ ROEs and the higher ROEs of the companies that the Commission 

included in the proxy group. 

We clarify that the Commission will apply such a natural break analysis to both 

the low-end and high-end outlier tests. We further clarify that the analysis may justify 

excluding companies whose ROEs are a few basis points above the low-end screen, if 

their ROEs are far lower than other companies in the proxy group; a similar analysis 

could also apply with respect to the high-end outlier test. We also clarify that the natural 

break analysis may justify inclusion of companies in the proxy group despite their failing 

either the low or high-end outlier test. For instance, a company’s ROE could be 152 

percent of the median ROE, but, based on this analysis, the Commission may include it in 

the proxy group if it were not substantially higher than other companies in the proxy 

group. 

Further, the Commission has not enumerated a rigid formula, such as specifying 

how close the company has to be to the next proxy group member to justify inclusion or 

exclusion from the proxy group, for the application of the natural break analysis, and we 

decline to do so here. The natural break analysis provides the Commission flexibility to 

reach a reasonable result based upon the particular array of ROEs presented in a specific 

case. Although we recognize the value of transparency and predictability, given the 

number of potential scenarios with respect to outlier proxy group companies, we are not 

convinced that there is any specific formula that would reach reasonable results in every 

possible factual situation. In any event, we believe it is appropriate to develop our policy 

on this issue through case-by-case analysis, rather than adopting a specific formula here. 

 793 131 FERC ¶ 61,020 at P 56. 

794 147 FERC ¶ 61,234 at P 123. 
Docket Nos. EL14-12-003 and EL15-45-000 - 189 - 

XI. Use of Midpoint or Median as Measure of Central Tendency 

In determining the central tendency of the zone of reasonableness, the 

Commission has distinguished between cases involving an RTO-wide ROE and cases 

involving the ROE of a single utility (or pipeline). In cases involving an RTO-wide 

ROE, the Commission has held that the midpoint is appropriate. The Commission has 

reasoned that, because an RTO-wide ROE will apply to a diverse set of companies, the 

range of results becomes as important as the central value, and the midpoint fully 

considers that range, because it is derived directly from the endpoints of the range. The 

Commission established this policy in an order on remand in the proceeding establishing 

the MISO TOs’ 12.38 percent ROE.795 By contrast, in cases involving a single utility, the 

Commission has held that using the median is appropriate, because the median “is the 

most accurate measure of central tendency for a single utility of average risk.”796 In the 

Briefing Order, the Commission proposed to continue this policy.797 

As described below, the CAPs and OMS assert that the Commission should no 

longer use the midpoint in cases involving an RTO-wide ROE, while MISO TOs defend 

the current policy. As discussed below, the Commission is retaining its current policy of 

using the midpoint for determining the central tendency of the zone of reasonableness in 

cases involving an RTO-wide ROE. 

A. CAPs 

CAPs recommend using the median for setting the base ROE for all MISO TOs, 

noting that the Commission has found that the “median best represents central tendency” 

if a distribution is skewed, for companies of average risk.798 CAPs further assert that “the 

midpoint is inherently inferior to the median as a measure of central tendency because it 

depends upon only the two most extreme, unrepresentative observations . . . and ignores 

 795 Midwest Indep. Transmission Sys. Operator, Inc., 106 FERC ¶ 61,302, at PP 9-

10 (2004) (MISO Remand Order), aff’d, Pub. Serv. Comm’n of Ky. v. FERC, 397 F.3d 

1004 (D.C. Cir. 2005) (Pub. Serv. Comm’n of Ky. v. FERC). 

796 See SoCal Edison, 131 FERC ¶ 61,020, at P 91, remanded on other grounds 

sub nom. S. Cal. Edison Co. v. FERC, 717 F.3d 177, 183-87 (D.C. Cir. 2013) (S. Cal. 

Edison v. FERC). 

797 Briefing Order, 165 FERC ¶ 61,118 at P18 n.40. 

798 CAPs Initial Br. (I) at 54; CAPs Initial Br. (II) at 53. 
Docket Nos. EL14-12-003 and EL15-45-000 - 190 - 

the distribution of proxy group results.”799 CAPs contend that the midpoint may be 

higher than almost all data points in a given distribution, and using the midpoint of such a 

distribution to establish a base ROE has previously been found arbitrary and 

capricious.800

CAPs acknowledge that the Commission previously found in the MISO Remand 

Order that using the midpoint to determine a single ROE for a diverse group of utilities is 

justified. However, CAPs contend that the MISO Remand Order is distinguishable from 

this proceeding. They contend that the MISO Remand Order emphasized that the proxy 

group used to define the zone of reasonableness in that proceeding was a subset of the 

MISO TOs to which the ROE would apply. Therefore, the Commission stated that, 

unlike a case involving a single utility, it was “not as concerned that the high or low 

results represent different risks from the single company because the range encompasses 

only publicly traded Midwest ISO TOs. Rather, we must use the measure that produces 

the most just and reasonable ROE for all of the Midwest ISO TOs.”801

CAPs point out that here, unlike in the MISO Remand Order, the zone of 

reasonableness is based on a national proxy group. They assert that the “risk 

comparability requirement established in Bluefield emphasizes the geographic proximity 

of proxy companies.” However, CAPs state that most of the proxy group companies are 

national holding companies whose risk profiles include risk unrelated to the MISO TOs’ 

transmission risk, and as a result, the range of costs of equity for this group are 

fundamentally not comparable to those of the MISO TOs.802 In particular, CAPs note 

that the credit ratings for the high and low-end outliers of the national proxy group do not 

correspond to those of the MISO TOs.803 Furthermore, CAPs claim that the proxy group 

companies have, on average, worse credit ratings than the MISO TOs.804

 799 CAPs Initial Br. (I) at 40 (citing Ex. OMS-108 at P 4); CAPs Initial Br. (II) 

at 60-61 (citing Ex. OMS-208 at P 4). 

800 CAPs Initial Br. (I) at 42; CAPs Initial Br. (II) at 63. 

801 CAPs Initial Br. (I) at 54-55 (citing MISO Remand Order, 106 FERC ¶ 61,302 

at P 10); CAPs Initial Br. (II) at 54. 

802 CAPs Initial Br. (I) at 55; CAPs Initial Br. (II) at 55. 

803 CAPs Initial Br. (I) at 56; CAPs Initial Br. (II) at 55. 

804 CAPs Initial Br. (I) at 57 (citing Ex. OMS-100 at 11); CAPs Initial Br. (II) 

at 57 (citing Ex. OMS-200 at 11, Ex. OMS-205 at 1-4). 
Docket Nos. EL14-12-003 and EL15-45-000 - 191 - 

Finally, CAPs argue that the justifications for using the midpoint established in 

previous proceedings are not applicable here. CAPs point out that the MISO Remand 

Order stated that the MISO TOs are a “broad group of utilities with diverse risks and 

business profiles,” but the Briefing Order stated that the MISO TOs are of average risk.805 

CAPs contend that, if the MISO TOs as a group can be considered of average risk, then 

using the median, which emphasizes the central tendency of the range, rather than the 

midpoint, which emphasizes the impact of the outliers, is consistent with Commission 

precedent.806 CAPs also note that averaging the midpoints of the DCF range, CAPM 

range, Expected Earnings range, and Risk Premium singular value to determine a 

replacement ROE does not consider whether the outliers’ risk profiles for each range are 

comparable to those of the MISO TOs’ outliers. As a result, the replacement ROE “may 

not correspond to [the costs of equity] of the MISO TOs’ outliers.”807

B. MISO TOs 

MISO TOs state that CAPs’ argument for use of the median relied on Commission 

decisions addressing single-utility ROEs, which ignores the Commission’s repeated 

rulings that the median is an appropriate measure for single-utility ROEs, but the 

midpoint is the appropriate measure for diverse groups of utilities in ISOs/RTOs.808 

MISO TOs state that the goal of setting a base ROE for an individual utility is to reflect 

most accurately the risk of an individual utility applicant, while the goal of setting a base 

ROE for a regional group of utilities is to estimate a central tendency while also 

reflecting the diverse nature of the group. MISO TOs argue that, when setting the base 

ROE for a regional group of utilities, the Commission is not seeking the most refined 

measure of central tendency, but to consider the full range and risks and business profiles, 

which is why it would be more appropriate to use the approach of using the midpoint for 

regional groups.809

MISO TOs state that CAPs’ argument that the Commission’s use of a national 

proxy group warrants the abandonment of the midpoint in favor of the median because 

 805 CAPs Initial Br. (I) at 58 (citing MISO Order Remand Order, 106 FERC 

¶ 61,302 at P 9). 

806 Id.; CAPs Reply Br. (I) at 41; CAPs Initial Br. (II) at 58; CAPs Reply Br. (II) 

at 61. 

807 CAPs Initial Br. (I) at 58-59; CAPs Initial Br. (II) at 58-59. 

808 MISO TOs Reply Br. (I) at 73; MISO TOs Reply Br. (II) at 70-71. 

809 MISO TOs Reply Br. (I) at 73-74; MISO TOs Reply Br. (II) at 71-72. 
Docket Nos. EL14-12-003 and EL15-45-000 - 192 - 

the returns identified for outliers have no particular correspondence to the highest and 

lowest risk profiles is inaccurate. MISO TOs state that Opinion No. 531 recognizes that 

transmission utilities compete nationally for investors’ capital, making the national range 

of utility returns the most appropriate range from which to derive a just and reasonable 

base ROE.810

MISO TOs state that the Commission should reject CAPs’ argument that the 

midpoint would overstate MISO TOs’ costs of equity and ignore the distribution of the 

proxy companies’ cost of capital estimates. MISO TOs state that CAPs’ argument 

assumes that the midpoint will generally be higher than the median. However, MISO 

TOs state that nothing about the midpoint ensures that it will be higher than the median in 

any particular instance and it is only “pure happenstance” when the midpoint exceeds a 

median of the same range and vice-versa.811 MISO TOs state that the Commission 

should reject CAPs’ argument for use of the median instead of the midpoint, and that the 

midpoints of the CAPM and Expected Earning ranges are the appropriate measure of the 

central tendency.812

MISO TOs state that, while CAPs argue that the use of the midpoint is no longer 

appropriate in light of the Commission’s adoption of a hybrid method for estimating the 

cost of equity, the new approach incorporates two new range-producing methods: CAPM 

and Expected Earnings. MISO TOs argue that the proxy groups for these methods are 

composed the same way as they have historically been used in the Commission’s DCF 

approach.813

MISO TOs state that the Commission’s proposal for calculating a new base ROE 

by averaging the four methods is appropriate because the new base ROE will then be a 

product of the midpoints of the three range-producing methods and the single result of the 

Risk Premium approach, and disagrees with CAPs’ assertion that the Commission’s 

proposed four-method approach would be calculated without regard to its placement 

within the new composite zone of reasonableness.814

 810 MISO TOs Reply Br. (I) at 74; MISO TOs Reply Br. (II) at 73-74. 

811 MISO TOs Initial Br. (I) at 76 (citing S. Cal. Edison v. FERC, 717 F.3d at 186). 

812 MISO TOs Reply Br. (I) at 75; MISO TOs Reply Br. (II) at 75. 

813 MISO TOs Reply Br. (I) at 76; MISO TOs Reply Br. (II) at 75-76. 

814 MISO TOs Reply Br. (I) at 77; MISO TOs Reply Br. (II) at 76. 
Docket Nos. EL14-12-003 and EL15-45-000 - 193 - 

C. Commission Determination 

We will continue to use the midpoint to determine the central tendency of the zone 

of reasonableness in cases involving an RTO-wide ROE, consistent with the policy set 

forth in the MISO Remand Order. The United States Court of Appeals for the District of 

Columbia upheld that policy in Public Service Commission of Kentucky v. FERC. We 

find that the CAPs have not presented a compelling reason why that policy should not be 

applied in this case. 

The court described the MISO Remand Order’s rationale for using the midpoint in 

cases involving an RTO-wide ROE as follows, 

The Commission . . . distinguished between ‘cases in which a 

ROE is set for one gas pipeline or electric utility’ and cases 

where ‘applicants proposed setting a single ROE for acrossthe-board application.’ In the latter situation, where ‘the ROE 

will apply to a diverse set of companies,’ FERC reasoned that 

the range of results becomes as important as the central value. 

The midpoint—unlike the other measures of central 

tendency—‘fully considers that range,’ because it is derived 

directly from the endpoints of the range.815

This reasoning applies equally in this case. The MISO TOs continue to be “a 

diverse set of companies.” For example, in both the First Complaint and Second 

Complaint proceedings, the MISO TOs’ S&P corporate ratings range from BB- to AA, 

and their Moody’s long-term ratings range from Ba3 to Aa2.816 This broad range of 

credit ratings supports a finding that the MISO TOs are a diverse group with a variety of 

risk profiles, even though we treat the group as a whole as of average risk, consistent with 

the MISO Remand Order.

817 

We recognize that the proxy group at issue in the MISO Remand Order was 

limited to MISO TOs, whereas in the First Complaint and Second Complaint proceedings 

we are using national proxy groups that include some firms with no MISO TO operating 

companies. However, this does not mean that the high and low ends of the DCF and 

CAPM zones of reasonableness produced by those proxy groups are unrepresentative of 

the highest and lowest risk profiles among the MISO TOs. In the First Complaint 

 815 Pub. Serv. Comm’n of Ky. v. FERC, 397 F.3d at 1010. 

816 Ex. MTO-26 at 2. Ex. MTO-32 at 2. 

817 Cross-Answering Testimony of Ellen Lapson in MISO I, Ex. MTO-39 at 46. 
Docket Nos. EL14-12-003 and EL15-45-000 - 194 - 

proceeding, the high end of the DCF zone of reasonableness is set by TECO.818 Its S&P 

corporate rating is BBB+ and its Moody’s long-term rating is Baa1.819 The high-end of 

the CAPM zone of reasonableness is set by Black Hills Corp.820 Its S&P corporate rating 

is BBB and its Moody’s long-term rating is Baa1.821 Thus, the credit ratings of the two 

companies whose ROEs are averaged together to establish the high end of the composite 

zone of reasonableness are both within the MISO TOs’ S&P corporate ratings range of 

BB- to AA, and Moody’s long-term ratings range of Ba3 to Aa2. The low end of the 

DCF range of reasonableness is set by Public Service Enterprise Group and IDACORP, 

Inc.822 Public Service Enterprise Group’s S&P corporate rating is BBB+ and its Moody’s 

long-term rating is Baa2.823 IDACORP, Inc.’s S&P corporate rating is BBB and its 

Moody’s long-term rating is Baa1.824 The low-end of the CAPM zone of reasonableness 

is set by Duke Energy Corp. (Duke) and Southern Company (Southern).825 Duke’s S&P 

corporate rating is A- and its Moody’s long-term rating is A3.826 Southern’s S&P 

corporate rating is A, and its Moody’s long-term rating is Baa1.827 These credit ratings 

are also within the ranges of MISO TOs’ S&P corporate ratings and Moody’s long-term 

ratings range. 828 Thus, the companies that set the high and low ends of the DCF and 

CAPM zones of reasonableness in the First Complaint proceeding have similar risk 

 818 See Appendix A to this order. 

819 Ex. MTO-26 at 1. 

820 See Trial Staff Initial Br. (I), Attachment A to App. 2 at 6, which, as discussed 

in section XVI of this order, reflects our holdings concerning the appropriate CAPM 

analysis for the First Complaint proceeding. 

821 Ex. MTO-26 at 1. 

822 Appendix A. 

823 Ex. MTO-26 at 1. 

824 Id.

825 Trial Staff Initial Br. (I), Attachment A to App. 2 at 6. In addition, Duke owns 

Duke Energy Indiana, Inc., a member of MISO. 

826 Ex. MTO-26 at 1. 

827 Id.

828 Id.
Docket Nos. EL14-12-003 and EL15-45-000 - 195 - 

profiles to the MISO TOs, and one of those companies is in fact a member of MISO. 

Similarly, in the Second Complaint proceeding, the high end of the DCF zone of 

reasonableness is set by PNM Resources.829 Its S&P corporate rating is BBB+ and its 

Moody’s long-term rating is Baa3.830 The high-end of the CAPM zone of reasonableness 

is set by Otter Tail Corp. (Otter Tail).831 Its S&P corporate rating is BBB and its 

Moody’s long-term rating is Baa2.832 These credit ratings are both within the MISO 

TOs’ S&P corporate ratings range of BB- to AA, and Moody’s long-term ratings range of 

Ba3 to Aa2. The low end of the DCF zone of reasonableness is set by CenterPoint 

Energy, Inc.833 Its S&P corporate rating is A- and its Moody’s long-term rating is 

Baa1.834 The low-end of the CAPM zone of reasonableness is set by PG&E.835 Its S&P 

corporate rating is BBB and its Moody’s long-term rating is Baa1.836 These credit ratings 

are also within the ranges of MISO TOs’ S&P corporate ratings and Moody’s long-term 

ratings. Thus, the companies that set the high and low ends of the DCF and CAPM zones 

of reasonableness in the Second Complaint proceeding also have similar risk profiles to 

the MISO TOs, and one of those companies is in fact a member of MISO. 

We also disagree that the Commission should abandon the midpoint in favor of the 

median because the proxy group ROEs could be so skewed that the midpoint might be 

higher than almost all the proxy group ROEs. As the Commission recognized in the 

MISO Remand Order, the midpoint may be inappropriate in certain circumstances 

because of egregious distortion by the highest or lowest number. However, here the 

proxy group ROEs are not so skewed as to render the midpoint inappropriate. In the First 

Complaint proceeding, the 9.88 percent midpoint of composite zone of reasonableness is 

only 38 basis points, or four percent, above the 9.50 percent median. In the Second 

 829 See Appendix B to this order. 

830 Ex. MTO-32 at 1. 

831 See Trial Staff Initial Br. (II), Attachment A to App. 2 at 6, which, as discussed 

in section XVII of this order, reflects our holdings concerning the appropriate CAPM 

analysis for the Second Complaint proceeding. Otter Tail is also a member of MISO. 

832 Ex. MTO-32 at 1. 

833 Appendix B. 

834 Ex. MTO-32 at 1. 

835 Trial Staff Initial Br. (I), Attachment A to App. 2 at 6. 

836 Ex. MTO-32 at 1. 
Docket Nos. EL14-12-003 and EL15-45-000 - 196 - 

Complaint proceeding, the 9.72 percent midpoint of the composite zone of 

reasonableness is only 4 basis points, or less than one percent, above the 9.68 percent 

median. The proxy group ROEs in these cases are thus no more skewed than in the Pub. 

Serv. Comm’n of Ky. v. FERC case, where the 12.38 percent midpoint of the zone of 

reasonableness was 53 basis points, or about 4.5 percent, above the 11.85 percent median. 

In that case, the court recognized that, although there was some skew, “this is part of the 

reason FERC used the midpoint in the first place.”837 The same reasoning applies to the 

current cases. 

Accordingly, we will determine the central tendency of both the DCF and CAPM 

zones of reasonableness in the First Complaint and Second Complaint proceedings based 

on the midpoint, consistent with our policy of using the midpoint in cases involving 

RTO-wide ROEs. 

XII. Weighting of Models 

A. Background 

In the Briefing Order, the Commission proposed to use the DCF model, the 

CAPM, and the Expected Earnings model to determine whether an existing ROE remains 

just and reasonable under the first prong of FPA section 206.838 The Commission then 

proposed to use the DCF model, the CAPM, the Expected Earnings model, and the Risk 

Premium model for establishing a new just and reasonable ROE, where the existing ROE 

has been shown to be unjust and unreasonable (i.e., the second prong of the FPA section 

206 analysis).839 Under each prong, the Commission proposed to give the models to be 

used equal weight.840 Below, we discuss issues raised by the participants with respect to 

the weighting of the various proposed models. 

 837 Pub. Serv. Comm’n of Ky. v. FERC, 397 F. 3d at 1003. 

838 Briefing Order, 165 FERC ¶ 61,118 at P 17. 

839 Id. P 18. 

840 See id. PP 13, 16, 18, 32. 
Docket Nos. EL14-12-003 and EL15-45-000 - 197 - 

B. CAPs 

CAPs argue that the Expected Earnings model should be excluded and, if 

included, should be given the least amount of weight.841 As described above, CAPs 

assert that the Expected Earnings model does not accurately estimate a utility’s cost of 

equity, because it is an accounting-based measure that does not reflect the rate of return 

that investors require in the market-priced common equity capital of a utility.842 CAPs 

argue that there is no evidence investors give the Expected Earnings model any weight in 

informing their investment decisions.843 If used, CAPs contend that the Expected 

Earnings model should be weighted significantly less than the market-oriented models 

(suggested weight of 16.7 percent for prong one and 12.5 percent for prong two),844

arguing that it distorts and inflates the estimate of investors’ required return on marketpriced equity.845

CAPs also assert a number of reasons why the DCF should be weighted more than 

other models. First, CAPs argue that the Commission has used the DCF method for 

many years with proven success.846 Second, CAPs state that, in contrast to other 

proposed models, the Commission has refined and honed the DCF model over a number 

of years, making it more accurate.847 Third, CAPs contend that, because the Commission 

has used the DCF model for many years, investors are familiar with it and more likely to 

 841 CAPs Initial Br. (I) at 46; CAPs Initial Br. (II) at 46; CAPs Reply Br. (I) at 40, 

46; CAPs Reply Br. (II) at 60, 67. 

842 CAPs Initial Br. (I) at 40-44; CAPs Initial Br. (II) at 39-44. CAPs states that the 

Expected Earnings model may only help predict the stock-issuing company’s own rate of 

return per its book equity, not the investor’s own rate of return on investment unless 

adjusted for the market/book ratio. CAPs Reply Br. (I) at 47; CAPs Reply Br. (II) at 67. 

843 CAPs Reply Br. (I) at 46; CAPs Reply Br. (II) at 67. 

844 CAPs Initial Br. (I) at 47; CAPs Initial Br. (II) at 47; Ex. OMS-108 at 8-9; Ex. 

OMS-208 at 8. 

845 CAPs Initial Br. (I) at 46; CAPs Initial Br. (II) at 46. 

846 CAPs Initial Br. (I) at 46; CAPs Initial Br. (II) at 46; CAPs Reply Br. (I) at 46; 

CAPs Reply Br. (II) at 66. 

847 CAPs Initial Br. (I) at 46; CAPs Initial Br. (II) at 46; CAPs Reply Br. (I) at 46; 

CAPs Reply Br. (II) at 66-67. 
Docket Nos. EL14-12-003 and EL15-45-000 - 198 - 

apply it in the same manner as prescribed the Commission.848 Fourth, CAPs argue that 

the DCF model is a superior model for assessing investors’ expectations and required 

returns, because it is the only one that incorporates direct inputs from investors pertaining 

to the market value of electric utilities’ common equity capital (through the “P” term in 

the DCF equation).849

CAPs argue that the Commission should exclude the Expected Earnings model, 

and if it is excluded, that the Commission should use the following weighting for the 

different models. CAPs assert that for the prong one analysis, the Commission should 

weight the DCF model at 60 percent and the CAPM at 40 percent; and that for the prong 

two analysis, the Commission should weight the DCF model at 42.8 percent, the CAPM 

at 28.6 percent, and the Risk Premium model at 28.6 percent.850 CAPs contend that, if 

the Commission includes the Expected Earnings model, the Commission should use the 

following weighting for the different models. CAPs assert that for prong one, the 

Commission should weight the DCF model at 50 percent, the CAPM at 33.3 percent, and 

the Expected Earnings model at 16.7 percent; and that for the prong two analysis, the 

Commission should weight the DCF model at 37.5 percent, the CAPM at 25 percent, the 

Expected Earnings model at 12.5 percent, and the Risk Premium model at 25 percent.851

C. MISO TOs 

MISO TOs assert that CAPs’ argument to weight the DCF model more heavily 

than other models is arbitrary and unsupported by evidence.852 MISO TOs argue in 

support of weighting all models equally. MISO TOs argue that the methodology is 

complex as is and that unequal weighting would only result in an extra layer of 

subjectivity.853 

 848 CAPs Reply Br. (I) at 46; CAPs Reply Br. (II) at 67. 

849 CAPs Reply Br. (I) at 46; CAPs Reply Br. (II) at 67. 

850 CAPs Initial Br. (I) at 47-48; CAPs Initial Br. (II) at 46-47; Ex. OMS-100 at 7-

8; Ex. OMS-200 at 7-8. 

851 CAPs Initial Br. (I) at 47-48; CAPs Initial Br. (II) at 46-47; Ex. OMS-100 at 7-

8; Ex. OMS-200 at 7-8. 

852 MISO TOs Reply Br. (I) at 52; MISO TOs Reply Br. (II) at 51. 

853 MISO TOs Reply Br. (I) at 52; MISO TOs Reply Br. (II) at 51. 
Docket Nos. EL14-12-003 and EL15-45-000 - 199 - 

MISO TOs contend that because there is no evidence that one model is inherently 

superior to another, weighting them differently is an option unsupported by evidence.854 

MISO TOs argue the Commission has recognized that there is no single approach that is 

fundamentally superior or foolproof and that each model offers unique features with their 

own advantages and disadvantages.855

While MISO TOs generally support weighting all models equally, MISO TOs take 

particular exception to giving the DCF more weight as compared to other models.856 

MISO TOs state that the evidence submitted during this proceeding indicates that the 

DCF model fails to meet the Hope and Bluefield standards, and, therefore, CAPs’ 

argument to weight the DCF model more than the others is particularly flawed.857

D. Trial Staff 

Trial Staff acknowledges that the Commission has proposed to use equal 

weighting for all models.858 Trial Staff argues that the Commission should not use the 

Expected Earnings model for either prong.859 But if the Commission chooses to use the 

Expected Earnings model, Trial Staff proposes that, for prong one, the Commission 

should weight the DCF model, the CAPM, and the Expected Earnings model equally.860 

Additionally, for prong two, Trial Staff proposes that the Commission should weight the 

 854 MISO TOs Reply Br. (I) at 52; MISO TOs Reply Br. (II) at 51-52. 

855 MISO TOs Reply Br. (I) at 52-53; MISO TOs Reply Br. (II) at 51-52. 

856 MISO TOs Reply Br. (I) at 53; MISO TOs Reply Br. (II) at 51-52. MISO TOs 

also assert there is evidence that investors’ decisions are more closely aligned with 

factors relating to CAPM than other models. MISO TOs argue that this further cuts 

against CAPs’ proposal to rely more heavily on the DCF model. MISO TOs Reply Br. (I) 

at 53 n.212 (citing Jonathan B. Berk & Jules H. van Binsbergen, How Do Investors 

Compute the Discount Rate? They Use the CAPM, Fin. Analyst J. (2d. Quarter 2017)); 

MISO TOs Reply Br. (II) at 52 (citing same). 

857 MISO TOs Reply Br. (I) at 53; MISO TOs Reply Br. (II) at 51-52. 

858 Trial Staff Initial Br. (I) at 20; see Trial Staff Initial Br. (II) at 18-19. 

859 Trial Staff Initial Br. (I) at 6; Trial Staff Initial Br. (II) at 5. 

860 Trial Staff Initial Br. (I), Keyton Aff. (I) at 39; Trial Staff Initial Br. (II), 

Keyton Aff. (II) at 37. 
Docket Nos. EL14-12-003 and EL15-45-000 - 200 - 

DCF model, the CAPM, the Risk Premium model, and the Expected Earnings model 

equally.861 

E. RPGI 

RPGI argues that the Commission should weight the DCF model no less than onehalf in proportion to the other models.862 RPGI states that the Commission has not 

explained nor justified no longer relying exclusively on the DCF model, rather than 

utilizing an equally-weighted multiple methodology approach.863 RPGI argues that, 

because the Commission has previously observed that the DCF model is statistically 

superior to alternatives and the Commission has not provided any evidence that the 

alternative models produce better forecasts, the DCF model should not be weighted 

equally with the others.864 RPGI summarizes its arguments in support of the DCF model 

being weighted at one-half, at the least, by stating that the DCF methodology maintains a 

preferred status at the Commission and that the Commission has failed to adequately 

explain its reasoning for adopting a changed course of action.865

F. Commission Determination 

As discussed above in sections VI and VIII, we find that is not appropriate to use 

the Expected Earnings and Risk Premium models in ROE methodology. Accordingly, 

the Commission will not give those models any weight in the analysis under either prong 

one or prong two of FPA section 206. As a result, the arguments proposing alternative 

weighting of the various models if the Expected Earnings and Risk Premium models are 

included in the ROE methodology are moot and we will not address them here. 

In light of our decision not to use the Expected Earnings and Risk Premium 

models, we will apply only the DCF and CAPM models, giving equal weight to each 

model. Specifically, the top and bottom of the zones of reasonableness produced by the 

DCF and CAPM will be given equal weight and averaged to produce a single composite 

zone of reasonableness that will be used for both the prong one and prong two analysis 

 861 Trial Staff Initial Br. (I), Keyton Aff. (I) at 51; Trial Staff Initial Br. (II), 

Keyton Aff. (II) at 49. 

862 RPGI Initial Br. (I) at 5, 38; RPGI Initial Br. (II) at 4, 41. 

863 RPGI Initial Br. (I) at 11; RPGI Initial Br. (II) at 15-16. 

864 RPGI Initial Br. (I) at 16, 25; RPGI Initial Br. (II) at 20, 29. 

865 RPGI Initial Br. (I) at 38; RPGI Initial Br. (II) at 41. 
Docket Nos. EL14-12-003 and EL15-45-000 - 201 - 

under FPA section 206. As discussed in section IV above, in order to determine whether 

an existing ROE is unjust and unreasonable, we will divide the composite zone of 

reasonableness into quartiles; the quartile centered on the central tendency866 of the 

overall composite zone of reasonableness will represent the range of presumptively just 

and reasonable ROEs for average risk utilities, and the quartiles centered on the central 

tendencies of the upper and lower halves of the composite zone of reasonableness will 

represent the range of presumptively just and reasonable ROEs for above- and belowaverage utilities, respectively. For purposes of determining just and reasonable ROEs 

under the second prong of FPA section 206 (and under FPA section 205), we will 

generally set the ROE of average risk utilities at the central tendency of the overall 

composite zone of reasonableness, and set the ROEs of above average risk utilities at the 

central tendency of the upper half of the composite zone of reasonableness and below 

average risk utilities at the central tendency of the lower half of the composite zone of 

reasonableness.867 

We find that the record evidence supports giving each model that will be used in 

the ROE methodology equal weight, as described above. The evidence indicates that 

neither remaining model is conclusively superior to the other model. Each model has 

unique aspects, and advantages and disadvantages that make it preferable to the other 

model in some respects, but not other respects. Parties point out, for example, that the 

DCF model is the only one that incorporates direct inputs from investors pertaining to the 

market value of electric utilities’ common equity capital;868 however, parties also argue 

that investors base their decisions on factors more closely aligned with those contained 

within the CAPM.869 Accordingly, we find that, on balance, the evidence does not 

indicate that there is a clearly superior model for estimating cost of equity that should be 

given more weight than the others. Moreover, we find that equally weighting the two 

models will reduce the model risk associated with any particular model more than giving 

one model greater weight than the other. Therefore we find that the risks associated with 

 866 As noted above in section XI, the Commission will continue to use the 

midpoint of the zone of reasonableness as the appropriate measure of central tendency for 

a diverse group of average risk utilities and the median as the measure of central 

tendency for a single utility. 

867 We do not intend by this discussion to foreclose the possibility that a particular 

utility could be of such high or low risk to justify setting its ROE at the top or bottom of 

the composite zone of reasonableness. 

868 CAPs Reply Br. (I) at 46; CAPs Reply Br. (II) at 67. 

869 MISO TOs Reply Br. (I) at 53 n.212 (citing Jonathan B. Berk & Jules H. van 

Binsbergen, How Do Investors Compute the Discount Rate? They Use the CAPM, Fin. 

Analyst J. (2d. Quarter 2017)); MISO TOs Reply Br. (II) at 52 (citing same). 
Docket Nos. EL14-12-003 and EL15-45-000 - 202 - 

the potential errors or flaws in any one model will be mitigated to the greatest extent by 

giving each model equal weight. 

Accordingly, we give equal weight to the CAPM and DCF models for purposes of 

the analysis under both prong one and two of the FPA, as discussed above.

XIII. Sequencing of Calculations in Determining Composite Zone 

A. Background 

As proposed in the Briefing Order, the calculations for determining the composite 

zone of reasonableness and applicable range of presumptively just and reasonable ROEs 

under the first prong of section 206 would be carried out as follows. First, a proxy group 

would be determined for each model using existing Commission screens. Second, for 

each model, low and high end outliers would be removed using applicable tests. Third, 

the models would apply to the proxy groups for each model, which would produce 

separate zones of reasonableness from each model. Fourth, the top and bottom of the 

zone of reasonableness produced by each methodology would be averaged to determine a 

single composite zone of reasonableness. Fifth, the midpoint/median, lower 

midpoint/median, and upper midpoint/median of that composite zone would be 

calculated. Sixth, the quartile ranges constituting the ranges of presumptively just and 

reasonable ROEs would be calculated, with the average risk quartile centered on the 

midpoint/median of the composite range, the above-average risk quartile centered on the 

upper midpoint/median of the composite range, and the below-average risk quartile is 

centered on the lower midpoint/median of the composite range. The Commission would 

then determine whether the utility, or group of utilities, at issue are of average risk, 

above-average in risk, or below-average in risk as compared with the proxy companies in 

order to determine the applicable range of presumptively just and reasonable ROEs. The 

Commission would then consider any other record evidence that would be relevant to its 

determination under the first prong of section 206. 

As proposed in the Briefing Order, if an existing ROE is found to be unjust and 

unreasonable under the first prong of section 206, then the additional calculations 

necessary to determine a replacement just and reasonable ROE would be carried out as 

follows. First, the applicable midpoint/median, or upper or lower midpoint/median, 

within the zones of reasonableness would be identified for the utility or utilities. Then 

those applicable midpoint/medians (or upper or lower midpoint/medians) would be given 

equal weight and averaged to produce a replacement ROE. As proposed in the Briefing 

Order, the cost of equity estimate produced by the Risk Premium model would also be 

given equal weight and averaged with the other values. However, as discussed above in 

section VIII, we find that it is not appropriate to include the Risk Premium model in our 

ROE methodology. Therefore that part of the calculation will not be included and we 

need not address it here. 
Docket Nos. EL14-12-003 and EL15-45-000 - 203 - 

B. CAPs 

CAPs argue that the Commission should use only the DCF model, but that, if the 

Commission instead uses multiple financial models, the Commission should use a 

different sequence of calculations to determine the composite zone of reasonableness and 

replacement ROE than the sequence proposed in the Briefing Order.870 CAPs argue that 

the computational sequence proposed in the Briefing Order increases the potential for 

errors due to model risk because it treats each model’s range as a separate zone of 

reasonableness, which results in separate results (median or midpoint) that are then 

averaged to establish the replacement ROE, but each model’s median or midpoint carries 

its own margin of error. CAPs contend that a more appropriate computational sequence 

is to average the results of each proxy company’s DCF and CAPM values, after first 

addressing any low-end or high-end outliers associated with each methodology.871

In particular, CAPs’ witness, Dr. Berry, proposes to first calculate for each proxy 

company the average872 of the DCF and the CAPM results to determine a companyspecific cost of equity. Specifically, Dr. Berry proposes to modify the sequence of 

calculations proposed in the Briefing Order for determining the composite zone of 

reasonableness and applicable range of presumptively just and reasonable ROEs under 

the first prong of section 206 to be carried out as follows. First, a proxy group would be 

determined using existing Commission screens. Second, for each model, low and high 

end outliers would be removed using applicable tests. Third, a cost of equity for each 

proxy group company would be determined by averaging the DCF and the CAPM results 

for each company. Fourth, highest and the lowest company-specific composite costs of 

equity would define the upper bound and the lower bound of the composite zone of 

reasonableness. Fifth, the Commission would determine whether the utility or utilities 

are of average risk, above-average risk, or below-average risk as compared with the 

proxy companies.873

 870 CAPs Initial Br. (I) at 65-66, Ex. OMS-100 at 9, Ex. OMS-108 at 9; CAPs 

Initial Br. (II) at 65-66, Ex. OMS-200 at 9, Ex. OMS-208 at 9. 

871 CAPs Initial Br. (I) at 65-66; CAPs Initial Br. (II) at 65-66. 

872 We note that Dr. Berry proposes to use a weighted average in calculations 

based on his proposed alternative weighting of the different models. As discussed above 

in section XII, we are not adopting Dr. Berry’s proposed alternative weighting therefore 

we need not address that aspect of his proposal in this section. 

873 CAPs Initial Br. (I), Ex. OMS-100 at 10-11; CAPs Initial Br. (I), Ex. OMS-200 

at 10-11. 
Docket Nos. EL14-12-003 and EL15-45-000 - 204 - 

Under Dr. Berry’s proposal, if an existing ROE is found to be unjust and 

unreasonable then the applicable median, or upper or lower median, of the composite 

zone would then be averaged with the Risk Premium model result to calculate a just and 

reasonable replacement ROE.874

CAPs provide several reasons in support of this alternative sequencing approach. 

First, CAPs assert that there is only one just and reasonable return for a given proxy 

company, though it is not directly observable, and the DCF and the CAPM methods 

attempt to estimate this unknown cost of equity for each proxy company. CAPs argue 

that, therefore, the identification of each proxy’s equity cost is improved if both methods 

are combined in identifying that proxy’s single equity cost.875 Second, CAPs contend 

that upper bounds, lower bounds, and midpoints/medians produced by each separate 

model are susceptible to model risk because they are calculated using only one model. 

Third, CAPs argue that this alternative sequencing approach reduces model risk by more 

effectively limiting the inclusion of extreme results in the proxy groups.876 To illustrate 

this point, CAPs state that other parties, by implementing the traditional sequencing 

approach, have engaged in blatant cherry-picking, as evidenced by the fact that each 

model’s proxy groups yielded a different company as the high point.877 Third, in 

response to MISO TOs’ argument that this alternative sequencing approach washes out 

the limits of the respective ranges of risk from independent financial models, CAPs argue 

that the narrowing of the composite zone of reasonableness is appropriate because it 

enhances the precision of the estimates and excludes the extreme and unrepresentative 

values that would otherwise be given undue and unreasonable weight.878 Fourth, CAPs 

state that any instance where companies may get weighted more or less, simply because 

they have more or less available financial data, would occur all the same using the 

traditional sequencing approach.879 Fifth, CAPs argue that using the alternative 

 874 CAPs Initial Br. (I), Ex. OMS-100 at 11; CAPs Initial Br. (I), Ex. OMS-200 

at 11. 

875 CAPs Initial Br. (I), Ex. OMS-100 at 12; Ex. OMS-108 at 9-10; CAPs Initial 

Br. (II), Ex. OMS-200 at 11-12; Ex. OMS-208 at 9. 

876 Ex. OMS-100 at 13; Ex. OMS-108 at 10; Ex. OMS-200 at 13; Ex. OMS-208 

at 10. 

877 Ex. OMS-108 at 10; Ex. OMS-208 at 10. 

878 Ex. OMS-108 at 11; Ex. OMS-208 at 11. 

879 Ex. OMS-108 at 11; Ex. OMS-208 at 11. 
Docket Nos. EL14-12-003 and EL15-45-000 - 205 - 

sequencing approach to control for outliers leads to results not materially different from 

the traditional approach.880

C. MISO TOs 

MISO TOs argue that, rather than averaging the cost of equity estimates produced 

for each individual proxy company across the DCF model and the CAPM, as CAPs 

support, a separate range and midpoint should be produced for each model as proposed in 

the Briefing Order.881 MISO TOs state that the ultimate goal is to specify the broad range 

of potentially lawful ROEs, and argue that their proposal for a traditional sequencing 

approach meets that standard.882

MISO TOs state a number of supporting arguments to claim that CAPs’ proposed 

alternative sequencing approach does not meet this ultimate goal. First, MISO TOs argue 

that evaluations of the cost of equity typically present the results of alternative models 

independently, rather than averaging estimates for each individual firm in a proxy group 

under the separate models.883 MISO TOs claim that no witnesses for the complainants 

had previously presented their methodology in this way and that no examples of similar 

proposals in comparable regulatory proceedings has been presented.884

Second, MISO TOs state that it is important to compare the results of each 

methodology against the others, and that, if the Commission followed CAPs’ suggested 

approach, this comparison would be obscured due to a reduction of the results to a single, 

arithmetic average.885 Third, MISO TOs argue that CAPs’ approach, based on the 

arithmetic mean of the cost of equity estimates for each proxy company, contradicts the 

 880 Ex. OMS-108 at 12; Ex. OMS-208 at 11. 

881 MISO TOs Reply Br. (I) App. 2, McKenzie Reply Aff. (II) at 112; MISO TOs 

Reply Br. (II) App. 2, McKenzie Reply Aff. (II) at 112. 

882 MISO TOs Reply Br. (I) App. 2, McKenzie Reply Aff. (I) at 112; MISO TOs 

Reply Br. (II) App. 2, McKenzie Reply Aff. (II) at 112. 

883 MISO TOs Reply Br. (I) App. 2, McKenzie Reply Aff. (I) at 114; MISO TOs 

Reply Br. (II) App. 2, McKenzie Reply Aff. (II) at 114. 

884 MISO TOs Reply Br. (I) App. 2, McKenzie Reply Aff. (I) at 114-15; MISO 

TOs Reply Br. (II) App. 2, McKenzie Reply Aff. (II) at 114-15. 

885 MISO TOs Reply Br. (I) App. 2, McKenzie Reply Aff. (I) at 113; MISO TOs 

Reply Br. (II) App. 2, McKenzie Reply Aff. (II) at 113. 
Docket Nos. EL14-12-003 and EL15-45-000 - 206 - 

Commission’s precedent of using range and midpoint values.886 Fourth, MISO TOs state 

that CAPs’ approach does not cancel out model risk or address the impact of extreme 

results, as CAPs claim, but, rather, just narrows the range by muting out the upper-end 

estimates.887 Fifth, MISO TOs argue that the purpose of the proceedings is to arrive at a 

single ROE that fully considers the range of risks for a diverse group of transmission 

owners; but, MISO TOs claim that CAPs’ approach, instead, determines the average 

ROE for the average utility, which washes out the limits of the respective ranges of risk 

from independent financial models.888

D. Commission Determination 

We will use the sequence of calculations proposed in the Briefing Order for the 

analyses under the first prong and second prong of section 206, with revisions to reflect 

our decision not to use the Expected Earnings or Risk Premium models, as discussed 

herein. In particular, we will apply the DCF and CAPM models separately to the 

applicable proxy group, producing two zones of reasonableness: a DCF zone of 

reasonableness and a CAPM zone of reasonableness. Then the top of the DCF zone of 

reasonableness will be averaged with the top of the CAPM zone of reasonableness and 

the bottom of the DCF zone of reasonableness will be averaged with the bottom of the 

CAPM zone of reasonableness to determine a single composite zone of reasonableness 

for use in both the first and second prong analysis under FPA section 206. If an existing 

ROE is found to be unjust and unreasonable, the replacement ROE will be set at the 

central tendency of the composite zone or reasonableness or the central tendency of the 

upper or lower halves of the composite zone of reasonableness depending upon whether 

the utility is of average, above average, or below average risk, respectively. 

We will not adopt CAPs’ proposed alternative calculation sequence. As noted 

above, CAPs propose that we determine a cost of equity for each proxy group company

by averaging the company-specific DCF and the CAPM results for each company and 

then using those company-specific composite costs of equity to define the composite 

zone of reasonableness. We find that the record evidence supports that the DCF and 

 886 MISO TOs Reply Br. (I) App. 2, McKenzie Reply Aff. (I) at 113; MISO TOs 

Reply Br. (II) App. 2, McKenzie Reply Aff. (II) at 113. 

887 MISO TOs Reply Br. (I) App. 2, McKenzie Reply Aff. (I) at 113; MISO TOs 

Reply Br. (II) App. 2, McKenzie Reply Aff. (II) at 113. MISO TOs point out that a 

standard outlier test would address OMS’s concerns about extreme cost of equity 

estimates. MISO TOs Reply Br. (I) App. 2, McKenzie Reply Aff. (I) at 113 n.266; MISO 

TOs Reply Br. (II) App. 2, McKenzie Reply Aff. (II) at 113 n.266. 

888 MISO TOs Reply Br. (I) App. 2, McKenzie Reply Aff. (I) at 114; MISO TOs 

Reply Br. (II) App. 2, McKenzie Reply Aff. (II)at 114. 
Docket Nos. EL14-12-003 and EL15-45-000 - 207 - 

CAPM models that we will use are intended to produce results separately based on the 

entire applicable proxy group to which the model is applied, without computing averages 

across multiple methods for a single company, as CAPs propose. There is no record 

evidence indicating that analysts apply these models in this way or present the results of 

these models in this way, nor has any party provided an example of these models being 

applied this way in a comparable regulatory proceeding. There is also nothing in the 

record to indicate that the assumptions or structures of the DCF and CAPM models 

contemplate that the result for a specific proxy group company will be isolated and 

averaged with a company-specific result from a separate model, rather than considered 

along with the full range of returns for the entire proxy group that the models produce. 

The sequencing approach that we adopt here allows the models to function as they are 

designed until they produce their intended end result. CAPs’ alternative proposal would 

interfere in the function of the models before they produce their intended end result and 

instead take inputs from the models and combine them before the inputs were used as the 

models intended. 

 Moreover, the purpose of the DCF and CAPM models is to produce a range of 

returns applicable to the entire span of investment risks for a proxy group of utilities. 

The purpose is not to provide a specific cost of equity estimate for each proxy group 

company that can be considered in isolation, outside of the parameters of the model, and 

then averaged with a company-specific estimate from a separate model. The product of 

each model is the full range of cost of equity estimates, as calculated within the 

parameters of the model. There is no evidence to indicate that the DCF and CAPM 

models would produce superior results if we used the individual data points that form 

each model’s range, before looking at the ranges themselves that are the intended product 

of the models. 

XIV. Use of Group-Wide ROEs as Opposed to Individual Utility ROEs 

A. Alliant 

Alliant argues that the Commission’s ROE methodology should allow the base 

ROE of each individual transmission owner to be different from that established for the 

group of MISO TOs as a whole. Alliant argues that this is appropriate because the cost of 

equity may be different among individual transmission owners within a designated group 

based on company-specific risk factors. Alliant acknowledges the potential 

administrative burden that would be associated with examining each individual 

transmission owner’s circumstances to determine if a specific transmission owner 

warrants a different ROE and to mitigate this, proposes to allow stakeholders the 
Docket Nos. EL14-12-003 and EL15-45-000 - 208 - 

opportunity to provide arguments within the already existing proceeding as to why a 

specific transmission owner warrants further examination.889

B. OMS 

OMS also argues that the Commission should depart from using RTO-wide ROEs 

and adopt a more granular approach to examining the risk profiles of utilities in future 

transmission rate proceedings. OMS contends that the rationale for the original RTOwide ROE was avoiding unnecessary litigation that could jeopardize formation of MISO, 

and this rationale no longer applies. OMS asserts that an RTO-wide ROE does not result 

from proxy groups that appropriately reflect the risk-profile of individual transmission 

owners based on their own credit rating. OMS contends that the record demonstrates that 

the MISO TOs feature a wide range of risk profiles and that, for example, a utility with 

an S&P AA credit rating should not have its rate of return determined using a proxy 

group that includes companies with an S&P BBB- credit rating. OMS argues that this 

will over-compensate some transmission owners and under-compensate others. OMS 

acknowledges that proving that the risks faced by an individual transmission owner 

(among a group of utilities) are higher or lower than those faced by companies in the 

proxy group through a comparative risk analysis is difficult. However, OMS does not 

propose a specific alternative approach but only asks the Commission to pursue a more 

granular risk analysis of individual transmission owners.890 

C. MISO TOs

MISO TOs argue that the proposals by Alliant and OMS to evaluate MISO TOs’ 

on an individual basis rather than a region-wide group are beyond the scope of these 

proceedings. MISO TOs assert that at no time prior to the Briefing Order did any 

complainant, intervenor (including Alliant and OMS), or Commission Trial Staff submit 

evidence or a brief arguing for evaluation of each MISO TOs’ base ROEs on an 

individual basis. MISO TOs also contend that the complaints in these proceedings 

challenged the MISO TOs’ region-wide base ROE and did not seek a new ROE 

separately for each transmission owner. MISO TOs also assert that the Commission’s 

orders setting the cases for hearing gave no indication that the possibility of companyspecific ROEs was at issue. MISO TOs argue that, accordingly, entertaining these 

proposals at this stage of the proceedings would deny the MISO TOs due process.891 

 889 Alliant Initial Br. (I) at 9-10; Alliant Initial Br. (II) at 9-10. 

890 OMS Initial Br. (I) at 2-8; OMS Initial Br. (II) at 2-8. 

891 MISO TOs Reply Br. (I) at 79-81; MISO TOs Reply Br. (II) at 78-80. 
Docket Nos. EL14-12-003 and EL15-45-000 - 209 - 

D. Commission Determination 

We find that the Alliant’s and OMS’s requests to depart from the use of an RTOwide ROE are outside the scope this proceeding. The complaints that originated these 

proceedings asserted that the base ROE for MISO TOs was unjust and unreasonable 

because it was too high. They did not, however, dispute the use of an RTO-wide ROE 

for the MISO TOs or contend that each MISO TO’s base ROE should be different. 

Moreover, the Commission did not propose to depart from the use of an RTO-wide ROE 

for the MISO TOs in its orders in Order No. 551 or in the Briefing Order. Consequently, 

we find that such arguments are beyond the scope here. 

Still, even in light of this finding, we note that it is appropriate for MISO, 

consistent with its historical practice,892 to retain a single RTO-wide base ROE.893 The 

reason is that many of the factors that affect the cost of capital for the MISO TOs are 

similar due to their MISO membership. For example, MISO administers a regional 

planning process in which the need for transmission upgrades and expansions within the 

RTO are established and the MISO TOs are subject to the same requirements with respect 

to construction of and cost responsibility for the upgrades and expansions identified in 

the that planning process. In particular, we note that MISO TOs share cost responsibility 

for some transmission facilities developed pursuant to the MISO Transmission Expansion 

Plan.894 In addition, all of the MISO transmission facilities are pooled and operated by 

MISO and subject to MISO’s functional control without distinction as to ownership. 

Accordingly, the risks faced by the MISO TOs associated with the operation of their 

transmission facilities will be substantially similar because the facilities will share the 

same operator and the costs associated with that operation will be shared by the MISO 

TOs as members of MISO. Furthermore, there is a single OATT for the MISO region 

and therefore the rules and requirements applicable to the use of those facilities will be 

similar in many ways. We find that in such circumstances it is reasonable to allow the 

 892 See MISO Remand Order, 106 FERC ¶ 61,302 at P 9 (“[H]ere the applicants 

proposed setting a single ROE for . . . application to all but one of the Midwest ISO TOs. 

Accordingly, . . . we must calculate a single ROE for application to a broad group of 

utilities with diverse risks and business profiles”) . 

893 See Opinion No. 551, 156 FERC ¶ 61,234 at P 2 (“The 12.38 percent base ROE 

continues to be the applicable ROE under Attachment O of the MISO Tariff used by all 

MISO TOs except for American Transmission Company, LLC (ATC).”). 

894 See, e.g., Midcontinent Independent System Operator, Inc., Compliance Filing 

Reporting on Multi-Value Project Process Under the Open Access Transmission, Energy 

and Operating Reserve Markets Tariff, Docket No. ER10-1791-000, at Tab A (filed 

Apr. 23, 2019) (discussing cost-shared projects in MISO and cost allocations). 
Docket Nos. EL14-12-003 and EL15-45-000 - 210 - 

use of a single RTO-wide ROE because many of the factors influencing the return that 

investors would require to invest in the MISO TOs are similar such as operating risks, the 

potential effects of upgrades and expansions, and the rules and requirements applicable to 

use of their transmission facilities. 

Moreover, we find that using a single RTO-wide base ROE will likely promote 

closer integration among the transmission owners in the MISO region and consistency in 

MISO planning efforts because the effects of RTO planning and expansion decisions will 

be more balanced across the various different transmission owners with a single RTOwide ROE than if those transmission owners earned multiple different ROEs on their 

respective rate bases. 

Furthermore, even when a single ROE is used for all of the MISO TOs, the 

method and the calculation of that ROE accounts for differences between the MISO TOs. 

For example, the comparable risk band used in forming the proxy groups in these 

proceedings is based on the credit rating range of all of the MISO TOs.895 Similarly, the 

Commission considers the full range of the risks and business profiles of the MISO TOs 

in setting the single RTO-wide ROE. The Commission has explained that, “Given that 

the ROE will apply across-the-board to all members of the Midwest ISO, rather than to a 

single company of average risk, we must consider their full range of risks and business 

profiles.”896 In addressing the MISO TOs’ ROE, the Commission similarly explained 

that “Here, we are dealing with a group of utilities with differing risks and business 

rankings. In our view, the differing ROEs in this group fairly brackets the range of 

reasonableness for all Midwest ISO TOs.”897 For these reasons, we find that it is still 

appropriate to retain an RTO-wide base ROE for the MISO TOs. 

XV. ROE Incentives Cap 

A. Background 

The Briefing Order proposed to cap a utility’s total ROE, i.e., its base ROE plus 

incentive ROE adders, at the top of the overall composite zone of reasonableness 

produced by the DCF, CAPM, and Expected Earnings models. The Briefing Order 

 895 See, e.g., OMS Initial Br. (I) at 4; OMS Initial Br. (II) at 4. 

896 MISO Remand Order, 106 FERC ¶ 61,302 at P 9. 

897 Id. 
Docket Nos. EL14-12-003 and EL15-45-000 - 211 - 

explained that this continued with the Commission’s current policy of capping a utility’s 

total ROE at the top of the zone of reasonableness.898

B. CAPs 

CAPs oppose the Commission’s proposal, arguing that it is flawed, and assert that 

the cap on total ROE should be no higher than the top of the zone of reasonableness 

produced by the DCF model.899 CAPs contend that the Commission has not provided a 

reasoned explanation for the proposed departure from Commission precedent of using the 

DCF zone of reasonableness to set the total ROE cap. CAPs state that the Commission’s 

primary basis for proposing to rely on multiple financial models instead of the DCF alone 

is that the DCF methodology alone no longer captures how investors view utility returns 

because investors do not rely on the DCF alone and the other methods used by investors 

do not necessarily produce the same results as the DCF. CAPs assert that this basis is not 

founded on reliable record evidence. Accordingly, they assert that the Commission’s 

proposal to use the top of the overall composite zone of reasonableness is not 

supported.900 

In particular, CAPs argue that inclusion of the Expected Earnings model in the 

calculation of the overall zone of reasonableness artificially increases the top of the zone 

in most instances, thereby inflating the total ROE cap and resulting in exploitation of 

customers.901 CAPs further contend that, even if the Commission’s explanation could 

support departure from precedent relying on the DCF method, the total ROE cap at the 

top of the DCF range was established by rulemaking procedures902 and should continue 

to apply, unless and until it is changed through a subsequent formal rulemaking. 

 898 Briefing Order, 165 FERC ¶ 61,118 at PP 18, 57. 

899 CAPs Initial Br. (I) at 10; CAPs Initial Br. (II) at 10. 

900 CAPs Initial Br. (I) at 84-85; CAPs Initial Br. (II) at 83-85; CAPs Reply Br. (I) 

at 76-77; CAPs Reply Br. (I) at 96-97. 

901 CAPs Initial Br. (I) at 84-85; CAPs Br. (II) at 84; CAPs Reply Br. (I) at 76-77; 

CAPs Reply Br. (II) at 96-97. 

902 CAPs Initial Br. (I) at 85 (citing Promoting Transmission Investment through 

Pricing Reform, Order No. 679, 116 FERC ¶ 61,057, at PP 92-93 (2006), order on reh'g, 

Order No. 679-A, 117 FERC ¶ 61,345 (2006), clarified, 119 FERC ¶ 61,062 (2007)); 

CAPs Initial Br. (II) at 84-85 (citing Order No. 679, 116 FERC ¶ 61,057 at PP 92-93). 
Docket Nos. EL14-12-003 and EL15-45-000 - 212 - 

CAPs assert that, if the Commission does adopt the top of the overall composite 

zone of reasonableness as the cap on total ROE, it should adopt CAPs’ proposed 

alternative sequence of calculations that would first calculate, for each proxy company, 

the average of the different financial models that produce zones of reasonableness to 

determine a company-specific cost of equity, then use the highest and lowest companyspecific composite costs of equity define the upper bound and lower bound of the 

composite zone of reasonableness, and have that upper bound serve as the cap for the 

total ROE plus incentives.903 

C. MISO TOs 

MISO TOs support the Commission’s proposal to cap total ROE plus incentives at 

the top of the overall composite zone of reasonableness. MISO TOs assert that the 

Commission’s proposal is consistent with the Commission’s incentives policy. They 

argue that it would be irrational for the Commission to adopt a multi-method hybrid 

approach for analyzing cost of equity and then not use the range of returns produced by 

that multi-method approach to establish the high end of the range as the cap on total 

ROE. MISO TOs contend that CAPs provide no justification for placing undue weight 

on the DCF model solely for the purpose of setting the upper bound on total ROE.904 

D. Commission Determination 

Our existing policy is to cap a utility’s total ROE—i.e., base ROE in addition to all 

incentive adders— at the top of the zone of reasonableness.905 Although we are not 

changing that policy in this order, we must now incorporate our new method of 

calculating the overall composite zone of reasonableness into our existing policy. As 

discussed above, we find that calculating the zone of reasonableness using the DCF and 

CAPM will more accurately reflect a utility’s cost of equity, because it will better 

represent how investors make their investment decisions. Accordingly, we find that it is 

appropriate to use the upper end of the composite zone of reasonableness as produced by 

the revised methodology adopted in this order to cap total ROE rather than only the upper 

end of the zone of reasonableness produced by the DCF methodology, as CAPs argue. 

CAPs oppose continuing the Commission’s policy of using the top of the overall 

zone of reasonableness to cap total ROE on the basis that the Commission has not 

justified using multiple models to calculate the zone of reasonableness instead of only the 

DCF. We address these arguments in this order, specifically in section III, and explain 

 903 CAPs Reply Br. (I) at 43-45; 77-78; CAPs Reply Br. (II) at 63-65; 97-98. 

904 MISO TOs Reply Br. (I) at 81-82; MISO TOs Reply Br. (II) at 80-81. 

905 See, e.g., Order No. 679, 116 FERC ¶ 61,057 at P 93. 
Docket Nos. EL14-12-003 and EL15-45-000 - 213 - 

why we find that it is no longer appropriate to use only the DCF model to calculate the 

zone of reasonableness. For those reasons, CAPs’ argument on this point is unavailing. 

CAPs further argue against capping total ROE with the top of the overall zone of 

reasonableness by asserting that including the Expected Earnings analysis artificially 

inflates the top of the zone and thus inflates the total ROE cap because it is an outlier that 

does not reflect to the market cost of equity. As discussed above in section VI, we are 

not including the Expected Earnings analysis in our calculation of the overall composite 

zone of reasonableness. Accordingly, CAPs’ arguments on this point are inapposite. 

In addition, CAPs contend that, even if the Commission could support its 

approach, the total ROE cap at the top of the DCF range was established by rulemaking 

procedures and should continue to apply, unless and until it is changed through a 

subsequent formal rulemaking.906 CAPs cite a case stating that agencies must “use the 

same procedures when they amend or repeal a rule as they used to issue the rule in the 

first instance.”907 We find this argument unavailing. We are not amending or repealing 

our current policy of using the top of the overall zone of reasonableness to cap total ROE. 

We are continuing that policy, but amending our previous approach to calculating the 

overall zone of reasonableness. That approach was established via adjudication and 

therefore we are “us[ing] the same procedures” to change that approach as we did to 

implement it “in the first instance.” 

Moreover, we find that, even if this constituted a change to our policy of capping 

total ROE, we could do so in this proceeding. The Commission “has substantial 

discretion to establish rules of general application by adjudication and need not 

necessarily employ a separate generic proceeding.”908 We have similarly explained that 

 906 CAPs Initial Br. (I) at 85 (citing Order No. 679, 116 FERC ¶ 61,057 at PP 92-

93; Perez v. Mortg. Bankers Ass'n, 135 S. Ct. 1199, 1206 (2015) (“the Administrative 

Procedures Act ‘mandate[s] that agencies use the same procedures when they amend or 

repeal a rule as they used to issue the rule in the first instance.’”)); CAPs Initial Br. (II) 

at 84-85 (citing same). 

907 CAPs Initial Br. (I) at 85 (citing Perez v. Mortg. Bankers Ass'n, 135 S. Ct. 

1199, 1206 (2015) (“the Administrative Procedures Act ‘mandate[s] that agencies use the 

same procedures when they amend or repeal a rule as they used to issue the rule in the 

first instance.’”)); CAPs Initial Br. (II) at 84-85 (citing same). 

908 Procedures for Disposition of Contested Audit, Order No. 675, 114 FERC 

¶ 61,178, at P 32 (2006). See also NLRB v. Bell Aerospace Corp., 416 U.S. 267, 294 

(1974) (“[A]djudicative cases may and do serve as vehicles for the formulation of agency 

policies.”); SEC v. Chenery Corp., 332 U.S. 194, 203 (1947) (“[T]he choice made 

between proceeding by general rule or by individual, ad hoc litigation is one that lies 
Docket Nos. EL14-12-003 and EL15-45-000 - 214 - 

“[o]ur decision to establish new policy in the context of case-specific proceedings is 

clearly within our authority.”909 Moreover, we stated in the Briefing Order that “we [did] 

not make any final determinations with respect to the proposed new methodology,”910

which included our proposal to cap total ROE with the top of the overall zone of 

reasonableness,911 and that we would consider briefing regarding “the justness and 

reasonableness of any aspect of the proposed methodology.”912 

In addition, while briefs were being filed in response to the Briefing Order, the 

Commission issued an NOI that raised questions regarding the Commission’s policy on 

capping total ROE and indicated that any new policy adopted in these proceedings could 

be modified in the future, and could be incorporated into the Commission’s rules through 

a formal rulemaking.913 Accordingly, all parties have had ample notice of and 

opportunity to address the Commission’s proposal to continue with its existing policy of 

capping total ROE at the top of the overall zone of reasonableness. 

We are also not persuaded by CAPs’ arguments that, if we do adopt the top of the 

overall composite zone of reasonableness as the cap on total ROE, we should adopt 

 

primarily in the informed discretion of the administrative agency.”); Michigan-Wisconsin 

Pipeline Co. v. FPC, 520 F.2d 84, 89 (D.C. Cir. 1975) (“[T]here is no question that the 

Commission may attach precedential and even controlling weight to principles developed 

in one proceeding and then apply them under appropriate circumstances in a stare decisis 

manner.”); Pacific Gas and Electric Co. v. FPC, 506 F.2d 33, 38 (D.C. Cir. 1974) 

(“[A]gency may establish binding policy through rulemaking procedures . . . or through 

adjudications which constitute binding precedents.”); AEP Power Mktg., Inc., 108 FERC 

¶ 61,026, at P 187 (2004) (“Our decision to establish new policy in the context of casespecific proceedings is clearly within our authority.”); Investigation of Terms and 

Conditions of Public Utility Market-Based Rate Authorizations, 103 FERC ¶ 61,349 at 

P 51 (2003) ( “The Commission, moreover, is not limited to notice and comment 

rulemaking to develop policy. Agencies generally are permitted considerable discretion 

to choose whether to proceed by rulemaking or by adjudication.”). 

909 AEP Power Mktg.,107 FERC ¶ 61,018, at P 199. 

910 Briefing Order, 165 FERC ¶ 61,118 at P 10. 

911 Id. PP 18, 57. 

912 Id. P 20. 

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

166 FERC ¶ 61,207, at P 46 (2019). 
Docket Nos. EL14-12-003 and EL15-45-000 - 215 - 

CAPs’ proposed alternative sequence of calculations. As discussed above in section XIII

we find that this proposed alternative sequence of calculations would not accurately 

reflect a utility’s cost of equity and we do not adopt that proposal. 

XVI. Complaint-Specific Results: First Complaint 

As discussed above, we find that the revised methodology established in this order 

will better enable us to identify whether an existing ROE is unjust and unreasonable and, 

if so, what is a just and reasonable ROE. Applying this methodology to the First 

Complaint, we continue to find that the MISO TOs’ existing 12.38 percent ROE for 

purposes of the First Complaint is unjust and unreasonable. Having addressed the first 

prong of the Commission’s dual burden under FPA section 206 and thus satisfied the 

“condition precedent”914 to exercising our authority to change a rate under section 206, 

we grant rehearing of Opinion No. 551 and find that a just and reasonable replacement 

ROE for MISO TOs’ in the First Complaint is 9.88 percent under the section prong of the 

Commission’s dual burden under FPA section 206. 

Below we address the “specific findings”915 as to the “‘particular 

circumstances’”916 of the First Complaint proceeding that establish “‘a rational 

connection’”917 between the record evidence in that proceeding and our decisions under 

both prongs of section 206 herein to establish that we have “‘made a principled and 

reasoned decision supported by the evidentiary record.’”918 Because the Commission 

bases its decisions concerning just and reasonable ROEs for public utilities on the most 

recent information in the record regarding market cost of equity, the starting point for 

determining whether MISO TOs’ existing ROE has become unjust and unreasonable 

must be a consideration of whether the current market cost of equity has changed since 

the MISO TOs’ existing ROE was established based on financial for the six months 

ending February 2002. Accordingly, we begin by determining a composite zone of 

reasonableness using the most recent financial information in the record of the First 

Complaint proceeding, i.e., data for the first six months of 2015. 

 914 Emera Maine, 854 F.3d at 25 (citing FPC v. Sierra Pac. Power, 350 U.S. 348, 

353 (1956)). 

915 Id. at 30. 

916 Id. at 27 (citing FPC v. Nat. Gas Pipeline Co., 315 U.S. 575, 586 (1942)). 

917 Id. at 28 (citing FERC v. Elec. Power Supply Ass’n, 136 S.Ct. 760, 782 (2016)). 

918 Id. at 30 (citing S. Cal. Edison v. FERC, 717 F.3d at 181). 
Docket Nos. EL14-12-003 and EL15-45-000 - 216 - 

A. Composition of Starting Proxy Group 

As described in the Briefing Order,919 the Commission uses the following screens 

for developing a proxy group: (1) the use of a national group of companies considered 

electric utilities by Value Line; (2) the inclusion of companies with credit ratings no more 

than one notch above or below the utility or utilities whose ROE is at issue; (3) the 

inclusion of companies that pay dividends and have neither made nor announced a 

dividend cut during the six month study period; (4) the inclusion of companies with no 

merger activity during the six-month study period that is significant enough to distort the 

study inputs; and (5) companies whose ROE results pass threshold tests of economic 

logic, including the low-end outlier test and high-end outlier test adopted in section X of 

this order. The first four screens listed above evaluate particular characteristics of the 

companies in question that do not vary depending upon the results of the DCF or CAPM 

analyses. Accordingly, those screens may be used to develop a starting group of proxy 

companies eligible for inclusion in the proxy group to be used for the purposes of both 

the DCF and CAPM models. The low-end and high-end outlier tests must then be 

applied separately to the results of the DCF and CAPM models to determine the final 

DCF and CAPM proxy groups. Below, we first address issues concerning the 

determination of the starting proxy group in the First Complaint proceeding. We then 

apply the low-end and high-end outlier tests to the results of the DCF and CAPM 

analyses in order to determine the DCF and CAPM zones of reasonableness. 

1. Opinion No. 551

The Presiding Judge determined that the DCF Study Period for calculating the 

zone of reasonableness should be the most recent six-month period for which there is 

financial data in the record, January to June 2015.920 

In order to establish a proxy group, the Presiding Judge reviewed the DCFdetermined cost of equity for 42 companies. The Presiding Judge determined that 40 of 

those companies should be included in the proxy group, before application of any low or 

high-end outlier test. Of those companies, the lowest cost of equity was Edison 

International’s 4.38 percent and the highest cost was TECO’s 11.35 percent.921 The 

Presiding Judge rejected contentions that TECO should be excluded from the proxy 

group because of certain Merger and Acquisition (M&A) Activity. The Presiding Judge 

excluded Madison Gas and Electric Energy, Inc. because it did not have a credit rating 

 919 Briefing Order, 165 FERC ¶ 61,118 at PP 50-51. 

920 Initial Decision (I), 153 FERC ¶ 63,027 at PP 56, 61. 

921 Id. at App. A. 
Docket Nos. EL14-12-003 and EL15-45-000 - 217 - 

from either Moody’s Investors Service or S&P and, therefore, could not be shown to have 

a credit rating of not more than one notch above or below MISO TOs, as required by 

Opinion No 531.922 In addition, the Presiding Judge also excluded Unitil Corporation 

(Unitil) from the proxy group because it is not one of the companies covered by Value 

Line and because, unlike the companies in Value Line, Unitil has a capitalization of less 

than $1 billion.923

Complainants, Joint Customer Intervenors, and Trial Staff excepted to the 

Presiding Judge’s inclusion of TECO in the proxy group.924 No participant filed 

exceptions to any of the Presiding Judge’s other rulings with respect to the proxy group. 

In Opinion No. 551, the Commission affirmed the Presiding Judge’s decision to 

include TECO in the proxy group.925 Citing Opinion No. 531, the Commission explained 

that “it is the Commission’s ‘practice . . . to eliminate from the proxy group any company 

engaged in M&A activity significant enough to distort the [company’s] DCF inputs” — 

i.e., the company’s “stock prices, dividends, or growth rates.”926 The Commission stated 

that it does not exclude a company simply because it has engaged in any M&A activity or 

that activity may cause changes in the DCF inputs.927 Rather, the Commission stated that 

it excludes a company if the M&A activity may cause temporary changes in DCF inputs 

that are not sustainable or representative of longer-term investor expectations for the 

company. 

As noted in Opinion No. 551, TECO engaged in two M&A activities that could 

potentially require its exclusion from the proxy group. First, on September 2, 2014, 

nearly four months before the beginning of the updated the study period, TECO 

completed its acquisition of New Mexico Gas Company (New Mexico Gas). The record 

reveals that, several months later, during the January 2015 to June 2015 study period, 

 922 Id. PP 70, 72 (citing Opinion No. 531, 147 FERC ¶ 61,234 at P 106). 

923 Id. PP 74-75, 77. 

924 Opinion No. 551, 156 FERC ¶ 61,234 at PP 30-34. 

925 Id. PP 37-43. 

926 Id. P 23 (citing Opinion No. 531, 147 FERC ¶ 61,234 at P 114). 

927 Id. (citing Opinion No. 489, 117 FERC ¶ 61,129 at PP 67-68 (“We also reject 

[the] . . . argument that Commission precedent supports, in every instance, the exclusion 

from a proxy group of any utility engaged in merger activity.”), order on reh’g, 122 

FERC ¶ 61,265, order on clarification, 124 FERC ¶ 61,136 (2008)). 
Docket Nos. EL14-12-003 and EL15-45-000 - 218 - 

analysts were still assessing the impact of the New Mexico Gas acquisition on TECO 

earnings.928 For example, the May 22, 2015 issue of Value Line noted that the acquisition 

should increase TECO’s earnings, although the acquisition was just one of several 

factors, including strong customer growth and impending rate increases, that Value Line

identified to support the projected increase in TECO’s earnings for 2015 and 2016.929

Second, on October 20, 2014, roughly a month after closing the New Mexico Gas 

acquisition, TECO announced an agreement to sell its coal mining subsidiary, TECO 

Coal Corporation (TECO Coal) to Cambrian Coal Corp. (Cambrian) for $120 million and 

a contingent payment of up to $50 million, depending on coal prices.930 TECO’s stock 

price rose approximately 8 percent in the month following news of the sale. A few 

months later, in February 2015, TECO announced an amendment to the terms of the 

agreement that lowered the purchase price to $80 million, but increased the maximum 

contingent payment to $60 million.931 Later in February, a securities analyst at UBS 

upgraded TECO from “neutral” to “buy,” noting the potential sale of TECO Coal as one 

of the reasons for the upgrade. Throughout this period in early 2015, IBES’s growth 

projections for TECO increased from 6.43 percent in January to 7.08 percent in February 

and all the way up to 9.20 percent by March 2015, even as at least one analyst expressed 

skepticism that TECO would complete the sale of TECO Coal.932

In April 2015, TECO announced that it was considering selling TECO Coal to 

other potential buyers in the event that the deal with Cambrian fell through.933 As it 

happened, TECO announced in June 2015, the last month of the study period, that the 

deal with Cambrian had not closed as scheduled, but that it had received a non-binding 

offer for TECO Coal from an undisclosed buyer. The IBES growth projections remained 

steady at 9.20 percent throughout April, May, and June, notwithstanding the multiple 

reports casting doubt on TECO’s ability to complete the sale of TECO Coal.934 In early 

 928 Id. P 24. 

929 Initial Decision (I), 153 FERC ¶ 63,027 at P 91; Ex. S-6 at 161. 

930 Initial Decision (I), 153 FERC ¶ 63,027 at P 98; Ex. S-3. 

931 Initial Decision (I), 153 FERC ¶ 63,027 at P 98. The terms of the sale were 

amended again in mid-April 2015. 

932 Id. P 101; Ex. S-4 at 15; S-6 at 147, 171. 

933 Initial Decision (I), 153 FERC ¶ 63,027 at P 99. 

934 Id. P 101; Ex.S-6 at 149, 151. 
Docket Nos. EL14-12-003 and EL15-45-000 - 219 - 

July 2015, TECO announced that it had failed to reach an agreement with the undisclosed 

buyer, but that a sale of TECO Coal to Cambrian remained a possibility. A week later, 

on July 13, 2015, IBES’s growth projection for TECO declined to 7.68 percent.935 The 

Presiding Judge used the 7.68 percent IBES growth projection in his DCF analysis of 

TECO. 

Opinion No. 551 affirmed the Presiding Judge’s conclusion that neither the 

acquisition of New Mexico Gas nor the attempted sale of TECO Coal was sufficient to 

“distort” the DCF inputs.936 In Opinion No. 551, with respect to New Mexico Gas, the 

Commission noted the Initial Decision’s finding that TECO’s acquisition of New Mexico 

Gas was completed on September 2, 2014, nearly four months before the beginning of the 

updated study period, which covered January-June, 2015.937 As such, the Commission 

determined that speculation about whether the acquisition would be completed could not 

have affected, much less distorted, the stock price or the other DCF inputs during the 

updated study period. The Commission rejected Complainants’ contention that TECO 

should be excluded on the grounds that the acquisition of New Mexico Gas created a 

temporary and unsustainable increase in TECO’s expected earnings. As an initial matter, 

the Commission found that, over the course of the updated study period, the IBES growth 

estimates increased 125 basis points, not 280 basis points that Complainants’ witness 

Mr. Gorman testified to.938 However, the Commission further noted, as illustrated by the 

July 13, 2015 Yahoo! Finance data included along with the testimony of Joint Consumer 

Advocates’ witness Mr. Hill, the actual projected earnings growth for TECO at the end of 

 935 Initial Decision (I), 153 FERC ¶ 63,027 at P 101. The Presiding Judge’s Order 

Establishing Procedural Schedule provided that the cut-off date for data to be used by any 

party in updates of ROE studies would be July 13, 2015. Ex. JCA-22. 

936 Initial Decision (I), 153 FERC ¶ 63,027 at PP 81, 96, 106. 

937 Opinion No. 551, 156 FERC ¶ 61,234 at P 38. 

938 Id. (citing Ex. JC-22 at 7). In making that finding, the Commission rejected 

Complainants’ contention that there was a disputed issue of fact regarding the appropriate 

growth rate for TECO at the end of the updated study period. The Commission affirmed 

the Presiding Judge’s decision to rely on Mr. Hill’s 7.68 percent growth rate, determining 

that Mr. Hill’s testimony states clearly that he relied upon the numbers from Yahoo! 

Finance on July 13, 2015, the cut-off date for ROE data used in the updated study period, 

to evaluate TECO’s merger activity. By contrast, the Commission determined that there 

was nothing in Mr. Gorman’s testimony that suggests that he used July 13, 2015 IBES 

data – and not data from earlier in the study period, when the IBES growth rate was 9.20 

percent when deciding whether to exclude TECO from the proxy group. Id. P 50 n.88. 
Docket Nos. EL14-12-003 and EL15-45-000 - 220 - 

the updated study period used in the parties’ DCF analysis was 7.68 percent, 125 basis 

points above the 6.43 percent at the beginning of the study period.939 

The Commission concluded that there was no evidence in the record suggesting 

that the New Mexico Gas acquisition caused a significant and unsustainable increase in 

TECO’s earnings expectations during the updated study period. The Commission 

determined that the May 22, 2015 Value Line report suggested that the acquisition will 

increase earnings “over and above” the savings TECO will realize from no longer paying 

transaction costs associated with the acquisition. The Commission found that there was 

nothing suggesting that the additional increase is unsustainable. After all, the 

Commission determined, all other things being equal, an earnings increase is what would 

be expected when a company increases its regulated gas and electric customers by 50 

percent, as TECO did in acquiring New Mexico Gas.940 The Commission further stated 

that, in any case, the acquisition was just one of many factors, along with rate increases 

for TECO’s Florida utilities and an anticipated reduction in TECO’s cost of debt, which 

supported Value Line’s increased earnings projections.941 The Commission determined 

that the Value Line report thus was not evidence suggesting that the acquisition distorted 

TECO’s expected growth rate based on temporary, short-term developments that are 

unlikely to continue.942

Regarding TECO’s attempts to sell TECO Coal, the Commission similarly 

concluded that there was no evidence suggesting that those efforts “distorted” the DCF 

inputs. The Commission stated that, unlike the acquisition of New Mexico Gas, the 

efforts to sell TECO extended into the updated study period and, therefore, it was 

possible that speculation related to the potential merger could have affected TECO’s DCF 

inputs. Nevertheless, the Commission concluded that any effect was either too small or 

 939 Id. 

940 Id. P 39. To the extent that the parties suggested that TECO should be 

excluded because its earnings outlook improved because it was no longer incurring the 

transaction cost associated with the acquisition, the Commission rejected their argument. 

The Commission stated that adopting that position would require that it exclude 

companies for a year after almost any major merger or acquisition as the savings from no 

longer incurring the transaction costs materialize in annual earnings. The Commission 

stated that that result is not the purpose of the M&A screen. Id. P 50 n.89. 

941 Id. P 39 (citing Initial Decision (I), 153 FERC ¶ 63,027 at P 91). 

942 Id. 
Docket Nos. EL14-12-003 and EL15-45-000 - 221 - 

too attenuated to rise to the level of a distortion requiring TECO’s exclusion from the 

proxy group.943 

The Commission found that that the record did not show that the attempted sale of 

TECO Coal distorted TECO’s expected earnings. Noting that TECO Coal represents less 

than 1.5 percent of TECO’s total market capitalization,944 the Commission determined 

that the sale of such a relatively small asset is, as a general matter, not the type of inputdistorting transaction that the M&A screen is intended to address. Additionally, the 

Commission stated that many of the public utilities, especially relatively large companies 

that make a good comparison for TECO, are regularly engaged in potential mergers or 

acquisitions of small business units or subsidiaries. It stated that excluding such 

companies from the proxy group on the basis of any small purchase or sale would 

unnecessarily shrink the group of representative companies, thereby making the proxy 

group, and the resulting DCF analysis, a less reliable tool for ensuring that the allowed 

ROE satisfies the requirements of Hope and Bluefield.

945

The Commission determined that the evidence in this case confirmed that TECO’s 

potential sale of its underperforming asset, TECO Coal, had little impact on its projected 

growth rates or stock prices. As the Presiding Judge observed, IBES’s projected growth 

rates for TECO steadily increased throughout the first five months of the six-month study 

period, even as the prospects for selling TECO Coal steadily deteriorated.946 The 

Commission stated that, if the potential sale of TECO Coal was a significant factor 

affecting TECO’s DCF inputs, it would anticipate at least some decline in the expected 

growth rate as the prospects for a sale deteriorated between February and June, 2015. 

Instead, TECO’s expected growth rate first increased between February and March and 

then held steady through June.947 In short, the Commission concluded that the record 

 943 Id. PP 40-43. 

944 While noting the possibility that the expected earnings growth rate would have 

further increased during this period were it not for the eroding chances of a successful 

sale of TECO Coal, the Commission concluded that there was no evidence in the record 

suggesting that the decreasing likelihood of a sale provided any such drag on TECO’s 

earnings expectations. Id. P 51 n.91. 

945 Id. P 41. 

946 Initial Decision (I), 153 FERC ¶ 63,027 at P 103. 

947 Id. P 101. 
Docket Nos. EL14-12-003 and EL15-45-000 - 222 - 

simply did not suggest that the potential sale had much, if any, effect on the growth rate 

used in the DCF analysis.948 

Similarly, the Commission concluded that there was no evidence in the record that 

the attempted sale of TECO Coal caused a distortion in TECO’s stock price. The 

comparison of TECO’s stock price versus the Dow Jones Utility Average submitted by 

Dr. Avera showed that the two moved in near lockstep from November 2014 through 

April 2015, which significantly overlapped with the study period. In any case, 

Dr. Avera’s graph showed that TECO outperformed the industry average by an even 

greater amount for much of March and April, 2015, when the chances of a successful sale 

appeared to be diminishing.949 Once again, the Commission determined that, if the 

potential sale of TECO Coal was affecting TECO’s DCF inputs in any significant way, it 

would not expect to see TECO’s stock price performing well relative to the industry 

average even as the prospects for the sale declined. The Commission stated that, 

although it might be argued that looking at relative performance is somewhat misleading, 

and that TECO’s stock would have performed consistently worse relative to the industry 

average were it not for the potential sale, there was no evidence in the record suggesting 

that that is the case here and the Commission’s M&A screen did not require a company’s 

exclusion from the proxy group on so speculative a basis.950

2. Request for Rehearing 

CAPs state that because TECO’s 11.35 percent market cost of equity is the highest 

of all proxy group companies, TECO, if it is included, sets the upper end of the zone of 

 948 Opinion No. 551, 156 FERC ¶ 61,234 at P 42. 

949 The Commission noted that the Presiding Judge did not rely on Dr. Avera’s 

chart because the y-axis for TECO’s stock price was smaller relative to the y-axis for the 

industry average, which, according to the Presiding Judge, caused Dr. Avera’s chart to 

underrepresent the variation in TECO’s stock price. But, the Commission stated, that 

observation did not require it to change its conclusion, which rested in part on the fact 

that TECO’s stock price performed better relative to the industry average when the 

prospects for the sale dimmed, than when the sale appeared most likely to occur. Id. P 53 

n.95. 

950 Id. P 43. Although there was evidence in the record that some analysts viewed 

TECO Coal as “a drag on shares” of TECO, the Commission found that that evidence did 

not suggest that the increasingly dim prospect of eliminating that “drag” was sufficient to 

“distort” the DCF inputs, especially given the absence of any apparent correlation 

between the DCF inputs and the prospects for a successful sale of TECO Coal. Id. P 56 

n.97 (citing Initial Decision (I), 153 FERC ¶ 63,027 at P 100). 
Docket Nos. EL14-12-003 and EL15-45-000 - 223 - 

reasonableness, thereby having a significant impact on the determination of the midpoint. 

CAPs state that it is important in this case to ensure that the high end of the DCF range is 

not associated with DCF model inputs that may been distorted by merger-related activity. 

CAPs argue that, consistent with Commission precedent, TECO should be excluded from 

the proxy group due to M&A activity that distorted TECO’s DCF inputs during the 

relevant study period.951

CAPs argue that, in Opinion No. 551, the Commission did not properly apply the 

standard established by the Commission in Opinion No. 531. They argue that the 

Commission’s application of the M&A screen in Opinion No. 531 focused on whether 

the M&A activity is significant enough to cause a distortion to the DCF inputs, not 

whether the M&A activity distorts DCF inputs only on a basis that is “temporary” or “not 

sustainable.” They argue that by imposing on parties the additional burden of 

demonstrating that the impact on DCF inputs will be temporary or unsustainable in 

Opinion No. 551, the Commission departed from established precedent without 

explanation. They further contend that the Commission failed to explain how a party can 

demonstrate in advance whether the effect of particular M&A activity will be 

sustainable.952

Citing TECO’s acquisition of New Mexico Gas and the sale of its subsidiary 

TECO Coal, CAPs argue that the record demonstrates that TECO was engaged in various 

M&A activities throughout the study period and that such M&A activity distorted the 

DCF inputs.953 CAPs contend that neither Opinion No. 531 nor any precedent cited 

therein supports the proposition that a certain level or duration of distortion is required to 

exclude a utility from the proxy group. They further contend that Commission precedent 

is also silent on whether the distortion must occur in a certain direction (positive or 

negative) in order to warrant removal group.954 In addition, they argue that M&A activity 

 951 CAPs Rehearing Request at 9-10. CAPs state that the Joint Consumer 

Advocates opt out of CAPs’ rehearing request on this issue. 

952 Id. at 10. 

953 Id. at 11 (citing Initial Decision (I), 153 FERC ¶ 63,027 at PP 100-101). 

954 Id. at 12 (citing Opinion No. 486-B, 126 FERC ¶ 61,034 at PP 79, 81 

(explaining that, here, the Commission’s removal of a utility from the proxy group was 

based, in part, on the basis that the utility’s M&A activity “can distort that share prices by 

creating uncertainty (positive or negative) about the impact of change”)). 
Docket Nos. EL14-12-003 and EL15-45-000 - 224 - 

is not limited to activity within the study period, but may include activity that is "recent, 

current, or forecasted."955

3. Briefs 

 CAPs witness Mr. Solomon argues for the exclusion of TECO from the proxy 

group.956 Mr. Solomon asserts that TECO’s DCF study inputs were distorted during the 

relevant study period, January to June 2015, as a result of its major M&A activity.957 

Mr. Solomon contends that the late October 2014 announcement of the agreement to sell 

TECO Coal had the effect of increasing TECO’s price relative to the SNL Energy stock 

index, and it subsequently maintained that higher relative price throughout the study 

period ending June 30, 2015, demonstrating the continuing effect the expected sale of 

TECO Coal had on TECO’s stock price. Mr. Solomon states that changes in TECO’s 

stock price followed changes in the SNL Energy group average price relatively closely 

from July 1, 2014, until the late October 2014 announcement of the agreement to sell 

TECO Coal, when there was a clear increase in the price of TECO Energy stock relative 

to the SNL Energy average price. He states that, with some fluctuations, the TECO price 

subsequently maintained that relative price spread, indicating the continuing favorable 

effect the expected TECO Coal sale had on the TECO stock price. He argues that this 

effect on key market-based data requires TECO’s exclusion from the proxy group.958

Mr. Solomon also states that, on July 16, 2015, shortly after the conclusion of the 

study period in this proceeding, TECO disclosed that it was exploring strategic 

alternatives, which could include a sale of the entire company. He states that in reaction, 

shares of TECO spiked that day, justifying excluding TECO from the proxy group.959

With regard to the Judge’s conclusion that TECO should not be excluded from the 

proxy group because, if anything, the distortion reduces the resulting DCF study ROE 

input, Mr. Solomon contends that the purpose of the M&A screen is not to determine 

 955 Id. (citing Atlantic Grid Operations, 135 FERC ¶ 61,144, at P 88 n.55 (2011) 

(finding proxy group screens for “significant recent, current or forecasted merger activity 

to be appropriate)). 

956 CAPs Initial Br. (I), Ex. JCI-100 (Solomon Aff.) at 11. 

957 Id. at 54 (citing Initial Decision (I), 153 FERC ¶ 63,027 at PP 56 and 60; 

Opinion No. 551, 156 FERC ¶ 61,234 at P 19). 

958 Id. at 55. 

959 Id. at 55-56. 
Docket Nos. EL14-12-003 and EL15-45-000 - 225 - 

whether a distorted input causes an increase or decrease in the resulting ROE. He argues 

that the criterion described in Opinion No. 531 and elsewhere simply requires the 

exclusion of companies that engaged in significant M&A activity where such activity 

distorts study inputs, which compromises the integrity of the model’s output in respect of 

the company subject to M&A activity.960

Mr. Solomon states that the Commission’s rationale in affirming the Initial 

Decision is in contrast to the views expressed by the Judge. According to Mr. Solomon, 

whereas the Judge declined to exclude TECO from the proxy group on the ground that 

the price spike caused TECO’s dividend yield and 11.35 percent DCF result, which set 

the top of the range, to be lower than it should be and that excluding TECO would lower 

the top of the range even more, the Commission instead found that the effect was too 

small to remove TECO Energy from the proxy group.961 Mr. Solomon argues that the 

Commission responded only indirectly to the Judge’s finding that TECO’s stock price 

was affected by its announced intention and subsequent attempts to sell TECO Coal. 

First, Mr. Solomon states that, in finding that the potential sale had little or no 

effect on the growth rate used in the DCF analysis, the Commission did not use the 9.20 

percent growth rate that was in place from March through June in the approved DCF 

calculations, but rather used the 7.68 percent growth rate from July 13, 2015, which was 

some 152 basis points, or 16.5 percent, lower. Mr. Solomon further contends that 

although the Commission cited the Initial Decision at P 103 where the Presiding Judge 

concluded that there was no evidence “that the 7.68 percent projection was the result of 

distortions resulting from TECO’s attempts to sell TECO Coal,” the Presiding Judge also 

did not cite any evidence to the contrary. Nonetheless, Mr. Solomon argues, TECO’s 

projected growth rate did drop in July 2015, likely for multiple reasons including its 

declining prospects for unloading TECO Coal. It was also not until July 6, 2015 that 

Standard and Poor’s removed TECO Energy from CreditWatch due to its failure, to that 

point, to find a buyer for TECO Coal.962

Second, Mr. Solomon challenges what he characterizes as the Commission’s 

apparent reliance upon a chart produced by MISO TO witness Dr. Avera that purportedly 

demonstrates that TECO’s stock price moved in near lockstep with the Dow Jones Utility 

Average during much of the study period.963 Mr. Solomon states that the Presiding Judge 

 960 Id. at 56-57. 

961 Id. at 57-58. 

962 Id. at 58-59. 

963 Id. at 59 (citing Opinion No. 551, 156 FERC ¶ 61,234 at P 43). 
Docket Nos. EL14-12-003 and EL15-45-000 - 226 - 

expressed concern that Dr. Avera’s chart created an optical illusion (because the variation 

in the scale on the two axes was not equal) which, when corrected for the optical illusion, 

“would likely result in a price pattern comparable to that shown on Mr. Solomon’s 

graph.”964

In addition, Mr. Solomon notes that, on February 10, 2015, during the study 

period, a UBS securities analyst advised SNL Financial that the sale of TECO Coal 

would remove a large drag on shares. Thus, as the Presiding Judge found, there is 

evidence in the record to demonstrate that the TECO stock price was affected by TECO’s 

announcement of an agreement to sell and subsequent attempts to sell its 

underperforming TECO Coal subsidiary prior to which Value Line had found had 

weighed on the stock.965

Mr. Solomon also argues that there was an increase in TECO’s projected earnings 

growth rate during the study period that was at least partially attributable to TECO’s 

acquisition of New Mexico Gas, which increased TECO’s regulated gas and electric 

customers by 50 percent. Mr. Solomon argues that, while this acquisition was completed 

almost four months prior to the beginning of the DCF study period, it certainly impacted 

the expected growth rate for TECO Energy. Mr. Solomon states that it is undisputed that 

TECO’s expected earnings growth rate increased from 6.43 percent at the beginning of 

study period, to the 7.68 percent the Commission found appropriate to use in the DCF 

analysis by the end of the study period. Mr. Solomon argues that, while the New Mexico 

Gas acquisition was likely only one of many factors, including rate increases for TECO’s 

Florida utilities and an anticipated reduction in TECO Energy’s cost of debt, contributing 

to the expected growth earnings increase, the resulting 50 percent in regulated gas and 

electric customers had to be a major contributor and there has been no showing that it 

was not.966

Further, Mr. Solomon disagrees with the Commission’s conclusion in Opinion 

No. 551 that there was no evidence in the record suggesting that the New Mexico 

Generation acquisition caused a significant and unsustainable increase in TECO’s 

earnings expectations during the updated study period. First, Mr. Solomon argues that an 

 964 Id. (quoting Initial Decision (I), 153 FERC ¶ 62,027 at P 105). 

965 Id. at 60. 

966 Id. at 60-61. 
Docket Nos. EL14-12-003 and EL15-45-000 - 227 - 

increase in TECO’s expected earnings per share growth rate from 6.43 percent to 7.68 

percent—a more than 19 percent increase—is not insignificant.967 

Second, Mr. Solomon argues that the finding of sustainability is misdirected. 

Mr. Solomon argues that the Commission’s statement that an earnings increase would be 

expected when a company increases its regulated gas and electric customers by 50 

percent, as TECO did in acquiring New Mexico Gas, misses the point.968 According to 

Mr. Solomon, the point is that the acquisition caused a one-time increase in the expected 

earnings growth rate, not a one-time increase in the absolute level of expected earnings. 

Mr. Solomon argues that, after the acquisition is assimilated with a higher base level of 

earnings, changes in the expected growth rate will not be as large. He contends that 

while some analysts may make adjustments in an attempt to restate the historical data to 

account for the acquisition, others may not and, in any event, such adjustments are 

difficult to quantify.969 

Moreover, Mr. Solomon argues, the Value Line betas used for the CAPM analysis 

are based on historical prices for the last five years and are less certain to be 

representative of future betas for TECO now that TECO Energy has increased its 

regulated electric and gas customer base by 50 percent with the New Mexico Gas 

acquisition, which not only significantly changed the number, but also the composition of 

its electric versus gas service.970

MISO TOs respond that Mr. Solomon’s argument that TECO is not a proper proxy 

due to its M&A activity flies in the face of the Commission’s prior findings in Opinion 

No. 551 that there is no evidence in the record suggesting that the New Mexico Gas 

acquisition caused a significant and unsustainable increase in TECO’s earnings 

expectations during the dated study period, or that such activity operated to distort the 

DCF inputs.971

In a reply affidavit, MISO TOs’ witness, Mr. McKenzie, argues that 

Mr. Solomon’s arguments to exclude TECO Energy from the proxy group should be 

rejected. First, Mr. McKenzie argues that the issue of whether to include TECO Energy 

 967 Id. at 61. 

968 Id. at 61-62 (citing Opinion No. 551, 156 FERC ¶ 61,234 at P 39). 

969 Id. at 62. 

970 Id. 

971 MISO TOs Reply Br. (I) at 51. 
Docket Nos. EL14-12-003 and EL15-45-000 - 228 - 

in the proxy group in Docket No. EL14-12-000 is not in any way related to the ROE 

methodology proposed in the Briefing Order.972 Mr. McKenzie contends that neither the 

Court’s findings in Emera Maine nor the Commission’s ROE methodology in the 

Briefing Order pertain to the evaluation of proxy group companies. Mr. McKenzie 

argues that Mr. Solomon is improperly attempting to broaden the scope of inquiry, 

none of his arguments raised in his affidavit are based on new information and that 

Mr. Solomon is simply second-guessing the Commission’s previous determination that 

TECO belongs in the proxy group.973 Mr. McKenzie also states that the Commission, in 

Opinion No. 531, specifically ruled out excluding proxy companies without a 

demonstration that the transaction impacted the DCF results by distorting the companies’ 

stock prices, dividends, or growth rates.974

In response to Mr. Solomon’s assertion that Dr. Avera’s chart created an optical 

illusion, Mr. McKenzie presents a chart using the same data comparing the TECO stock 

price with the Dow Jones Utility Average. But, in response to the Presiding Judge’s 

concerns, the values on the two axes are both scaled by exactly 25 percent. Mr. 

McKenzie asserts that his chart shows that there is no indication of systemic distortion in 

TECO’s stock prices, relative to broader trends for the utility industry.975 Meanwhile, 

argues Mr. McKenzie, the chart presented by Mr. Solomon976 does not compare the 

movement of TECO Energy’s stock price to the corresponding trend for utilities as a 

whole. Mr. McKenzie contends that the diverse group of companies in the SNL Energy 

stock index used in Mr. Solomon’s comparison is not indicative of price trends for a 

utility like TECO. Further, Mr. McKenzie argues that Mr. Solomon’s figure is a 

comparison of cumulative percentage changes in value from a selected beginning point, 

which is arbitrary.977 

Moreover, Mr. McKenzie states that, as Dr. Avera documented, the cash price for 

TECO’s coal subsidiary represented less than 1.5 percent of TECO Energy’s total capital. 

Mr. McKenzie argues that Mr. Solomon’s speculation that the sale of an asset that had 

 972 MISO TOs Reply Br. (I), App. 2 McKenzie Reply Aff. (I) at 126. 

973 Id. 

974 Id. at 127 (citing Opinion No. 531, 147 FERC ¶ 61,234 at P 114). 

975 Id. at 128-129. 

976 Ex. JCI-8 at 7. 

977 MISO TOs Reply Br. (I), App. 2 McKenzie Reply Aff. (I) at 129-130. 
Docket Nos. EL14-12-003 and EL15-45-000 - 229 - 

already been classified as discontinued since the third quarter of 2014 would somehow 

motivate a 20 percent revaluation of TECO’s stock price is illogical and unsupported.978

4. Determination 

a. Commission Response to Rehearing Arguments 

We are not persuaded by CAPs’ argument, reiterated in their briefing arguments, 

that the Commission’s application of the M&A screen in establishing the starting proxy 

group did not properly apply the standard established in Opinion No. 531. CAPs argue 

that Opinion No. 531 requires exclusion from the proxy group of any company whose 

M&A activity caused a change in its DCF inputs. They contend that Opinion No. 551 

improperly altered that standard by requiring them to show not only that TECO’s M&A 

activity had an impact on its DCF inputs, but also that that impact was “temporary” or 

“not sustainable.” 

Opinion No. 551 properly considered whether TECO’s M&A activity “may cause 

temporary changes in DCF inputs that are not sustainable or representative of longer-term 

investor expectations for the company.”979 In Opinion No. 531, the Commission, citing 

precedent, noted that its practice is to eliminate from the proxy group any company 

engaged in M&A activity significant enough to distort the DCF inputs, based on the facts 

and circumstances of each case.980 The DCF inputs are “distorted” if they are not 

representative of longer-term investor expectations for the company, for example because 

the M&A activity has caused a temporary jump in stock price or an unsustainable growth 

projection. However, if a completed M&A activity has caused a sustainable change in a 

DCF input, as the Commission found with respect to TECO’s purchase of New Mexico 

Gas, then the DCF inputs are representative of longer-term investor expectations and the 

company is properly included in the proxy group. 

Opinion No. 531 and the precedent it cited is not inconsistent with this 

interpretation of our M&A screen. For example, Opinion No. 531 cited the Presiding 

Judge’s initial decision in Bangor Hydro-Electric Co., which the Commission affirmed. 

In that initial decision, the presiding judge held that the facts and circumstances of that 

case did not warrant exclusion of the companies at issue from the proxy group: 

 978 Id. at 130. 

979 Opinion No. 551, 156 FERC ¶ 61,234 at P 37. 

980 Opinion No. 531, 147 FERC ¶ 61,234 at P 114 (citing, among other cases, 

Bangor Hydro-Electric Co., 111 FERC ¶ 63,048, at PP 67-68, aff’d in relevant part, 

Opinion No. 489, 117 FERC ¶ 61,129). 
Docket Nos. EL14-12-003 and EL15-45-000 - 230 - 

I agree with the testimony presented by the [New England 

TOs] that “Whether or not [the anticipation of a merger] does 

or does not [affect the market] depends on the facts and 

circumstances. If a very large company acquires a very small 

company, it typically is not very material to the very large 

company. It may be material to the small company, 

depending on whether there’s a premium or investors revise 

their expectations markedly . . . whether a merger makes a 

big effect or not depends on the facts and circumstances.” Tr. 

297-98. In this the [New England TOs] presented testimony 

that the anticipation of merger did not distort stock prices, and 

therefore, although I agree that whether a company is 

engaged in merger activity should be a criterion for 

examination when choosing a proxy group, in this case

neither PSEG nor Exelon should be eliminated on this 

basis.981

In Opinion No. 531 the Commission similarly analyzed whether the M&A activity 

was significant enough to distort the DCF inputs, based on the facts and circumstances of 

that case. It affirmed the initial decision’s approval of the elimination of two utilities 

from the proxy group based on their recent M&A activity as well as finding that the 

record did not indicate that a third utility’s recent M&A activity was significant enough 

to distort the DCF inputs.982 

Sustainability of the impact of M&A activity on growth was not at issue in 

Opinion No. 531. By contrast, the record relied upon by the Commission in Opinion 

No. 551 does include evidence of the sustainability of the impact of the M&A activity, 

specifically the purchase of New Mexico Gas, on growth, and nothing in Opinion 

No. 531 restricted the Commission from considering such record evidence in making its 

determination in Opinion No. 551. Further, in the Briefing Order, the Commission 

“recognize[d] that in unusual circumstances the two-step DCF methodology may produce 

unsustainably high results for a particular proxy company.”983

 981 111 FERC ¶ 63,048 at P 67 (emphasis added). 

982 Opinion No. 531, 147 FERC ¶ 61,234 at P 114. 

983 Briefing Order, 165 FERC ¶ 61,118 at P 53 (emphasis added). See also, e.g., 

Potomac-Appalachian Transmission Highline, L.L.C., 122 FERC ¶ 61,188, at P 98 

(2008), order on reh’g, 133 FERC ¶ 61,152, at PP 20, 64 (2010); ISO New England, Inc., 

111 FERC ¶ 61,344, at P 8 (2005). 
Docket Nos. EL14-12-003 and EL15-45-000 - 231 - 

b. Commission Response to Briefing Arguments 

We agree with MISO TOs that additional arguments and evidence regarding 

whether to exclude TECO from the starting proxy group that parties provided in their 

briefs is outside the scope of the Briefing Order. In the Coakley Briefing Order, the 

Commission set forth a framework for addressing proposed revised methodology for rate 

of return. As noted above, in the Briefing Order, the Commission sought comments on 

whether to apply the methodology it proposed in the Coakley Briefing Order. While the 

Commission said that all aspects of the proposed methodology were subject to comment 

and that parties could provide evidence, the Commission did not propose to change its 

screens for developing a proxy group, instead proposing to use the same screens as in 

Opinion Nos. 531 and 551.984 Moreover, CAPS do not oppose the Briefing Order’s 

proposed M&A screen itself.985 Rather, CAPs briefing argument, through Mr. Solomon’s 

testimony, is confined to reiterating CAPs’ opposition to the inclusion of TECO in the 

proxy group. But, even if Mr. Solomon’s arguments were properly within the scope of 

the Briefing Order, we find them unpersuasive, as discussed below. 

 Mr. Solomon’s argument that the Commission’s rationale with respect to the 

proposed sale of TECO Coal differed from that of the Presiding Judge is unpersuasive. 

The Commission may affirm the ultimate decision of the Initial Decision for different 

reasons than put forth by the Presiding Judge where, as in this case, there is a complete 

evidentiary record of the issue enabling the Commission to affirm the Initial Decision’s 

ultimate conclusion.986 Moreover, in this case, as we discuss below, the MISO TOs’ 

introduced additional evidence in their reply to the CAPs’ brief that addressed concerns 

raised by the Presiding Judge in his Initial Decision. 

CAPs contend that TECOs’ purchase of New Mexico Gas caused a one-time 

increase TECOs’ growth rate by increasing TECOs’ regulated gas and electric customers 

 984 Id. P 50. 

985 CAPs Initial Br. (I) at 25-26. 

986 See, e.g., Old Dominion Elec. Coop., 158 FERC ¶ 61,045, at P 72 n.107 (2017) 

(affirming the Initial Decision’s ultimate conclusion that a revised base energy rate was 

just and reasonable, despite disagreeing with the Initial Decision’s statement that it was 

an unchanged element of the applicant’s formula rate, because there was a complete 

evidentiary record on the issue), reh’g denied, 162 FERC ¶ 61,262 (2018); Pub. Serv. Co. 

of Indiana Inc., 7 FERC ¶ 61,319, at 61,701, order on reh’g, 8 FERC ¶ 61,224 (1979) 

(affirming the Initial Decision’s finding that purchased power estimates were reasonable, 

but for different reasons than expressed in the Initial Decision), order on reh’g, 14 FERC 

¶ 61,058 (1981). 
Docket Nos. EL14-12-003 and EL15-45-000 - 232 - 

by 50 percent. CAPs point out that the IBES short-term year growth projection for 

TECO increased from 6.43 percent at the beginning of the January to June 2015 study 

period to the 7.68 percent IBES growth projection on July 13, 2015, which the 

Commission found appropriate for use in TECO’s DCF analysis. CAPs argue that, after 

TECO’s acquisition of New Mexico Gas is assimilated with the higher base level of 

earnings resulting from the increase in its customers, the longer term increase in TECO’s 

earnings will not be as large. 

The Presiding Judge addressed this issue in his Initial Decision.987 Relying on a 

May 22, 2015 Value Line report, the Presiding Judge found that there were additional 

reasons beyond the New Mexico Gas purchase for TECO’s growth rate to increase. That 

report found that TECO’s Tampa Electric and Peoples Gas utilities in Florida were 

experiencing strong customer growth as the Florida economy expands, and Tampa 

Electric was benefitting from a rate hike that took effect in November 2014. Also, TECO 

was planning to replace maturing high-cost debt with borrowings that had a much lower 

interest rate. Furthermore, the Presiding Judge pointed out that the May 22, 2015 Value 

Line report stated, 

We forecast continued bottom-line growth in 2016. We expect the 

favorable trends at the Florida utilities to persist, and New Mexico Gas is 

also experiencing some growth, albeit modest. We estimate that earnings 

will rise 4%-5%, to $1.15 a share. A more significant increase is likely in 

2017, as Tampa Electric’s rates will be raised by $110 million once an 

upgrade to a power plant is completed.988 

The Presiding Judge reasonably found that this statement indicated that Value Line did 

not expect any one-time effects of the New Mexico Gas purchase to extend beyond 2015 

into 2016. Rather, New Mexico Gas’s contribution to TECO’s growth after 2015 would 

derive not from the two companies’ combination of earnings, but from New Mexico Gas’ 

own modest increase in earnings. In these circumstances, we continue to find that the 

July 13, 2015 IBES projection of TECO’s growth over the next three to five years may be 

treated as representative of longer-term investor expectations of sustainable growth and 

not significantly affected by any one-time effects of the New Mexico Gas purchase, 

which was completed over 10 months earlier. 

CAPs also dispute Opinion No. 551’s holding that TECO’s October 20, 2014 

announcement of an agreement to sell TECO Coal to Cambrian for $120 million and a 

contingent payment of up to $50 million, depending on coal prices, did not distort its 

 987 See Initial Decision (I), 153 FERC ¶ 63,027 at PP 89-96. 

988 Id. P 93 (citing Ex. MTO-54 at 41 (emphasis in Value Line report)). 
Docket Nos. EL14-12-003 and EL15-45-000 - 233 - 

DCF inputs during the January to June 2015 study period. CAPs cite various Value Line

reports from before the October 20, 2014 announcement noting that the coal mining 

business had become a drag on TECO, and a November 21, 2014 Value Line report 

stating that TECO’s stock had increased by 8 percent since the announcement.989 CAPs 

also rely on a graph comparing the price of TECO stock during the July 1, 2014 to 

July 13, 2015 to the SNL Energy stock index. CAPs assert that that the graph shows that 

the October 20, 2014 announcement of the agreement to sell TECO Coal had the effect of 

increasing TECO’s price relative to the SNL Energy stock index and it subsequently 

maintained that higher relative price throughout the study period, demonstrating the 

continuing effect of the expected sale of TECO Coal on TECO’s stock price. 

We continue to disagree with these contentions. Although the October 20, 2014 

announcement had an immediate effect on the price of TECO stock, we find that there is 

insufficient evidence that the announcement continued to have a sufficient effect on 

TECO’s stock during the January to June 2015 study period to justify excluding TECO 

from the proxy group. In the first place, there is no evidence that the average risk profile 

of the companies reflected in the SNL Energy stock index is comparable to TECO’s risk 

profile. The SNL Energy stock index “[i]ncludes all publicly traded (NYSE, NYSE 

MKT, NASDAQ, OTC) Electric, Gas, Diversified, and Merchant companies in SNL’s 

coverage universe.”990 About half the companies tracked are midstream gas and oil 

pipeline companies, and thus the SNL Energy stock index is more exposed to risks 

associated with changes in natural gas and crude oil commodity prices than an electric 

utility with some local gas distribution business such as TECO. As a result, there has 

been no showing that a comparison of how TECO stock performed versus the SNL 

Energy stock index provides any meaningful information as to how the announcement of 

the sale of TECO Coal may have affected TECO’s stock price during the first half of 

2015. 

In contrast to CAPs, MISO TOs provided at the hearing a graph comparing the 

price of TECO’s stock with the Dow Jones Utility Index from November 1, 2014 to 

June 30, 2015.991 That graph shows TECO’s stock moving in virtual lockstep with the 

Dow Jones Utility Index. During periods when the Dow Jones Utility Index increased, 

the price of TECO stock almost invariably also increased; similarly, when the Dow Jones 

Utility Index decreased, the price of TECO stock almost invariably also decreased. As 

CAPs point out, the Presiding Judge was concerned that the MISO TOs’ graph used 

different scales to display the prices of TECO stock and the Dow Jones Utility Index, and 

 989 Ex. JCI-100 at 54-55 (I). 

990 Ex. JCI-10 at 271. 

991 Ex. MTO-23 at 99, Figure 1. 
Docket Nos. EL14-12-003 and EL15-45-000 - 234 - 

he asserted that if the same scale had been used to display both prices, the graph would 

have shown TECO stock prices increasing at a somewhat faster rate than the Dow Jones 

Utility Index.992 However, in their reply brief in response to the Briefing Order, the 

MISO TOs have provided a revised graph comparing the TECO stock prices with the 

Dow Jones Utility Average, but using the same scale for both.993 The revised graph 

continues to show TECO’s stock moving in virtual lockstep with the Dow Jones Utility 

Index. CAPs’ witness, Mr. Solomon, asserts that in late January/early February 2015, 

TECO’s stock price was up approximately 20 percent compared to July 2014.994 

However, MISO TOs’ revised graph shows a similar increase in the Dow Jones Utility 

Index. As MISO TOs’ witness, Mr. McKenzie states, the revised graph indicates that 

there is no indication of systemic distortion in TECO’s stock prices, relative to broader 

trends for the utility industry.995 In fact, the revised graph shows, if anything, that during 

the latter part of the study period, the price of TECO stock declined at a slightly faster 

rate than the Dow Jones Utility Index did during that period, in further contradiction to 

CAPs’ assertion that the TECO Coal sale announcement caused the price of TECO stock 

to increase during the study period, thus depressing its dividend yield. 

Moreover, as the Commission pointed out in Opinion No. 551, TECO Coal 

represents less than 1.5 percent of TECO’s total market capitalization.996 We continue to 

find that the attempted sale of TECO coal appears too small relative to the size of the 

company to be responsible for significant changes in TECOs’ stock price. 

 In addition, we are not persuaded by Mr. Solomon’s argument disputing the 

Commission’s determination, in Opinion No. 551, affirming the Initial Decision’s finding 

that TECO’s potential sale of TECO Coal had little impact on its projected growth rates. 

Opinion No. 551 pointed out that IBES’s projected growth rates for TECO steadily 

increased throughout the first five months of the six-month study period, even as the 

 992 See Initial Decision (I), 153 FERC ¶ 61,027 at P 105. The Presiding Judge 

stated that while the TECO stock prices on the graph vary by 35.2 percent, the Dow Jones 

Utility Index varies by only 25.9 percent. 

993 MISO TOs Reply Br. (I), App. 2 McKenzie Reply Aff. (I) at 129. In the 

revised graph, both TECO stock prices and the Dow Jones Utility Average vary by 25 

percent. 

994 Ex. JCI-100 at 57. 

995 Id. at 128-129. 

996 Ex. MTO-23 at 99 (valuing TECO Coal using the most recent non-contingent 

purchase price for the attempted sale to Cambrian). 
Docket Nos. EL14-12-003 and EL15-45-000 - 235 - 

prospects for selling TECO Coal steadily deteriorated.997 If the potential sale of TECO 

Coal was a significant factor affecting TECO’s DCF inputs, we would anticipate at least 

some decline in the expected growth rate as the prospects for a sale deteriorated between 

February and June, 2015. Instead, TECO’s expected growth rate first increased from 

6.43 percent in January 2015, to 7.08 percent in February, and to 9.20 percent in March, 

and held steady through June. CAPs point out that TECO’s IBES growth projection fell 

to 7.68 percent in July, which was 152 basis points below the 9.20 percent growth 

projection in March, and the Commission used the 7.68 percent growth projection in its 

DCF analysis. CAPs suggest that the declining prospects for the sale of TECO Coal 

contributed to this decline. However, the 7.68 IBES growth projection in July was still 

above the January IBES growth projection of 6.43 percent and the February IBES growth 

projection of 7.08 percent, and thus simply returned TECO’s growth projection to 

approximately the same level as at the start of the January to June 2015 study period. In 

short, the record simply does not suggest that the potential sale had much, if any, effect 

on the growth rate used in the DCF analysis. Mr. Solomon proffers no new evidence to 

the contrary. 

Our merger screen seeks to exclude companies that are engaging in major mergers 

and acquisition activity. This attempted sale of TECO Coal does not reach this standard 

and appears to be the type of minor activity that occurs regularly in the course of business 

for utility holding companies. Accordingly, we deny rehearing of Opinion No. 551’s 

holding that TECO should be included in the proxy group. 

B. DCF Proxy Group and Analysis 

In Opinion No. 551, the Commission affirmed the Presiding Judge’s findings 

concerning how the two-step DCF analysis should be conducted. In this order, we have 

reaffirmed Opinion No. 551’s approval of the Presiding Judge’s DCF analysis, with one 

exception. In section V.C above, we have held that only the IBES short-term growth 

projection should be used for calculating the (1+.5g) adjustment to the dividend yield, 

instead of the composite growth rate used by the Presiding Judge. Accordingly, as shown 

in Appendix A to this order, we have revised the Presiding Judge’s DCF analysis of the 

starting proxy group to reflect the revised calculation of the dividend yield. 

We now turn to the issue of whether, for purposes of determining the DCF zone of 

reasonableness, any company in the starting proxy group should be excluded as a low- or 

high-end outlier. The Presiding Judge excluded three companies — Edison International, 

FirstEnergy Corporation (FirstEnergy), and Entergy Corporation (Entergy) — because 

 997 Initial Decision (I), 153 FERC ¶ 63,027 at P 103. 
Docket Nos. EL14-12-003 and EL15-45-000 - 236 - 

their ROEs were less than 5.65 percent, which is 100 basis points above the average yield 

for public utility bonds rated Baa by Moody’s.998 

No party excepted to the Presiding Judge’s ruling on this issue, and Opinion 

No. 551 accordingly adopted that ruling. However, as described above, in their brief 

responding to the Briefing Order, MISO TOs propose a revised low-end outlier test under 

which all companies whose ROEs are less than 254 basis points above the average yield 

for Baa utility bonds would be excluded from the proxy group. This revised test would 

exclude companies with ROEs below 7.19 percent.999 Based on this revised test, MISO 

TOs propose to exclude from the DCF proxy group three companies in addition to the 

three that the Presiding Judge excluded. The additional three companies are Public 

Service Enterprise Group, Consolidated Edison, Inc., and OGE Energy Corp. The ROEs 

of those companies range from 7.23 percent to 7.28 percent. Although these ROEs 

exceed MISO TOs’ 7.19 percent proposed threshold, MISO TOs nevertheless assert that 

they are sufficiently close to the threshold that an investor would consider the stock to 

yield essentially the same return as debt.1000 

We reject MISO TOs’ proposal to exclude Public Service Enterprise Group, 

Consolidated Edison, Inc., and OGE Energy Corp. from the DCF proxy group. In section 

X of this order, we rejected MISO TOs’ proposed revised low-end outlier test. Instead, 

we adopted a revised low-end outlier test under which we exclude from the proxy group 

companies with ROEs that do not exceed the Baa bond yield by at least 20 percent of the 

risk premium from the CAPM analysis. In the First Complaint proceeding, the risk 

premium from the CAPM analysis is 9.12 percent. Twenty percent of that risk premium 

is 182 basis points. Adding 182 basis points to the 4.65 percent Baa bond yield produces 

a low-end outlier threshold in the First Complaint proceeding of 6.47 percent. Although 

that low-end outlier threshold is higher than the 5.65 percent low-end outlier threshold 

that the Presiding Judge applied, it does not exclude any additional companies from the 

proxy group. Public Service Enterprise Group and IDACORP, INC., both with ROEs of 

7.23 percent, have the lowest DCF ROE of any company included in the proxy group. 

That ROE is well above the revised 6.47 percent low-end outlier threshold. 

The Presiding Judge did not exclude any company from the DCF proxy group on 

the ground that it is a high-end outlier, nor does any participant seek to exclude any 

company on that ground. Under the high-end outlier test we have adopted in this order, 

we would, subject to the natural break analysis, exclude any DCF ROE that is more than 

150 percent of the median of the starting proxy group DCF ROEs. In this case, the 

 998 See id. PP 66-67. 

999 MISO TOs Initial Br. (I), App.2 McKenzie Aff. (I) at 31. 

1000 Id. at 31 and n. 75. 
Docket Nos. EL14-12-003 and EL15-45-000 - 237 - 

median of the starting proxy group DCF ROEs, using the exclusions made by the 

Presiding Judge, is 8.68 percent. One-hundred-fifty percent of that median is 13.02 

percent. TECO’s DCF ROE of 11.37 percent is well below that amount. Accordingly, 

we do not exclude any company from the DCF proxy group as a high end-outlier. Based 

on this discussion, we conclude that the DCF zone of reasonableness is 7.23 percent to 

11.37 percent. 

C. CAPM Proxy Group and Analysis 

In Opinion No. 551, the Commission affirmed the Presiding Judge’s findings 

concerning how the CAPM analysis should be conducted. In this order, we have 

reaffirmed Opinion No. 551’s approval of the Presiding Judge’s CAPM analysis, with 

two exceptions related to the market risk premium. In section VII.C above, we have held 

that only the IBES short-term growth projection should be used in the one-step DCF 

analysis of the dividend paying members of the S&P 500, instead of the average of the 

IBES and Value Line growth projections approved by the Presiding Judge.1001 In 

addition, we have held that companies with negative ROEs or ROEs above 20 percent 

should be excluded from that analysis. Accordingly, we have revised the CAPM analysis 

of the starting proxy group approved by the Presiding Judge to reflect this revision.1002

We now turn to the issue of whether, for purposes of determining the CAPM zone 

of reasonableness, any company in the starting proxy group should be excluded from the 

CAPM proxy group as a low- or high-end outlier. The Presiding Judge did not exclude 

any company from the proxy group on these grounds, nor does any participant contend 

that any company is a low or high-end outlier. As discussed in the preceding section, we 

have determined that the low-end outlier threshold in the First Complaint proceeding is 

6.37 percent. The companies in the starting proxy group with the lowest ROE are Duke 

Energy Corp. and Southern Company, both with ROEs of 7.80 percent. Because that 

ROE is well above the 6.37 percent low-end outlier threshold, we do not exclude any 

company from the CAPM proxy group as a low-end outlier. 

Under the high-end outlier test we have adopted in this order, we would exclude 

from the CAPM proxy group any ROE that is more than 150 percent of the median of the 

starting proxy group CAPM ROEs. In this case, the median of the starting proxy group 

CAPM ROEs is 10.3 percent. One-hundred-fifty percent of that median is 15.45 percent. 

 1001 Opinion No. 551, 156 FERC ¶ 61,234 at PP 169, 172. 

1002 The results of the CAPM analysis incorporating this revision and the other 

revisions and clarifications discussed above (i.e., use of the one-step DCF, size 

adjustment, and only IBES growth rates) are reflected in page 6 of Attachment A to Trial 

Staff’s Initial Briefs. See Trial Staff Initial Br. (I), Attachment A to App. 2 at 6; Trial 

Staff Initial Br. (II), Attachment A to App. 2 at 6. 
Docket Nos. EL14-12-003 and EL15-45-000 - 238 - 

The company with the highest CAPM ROE in the starting proxy group has an ROE of 

13.09 percent, well below the 15.45 percent high-end outlier threshold. Accordingly, we 

do not exclude any company from the CAPM proxy group as a high end-outlier. Based 

on this discussion, we conclude that the CAPM zone of reasonableness is 7.80 percent to 

13.09 percent. 

D. Composite Zone of Reasonableness and FPA Section 206 Findings 

Averaging the top and bottom of the DCF and CAPM zones of reasonableness 

determined above based on financial data for the first six months of 2015 produces a 

composite zone of reasonableness in the First Complaint proceeding of from 7.52 percent 

to 12.24 percent. The midpoint of that zone of reasonableness is 9.88 percent. 

Having determined the composite zone of reasonableness based on financial data 

for the first half of 2015, we now turn to considering whether the MISO TOs’ existing 

12.38 percent ROE, which was determined based on financial data for the six months 

ending February 2002, may be found unjust and unreasonable pursuant to the first prong 

of FPA section 206. In section IV of this order, we have adopted the use of ranges of 

presumptively just and reasonable ROEs based on the risk profile of a utility or group of 

utilities to inform our decision whether an existing ROE has become unjust and 

unreasonable. Specifically, we have held that, for average risk utilities, the 

presumptively just and reasonable range is the quartile of the overall composite zone of 

reasonableness centered on the central tendency of the overall zone of reasonableness; for 

below average risk utilities, that range is the quartile of the zone of reasonableness 

centered on the central tendency of the lower half of the zone of reasonableness; and for 

above average risk utilities, that range is the quartile of the zone of reasonableness 

centered on the central tendency of the upper half of the zone of reasonableness. 

We find that, for purposes of determining the range of presumptively just and 

reasonable ROEs applicable to the MISO TOs, they must be treated as of average risk. In 

their initial brief in response to the Briefing Order, CAPs question whether the MISO 

TOs should be treated as of average risk.1003 They assert that the Briefing Order 

erroneously stated that this is an undisputed fact because MISO TOs’ credit ratings and 

risk profiles do not support a finding that the MISO TOs are of average risk. CAPs state 

that MISO TOs have study-period credit ratings ranging from S&P BB+ to A+ and 

contend that such a broad range of risk profiles cannot be described as average risk. 

They further argue that the risk profile of the MISO TOs as a group was disputed in both 

of the MISO ROE complaint proceedings. CAPs assert that CAPs introduced evidence of 

risk mitigation factors such as transmission rate incentives, high equity levels for some 

MISO TOs, and formula rates and MISO TOs introduced evidence of factors that 

increase risk, such as high CAPEX levels and evidence of risk purportedly not addressed 

 1003 CAPs Initial Br. (I) at 80; CAPs Initial Br. (II) at 80. 
Docket Nos. EL14-12-003 and EL15-45-000 - 239 - 

by transmission rate incentives. CAPs also assert that the Commission fails to explain 

why ROEs that exceed the cost-based level by as much as one-eighth of the composite 

zone of reasonableness are presumptively just and reasonable for all of the MISO TOs’ 

broad risk profiles.1004

In Opinion No. 551, the Commission disagreed with CAPs’ contentions that the 

MISO TOs’ formula rates and the high equity ratios of some MISO TOs reduce their risk 

profile as compared to the proxy group. Among other things, Opinion No. 551 held that 

our criteria for selecting members of the proxy group are intended to produce a proxy 

group made up of companies of similar risk. Those criteria include screens to ensure that 

the proxy group contains only utilities with similar credit ratings to the utility at issue. 

To the extent that a higher percentage equity in the capital structure reduces a utility’s 

risk, as CAPs assert, then the utility’s credit rating would be correspondingly higher than 

that of a utility with a typical capital structure.1005 Opinion No. 551 also found that, to 

the extent formula rates reduce risk, they would, similar to the use of more equity in the 

capital structure, improve utility credit ratings. This would, in turn, affect the DCF proxy 

group because the credit screens require a proxy group of similarly rated utilities, 

diminishing the ROE produced by the DCF analysis.1006 CAPs did not seek rehearing of 

these holdings in Opinion No. 551. Moreover, CAPs’ evidence indicates that MISO 

TOs’ average credit ratings are comparable to the averages for the proxy group. As 

MISO TOs point out, the average credit ratings that CAPs’ witness Dr. Berry reports for 

the MISO TOs are within one notch of the average ratings for the proxy group, which 

does not indicate that MISO TOs are demonstrably less risky than the proxy group 

companies.1007

The Commission recognizes that, because the various MISO TOs have a relatively 

wide range of credit ratings, the proxy group in this case contains companies with a 

similarly wide range of credit ratings. However, as discussed in section XI of this order, 

we have held that the MISO TOs’ ROE should be set at the midpoint of the zone of 

reasonableness, for the very reason that they are a diverse group with a variety of risk 

profiles, and the court has affirmed that policy. The midpoint fully considers the range of 

reasonable returns, because it is derived directly from the endpoints of the range. 

 1004 CAPs Initial Br. (I) at 80-82; CAPs Initial Br. (II) at 80-82. 

1005 Opinion No. 551, 156 FERC ¶ 61,234 at P 288. 

1006 Id. P 297. 

1007 See MISO TOs Reply Br. (I), App. 2 McKenzie Reply Aff. (II) at 121; CAPs 

Initial Br. (I), Ex. OMS-105; CAPs Initial Br. (II), Ex. OMS-205. 
Docket Nos. EL14-12-003 and EL15-45-000 - 240 - 

Given that Commission policy is to set an RTO-wide ROE at the midpoint of the 

zone of reasonableness and the other record evidence regarding MISO TOs’ risk profile, 

we conclude that MISO TOs must be treated as of average risk and that the range of 

presumptively reasonable ROEs for consideration in determining whether an existing 

RTO-wide ROE is unjust and unreasonable should be the quartile of the zone of 

reasonableness centered on the midpoint of the composite zone of reasonableness. In the 

First Complaint proceeding, that quartile is from 9.29 percent to 10.47 percent.1008 ROEs 

within this range may be treated as presumptively just and reasonable, because they are 

closer to the 9.88 midpoint of the overall composite zone of reasonableness where we 

would set the ROE for a diverse group of average risk utilities, than to either: (1) the 

8.70 midpoint of the lower half of that zone where we would set the ROE for a diverse 

group of below risk utilities; or (2) the 11.06 midpoint of the upper half of that zone 

where we would set the ROE for a diverse group of above risk utilities.1009 

The MISO TOs’ existing 12.38 percent is 191 basis above the range of 

presumptively just and reasonable ROEs for a diverse group of average risk utilities. 

Accordingly, it is treated as presumptively unjust and unreasonable. In fact, the existing 

12.38 percent ROE is higher than the 12.24 percent top of the overall zone of 

reasonableness.1010 It is thus clear that, in light of our estimate of the current cost of 

capital, the MISO TOs’ existing ROE is well outside any possible range of potentially 

just and reasonable ROEs for the MISO TOs. We see no other evidence in the record, 

such as state ROEs, ROEs of non-utility companies, ROEs produced by other 

methodologies, non-utility stock prices, investor expectations for non-utility stocks, 

various types of bond yields and their relation to stock prices, investor and other expert 

testimony, or testimony regarding the effects of rates on customers that would indicate 

that this is not the case. For example, the evidence in the record regarding state ROEs 

indicates that all state-authorized ROEs during the period April 1, 2013 through 

March 31, 2015 for integrated electric utilities providing generation, transmission, and 

distribution services ranged from 9.5 percent to 10.4 percent and that 87.34 percent of 

state-authorized ROEs for both integrated electric utilities and distribution-only electric 

utilities during that period were within this range.1011 The fact that MISO TOs’ 12.38 

 1008 See Appendix C. 

1009 Id.

1010 Although the 12.20 percent ATCLLC zone ROE is slightly below the top of 

the overall zone of reasonableness, it is 173 basis point above the range of presumptively 

reasonable ROEs established above. Therefore, our finding that MISO’s existing 12.38 

percent ROE is unjust and unreasonable applies equally to the 12.20 percent ATCLLC 

zone ROE. 

1011 See, e.g., Opinion No. 551, 156 FERC ¶ 61,234 at P 240. 
Docket Nos. EL14-12-003 and EL15-45-000 - 241 - 

percent ROE is 198 basis points above this range further demonstrates that MISO TOs’ 

12.38 percent ROE is unjust and unreasonable. In these circumstances, we find under the 

first prong of FPA section 206 that the MISO TOs’ existing 12.38 percent ROE has 

become unjust and unreasonable. 

Having found that the MISO TOs’ existing ROE is unjust and unreasonable, we 

turn to the establishment of a just and reasonable replacement ROE under the second 

prong of FPA section 206. As discussed above, we have found that the midpoint of the 

composite zone of reasonable ROEs based on the most recent financial information in the 

record of the First Complaint proceeding is 9.88 percent. As discussed above, we find 

that MISO TOs are of average risk. Our policy is to set an RTO-wide ROE at the 

midpoint of the zone of reasonableness when the transmission owners receiving the RTOwide ROE are of average risk. Accordingly, we find that the just and reasonable 

replacement ROE for the MISO TOs in the First Complaint proceeding is 9.88 percent. 

We therefore grant rehearing of Opinion No. 551 in part to require the MISO TOs to 

adopt a 9.88 percent ROE effective September 28, 2016, the date Opinion No. 551 

required the MISO TOs to adopt a 10.32 percent ROE. 

XVII. Complaint Specific Results: Second Complaint 

A. Existing ROE for Purposes of Second Complaint 

In the Briefing Order, the Commission stated that the issue to be addressed in the 

Second Complaint proceeding is whether the ROE established in the First Complaint 

remained just and reasonable based on financial data for the six-month period July to 

December 2015 presented by the participants at the hearing on the Second Complaint.1012 

However, certain parties dispute that the existing ROE to be analyzed for purposes of the 

Second Complaint is the ROE established in the First Complaint. 

1. CAPs 

CAPs argue that the Briefing Order errs in stating that the issue to be addressed in 

the Second Complaint proceeding is whether the ROE established in the First Complaint 

proceeding remained just and reasonable based on financial data for the six-month period 

from July to December 2015. CAPs contend that the existing ROE to which the July to 

December 2015 cost of equity should be compared is the 12.38 percent that was in effect 

from the time when the complaint was filed until September 28, 2016, when Opinion 

No. 551 was issued and reduced the ROE to 10.32 percent prospectively. They assert 

 1012 See Briefing Order, 165 FERC ¶ 61,118 at P 61. 
Docket Nos. EL14-12-003 and EL15-45-000 - 242 - 

that this should be the case regardless of any relief that has been applied or will be 

applied as a remedy resulting from the First Complaint.1013 

2. RPGI 

RPGI argues that the Commission has not justified its interpretation that the 

“existing rate” for purposes of a section 206 complaint is the one that is determined in a 

prior proceeding. RGPI asserts that, in the context of successive complaint proceedings, 

that figure would be unknown when a second complaint is filed. RPGI states that this 

would present potential complainants with a choice of either awaiting the outcome of any 

pending 206 complaint to resolve the just and reasonable rate that would serve as the 

“existing rate” for purposes of framing a complaint, or file a complaint based on a rate 

that may not prove to be relevant under the Commission’s proposed new ROE 

methodology. RPGI argues that the first choice foregoes any hope of receiving refunds 

for an unknown and potentially lengthy period of time, while the second choice is a 

gamble of investing in months or years of litigation that might prove fruitless or 

overtaken by events. RPGI asserts that the Commission’s proposed approach would 

discourage the filing of complaints and that the Commission has not acknowledged or 

justified such a policy initiative.1014

3. MISO TOs 

MISO TOs argue that the Briefing Order was correct in explaining that the 

existing base ROE for purposes of analyzing the Second Complaint is the ROE resulting 

from resolution of the First Complaint, as determined under the Commission’s new ROE 

methodology. They assert that CAPs’ objective in arguing that the 12.38 percent (or 

12.20 percent) ROE should be the existing base ROE for purposes of the Second 

Complaint is to preserve a basis for refunds during the Second Complaint’s refund 

period. MISO TOs contend that it would be illogical to evaluate the merits of a 

complaint against any rate other than the just and reasonable rate determined by the 

Commission from the preceding complaint. They argue that such an approach would 

lead to the meaningless outcome of forcing the Commission to re-examine a rate that it 

had already determined was unjust and unreasonable.1015 

MISO TOs also assert that CAPs’ interpretation of what the existing rate is for 

purposes of the Second Complaint would also violate section 206(b) of the FPA because 

 1013 CAPs Initial Br. (II) at 85-86. 

1014 RPGI Initial Br. (II) at 8-10. 

1015 MISO TOs Reply Br. (II) at 86-89. 
Docket Nos. EL14-12-003 and EL15-45-000 - 243 - 

it would, in this case, double the 15-month refund period in the statute. They argue that 

refunds arising by virtue of the Second Complaint, if any, will be based on the ROE 

determined in the First Complaint proceeding and the outcome of the First Complaint 

cannot legally serve as the predicate for refund liability for a period of thirty consecutive 

months, until the end of the Second Complaint refund period.1016

4. Commission Determination 

FPA section 206(a) provides that “[w]henever the Commission, after a hearing 

held upon its own motion or upon complaint, shall find that any rate . . . charged, or 

collected by any public utility for any transmission . . . subject to the jurisdiction of the 

Commission . . . is unjust, unreasonable, unduly discriminatory or preferential, the 

Commission shall determine the just and reasonable rate . . . to be thereafter observed and 

in force, and shall the fix the same by order.” For purposes of deciding whether a rate 

charged by a public utility is unjust and unreasonable and determining a new just and 

reasonable rate “to be thereafter observed” pursuant to FPA section 206(a), we must 

assess whether the public utility’s currently effective rate is unjust and unreasonable, not 

some earlier rate that may have been in effect when the complaint was filed but has now 

been superseded. Any new just and reasonable rate that we require “to be thereafter 

observed” pursuant to section 206(a) will replace the currently effective rate, not some 

previously effective rate. In other words, in order to determine a new rate to be thereafter 

observed, we must examine what the currently effective rate is because that is the rate 

that will need to be replaced if it is unjust and unreasonable. It therefore follows that it is 

the currently effective rate that must be found unjust and unreasonable. 

The 12.38 percent ROE in effect when Arkansas Electric Cooperative et al. filed 

the Second Complaint on February 12, 2015 has been superseded. As discussed in the 

preceding section, in the First Complaint proceeding, we are requiring MISO TOs to 

reduce their ROE to 9.88 percent effective prospectively from September 28, 2016. 

Therefore, that is the MISO TOs’ currently effective ROE as of today when we are 

deciding whether MISO TOs’ ROE is unjust and unreasonable and should be modified 

prospectively pursuant to FPA section 206 in the Second Complaint proceeding. 

Accordingly, 9.88 percent is the ROE which we would have to find unjust and 

unreasonable under the first prong of FPA section 206, before we could require a new 

ROE “to be thereafter observed” pursuant to the second prong of FPA section 206. 

Moreover, as MISO TOs note, it would be illogical for the Commission to re-examine an 

ROE that it has already determined is unjust and unreasonable and that has been 

superseded by a new ROE. 

We also agree with MISO TOs that interpreting the existing rate to be examined in 

the Second Complaint to be the now-superseded 12.38 percent ROE would effectively 

 1016 Id. at 90-91. 
Docket Nos. EL14-12-003 and EL15-45-000 - 244 - 

extends the refund period in the First Complaint proceeding beyond the 15-month 

limitation in section 206. The Commission’s decision in the First Complaint 

proceeding—i.e., that the 12.38 percent ROE is unjust and unreasonable—would 

effectively serve as the predicate for allowing refunds in the Second Complaint 

proceeding if that ROE continues to be unjust and unreasonable based on the data for the 

Second Complaint’s study period, which would allow refunds to extend beyond the 15-

month refund period limitation. In other words, if the Commission used the 12.38 

percent ROE as the existing rate for purposes of the Second Complaint, then the 

Commission would be permitted to merely repeat its decision in the First Complaint that 

the 12.38 percent ROE is unjust and unreasonable and this same decision could serve as 

the predicate for ordering refunds again, which would effectively extend the statutory 15-

month limitation. 

Under the framework that we have adopted above for analyzing whether a 

currently effective ROE can be found unjust and unreasonable, we must first develop a 

composite zone of reasonableness based on the most recent financial data in the Second 

Complaint proceeding record (i.e., financial data for the period July to December 2015), 

and then determine whether the currently effective 9.88 percent ROE falls within, or 

outside, the appropriate range of presumptively just and reasonable ROEs. For the 

reasons discussed below, in this section we find that the 9.88 percent ROE does fall 

within the range of presumptively just and reasonable ROEs from the Second Complaint 

proceeding and we find that this presumption has not been rebutted by the evidence in the 

Second Complaint proceeding. Accordingly, we cannot find that ROE unjust and 

unreasonable or require a prospective modification of that ROE. Below in section XVIII, 

we address the issue of whether, having made that finding, we can nevertheless require 

refunds for the 15-month refund period when the MISO TOs’ pre-existing 12.38 percent 

ROE was in effect. 

B. Composition of Starting Proxy Group 

As described above in paragraph 461 and in the Briefing Order,1017 the 

Commission uses five screens for developing a proxy group. The first four screens listed 

above evaluate particular characteristics of the companies in question that do not vary 

depending upon the results of the DCF or CAPM analyses. Accordingly, those screens 

may be used to develop a starting group of proxy companies eligible for inclusion in the 

proxy group to be used for the purposes of the DCF and CAPM models. The low-end 

and high-end outlier tests must then be applied separately to the results of the DCF and 

CAPM models to determine the final DCF and CAPM proxy groups. First, we address 

the determination of the composition of the starting proxy group in the Second Complaint 

proceeding. We then apply the low-end and high-end outlier tests to the results of the 

 1017 Briefing Order, 165 FERC ¶ 61,118 at PP 50-51. 
Docket Nos. EL14-12-003 and EL15-45-000 - 245 - 

DCF and CAPM analyses in order to determine the DCF and CAPM zones of 

reasonableness. 

For purposes of determining the starting proxy group, the Presiding Judge 

determined that the DCF Study Period for calculating the zone of reasonableness should 

be the most recent six-month period for which there is financial data in the record, July to 

December 2015.1018 

At the hearing in the Second Complaint proceeding, the participants considered 45 

companies included in Value Line’s list of electric utilities for inclusion in the proxy 

group. The Presiding Judge found that all the participants agreed that 11 of these 

companies should be excluded, primarily because they failed the merger and acquisition 

screen.1019 In addition, the Presiding Judge agreed with CAPs that Duke Energy 

Corporation and NextEra Energy Inc., should also be excluded from the proxy group 

because of merger and acquisition activity.1020 This left a proxy group of 32 companies 

before application of any low-end or high-end outlier tests,1021 No participant filed an 

exception to these findings by the Presiding Judge, and accordingly we affirm the 

Presiding Judge’s findings as to the composition of the starting proxy group before 

application of the high-end and low-end outlier tests. 

C. DCF Proxy Group and Analysis 

1. Dividend Yield Data 

a. Initial Decision (II) 

The Presiding Judge stated that all participants in the Second Complaint 

proceeding calculated dividends for purposes of the DCF using the average yield 

approach. However, the Presiding Judge noted that the dividend yields that the 

participants calculated vary from one another. He explained that, while some witnesses 

 1018 Initial Decision (II), 155 FERC ¶ 63,030 at P 24. 

1019 Id. P 50. These companies were Black Hills Corporation; Cleco Corporation; 

Empire District Electric Company; Exelon Corporation; Hawaiian Electric Industrial, 

Inc.; ITC Holdings Corporation; MGE Energy, Inc.; Pepco Holdings, Inc.; Southern 

Company; TECO Energy, Inc.; and UIL Holdings. 

1020 Id. P 51. 

1021 The 32 companies (together with the ROEs for each company adopted by the 

Presiding Judge) are listed in Appendix I of the CAPs’ initial post-hearing brief. 
Docket Nos. EL14-12-003 and EL15-45-000 - 246 - 

provided workpapers, their underlying data differs in ways that are difficult to check 

(e.g., monthly stock prices).1022 

The Presiding Judge stated that these variances only mattered with respect to OGE 

Energy and PNM Resources, the total returns of which constitute, respectively, the low 

and high ends of the range of reasonableness. He stated that the CAPs and the MISO TOs 

calculate a 3.81 percent dividend yield for OGE Energy, while Trial Staff witness 

Mr. Keyton calculates a dividend yield 3.87 percent for the company. He further 

explained that the CAPs and the MISO TOs calculate a 2.92 percent yield for PNM, 

while Mr. Keyton calculates a 2.97 percent yield for the company.1023

The Presiding Judge stated that the Initial Decision “uses a consensus approach” 

that adopted the dividend yields calculated by CAPs and MISO TOs, as opposed to those 

calculated by Trial Staff’s witness.1024

b. MISO TOs’ Exceptions 

In their Brief on Exceptions to Initial Decision (II), MISO TOs take exception to 

the Presiding Judge’s decision to use the dividend yields for OGE Energy and PNM 

Resources calculated by CAPs and MISO TOs, as opposed to the higher dividend yields 

calculated by Trial Staff’s witness.1025 MISO TOs argue that Trial Staff’s higher 

dividend yields for those two companies are based on its witness’s reliance on the proxy 

companies’ respective declared dividends in each month of the study period, and that this 

approach is consistent with Commission precedent that “‘approv[es] the use of the most 

recent dividend declared by the relevant company to determine the ‘indicated annual 

dividend’ for each of the six months’” of the DCF study period.1026 MISO TOs further 

assert that this approach is appropriate because “‘[a] reasonable investor would factor a 

change in dividend . . . into its risk assessment of a company as of the date the dividend is 

 1022 Initial Decision (II), 155 FERC ¶ 63,030 at P 55. 

1023 Id. P 56. 

1024 Id. P 57. 

1025 MISO TOs Br. on Exceptions at 44-45. 

1026 Id. at 45-46 (quoting Opinion No. 531, 147 FERC ¶ 61,234 at P 77 n.135). 
Docket Nos. EL14-12-003 and EL15-45-000 - 247 - 

declared, not the date it is paid.’”1027 MISO TOs argue that the Presiding Judge offers no 

rationale for disregarding the declared dividends that Trial Staff’s witness used. 

c. Briefs Opposing Exceptions 

CAPs argue that the Commission should deny MISO TOs’ exceptions to the 

Presiding Judge’s decision regarding the appropriate dividend yields to utilize for OGE 

and PNM. CAPs contend that the MISO TOs’ own witness used the same dividends and 

dividend timing as the Presiding Judge in Initial Decision (II). CAPs assert that nowhere 

in the record have MISO TOs previously advocated for the use of the dividend increase 

timing used by Trial Staff’s witness. CAPs further argue that MISO TOs have not 

demonstrated that the approach used by Trial Staff’s witness is more appropriate than the 

approach that was used by both CAPs’ witnesses and MISO TOs’ witnesses.1028 

CAPs contend that MISO TOs have provided no evidence or argument that the 

approach taken by Trial Staff’s witness is uniquely accurate in reflecting the dividend 

increase timing that was known to the investors who set each study month’s high and low 

stock prices. CAPs assert that the mere existence of slight variances in the witnesses’ 

approaches does not prove that the Trial Staff witness’ approach was more accurate. 

CAPs argue that MISO TOs had opportunities during the proceeding to present a basis 

supporting the approach taken by Trial Staff’s witness, but they instead elected to present 

the dividend increase timing used by their own witness and did not disclose their 

disagreement with their own witness, or their preference for the approach used by Trial 

Staff’s witness until well after the record closed.1029 

CAPs contend that, as the record stands, it is at least equally possible that CAPs 

and MISO TOs witnesses, rather than Trial Staff’s witness, took the more accurate and 

reasonable approach to the fine points of determining just when a dividend increase 

should be recognized in calculating a dividend yield. CAPs argue that, faced with a 

limited record, the Presiding Judge made a reasonable and supportable decision to utilize 

the dividend increase timing, and resulting dividend yields, presented by most of the 

witnesses, including the MISO TOs witness. CAPs conclude that the fact that MISO TOs 

 1027 Id. at 46 (quoting Portland Natural Gas Transmission Sys., Opinion No. 524, 

142 FERC ¶ 61,197, at P 321 (2013), reh’g denied, Opinion No. 524-A, 150 FERC 

¶ 61,107 (2015)). 

1028 CAPs Br. Opposing Exceptions at 45-46. 

1029 Id. at 47. 
Docket Nos. EL14-12-003 and EL15-45-000 - 248 - 

now prefer Trial Staff witness’ slightly higher dividend yields is no reason to overturn the 

Presiding Judge’s determination.1030

OMS and JCA also opposed MISO TOs’ exception on this issue. They argue that 

MISO TOs should not be allowed to file exceptions after the close of the record that are 

contrary to positions that their own witnesses took during litigation because it would 

deprive other participants of fair notice of their positions and an opportunity to 

adequately defend against them. OMS and JCA further note that Trial Staff itself did not 

file exceptions on this point, thereby tacitly accepting the approach adopted by the 

Presiding Judge in Initial Decision (II).1031

RPGI similarly opposes MISO TOs’ exception on this point. RPGI argues that its 

witness, Mr. Parcell, calculated the exact same results for PNM Resources as MISO TOs’ 

Witness McKenzie and two other witnesses, and the exact same results for OGE Energy 

as every other single witness except Trial Staff witness Mr. Keyton. RPGI asserts that 

MISO TOs failed to raise this matter in answering testimony, in cross examination or any 

time before filing exceptions despite having ample opportunity to do so.1032

RPGI also contends that MISO TOs’ attempt to introduce their new “Appendix 

2”—which provides revised IBES-based DCF returns for OGE Energy and PNM 

Resources, using the dividend yield calculations of Trial Staff’s witness—into the record 

now without evidentiary foundation is unfair to the Commission and the parties. RPGI 

asserts that their witness cannot, at this point, offer any explanation or elaboration upon 

his decision to apply the dividend increase in the months that he did, nor can RPGI 

question MISO TOs’ witness Mr. McKenzie about why he chose the same methodology 

as RPGI’s witness.1033

d. Commission Determination 

We agree with MISO TOs that Commission precedent requires changes in 

dividends to be reflected as of the date changes in dividends are declared, not as of the 

date that they are paid.1034 We have explained that “the most recent declared dividend as 

 1030 Id. at 48. 

1031 OMS-JCA Br. Opposing Exceptions at 26-27. 

1032 RPGI Br. Opposing Exceptions at 33. 

1033 Id. at 33-34. 

1034 MISO TOs Br. on Exceptions at 45-46. See also Opinion No. 524, 142 FERC 

¶ 61,197 at P 321 (“Trial Staff correctly used the declared date of January 21, 2011 for 
Docket Nos. EL14-12-003 and EL15-45-000 - 249 - 

of the end of each month during the six-month period” should be used when calculating 

the estimated dividend yield for purposes of the DCF analysis.1035 Similarly, “the 

Commission [has] approved the use of the most recent dividend declared by the relevant 

company to determine the ‘indicated annual dividend’ for each of the six months.”1036 

However, there is insufficient evidence for us to conclude that the OGE Energy and PNM 

Resources dividend yield calculations of Trial Staff’s witness rely upon the dates that 

dividends were declared, while the calculations adopted by the Presiding Judge do not 

and instead rely upon the date on which dividends were paid, such that the latter 

calculations are inconsistent with Commission precedent. We agree with the Presiding 

Judge’s determination that the differences between the dividend yield calculations of 

Trial Staff’s witness and those of CAPs and MISO TOs’ witnesses result from 

“underlying data [that] differs in ways that are difficult to check.”1037 Under these 

circumstances, we find that there is insufficient evidence to reverse the Presiding Judge’s 

decision to adopt the dividend yield calculations that were used by a greater number of 

expert witnesses in this proceeding. 

It does appear, as MISO TOs suggest, that Trial Staff’s dividend yield calculations 

may have accurately factored in dividend changes as of the dates the dividends were 

declared, consistent with Commission precedent. For example, it appears that Trial 

Staff’s witness increased the dividend in its calculations for PNM Resources to $0.88 per 

share for the month of December 2015,1038 but CAPs’ witness used a dividend of $0.80 

per share for the month of December 2015, which was the rate that prevailed in the 

preceding months of the study period.1039 Assuming the parties were relying on PNM 

Resource’s December 10, 2015 declaration of a dividend increase to an indicated annual 

rate of $0.88 per share of common stock,1040 then Trial Staff’s calculations appear to 

 

the dividend. A reasonable investor would factor a change in dividend (here, an increase) 

into its risk assessment of a company as of the date the dividend is declared, not the date 

it is paid.”). 

1035 Opinion No. 554, 158 FERC ¶ 61,050 at P 249. 

1036 Opinion No. 531, 147 FERC ¶ 61,234 at P 77 n.135. 

1037 Initial Decision (II), 155 FERC ¶ 63,030 at P 56. 

1038 Trial Staff Ex. S-6 at 240 

1039 Joint Customer Complainants Ex. JCI-8 at 5. 

1040 PNM Resources, PNM Resources Board Increases Dividend Payment, 

Declares Quarterly Common Stock Dividend, (Dec. 10, 2015), 
Docket Nos. EL14-12-003 and EL15-45-000 - 250 - 

include the appropriate dividend value for December 2015. However, it is unclear if the 

dividend values in Trial Staff’s calculations were necessarily changed in response to this 

announcement or if the dividend values in the calculations of CAPs’ witness remained 

unchanged because the dividend was not paid until after December 2015, or for some 

other reason. There is no clear and explicit explanation in the record of the reason for the 

changes in the inputs to the participants’ dividend yield calculations. Accordingly, there 

is not a sufficient basis to conclude that the dividend yield calculations adopted by the 

Presiding Judge in Initial Decision (II) were inconsistent with Commission precedent and 

we affirm his decision on this issue. 

Moreover, as OMS and JCA note, Trial Staff did not file exceptions to the 

Presiding Judge’s decision on this issue.1041 This creates further uncertainty as to the 

source of the differences between Trial Staff’s dividend yield calculations and the 

calculations adopted by the Presiding Judge. In particular, it means that the record does 

not contain an explanation from Trial Staff addressing whether or not they agree with 

MISO TOs’ contention that Trial Staff’s calculations are consistent with Commission 

precedent, while those adopted by the Presiding Judge are not. The issue is further 

obscured by the fact that the Presiding Judge relied on the dividend yield calculations 

submitted by MISO TOs but now MISO TOs favor Trial Staff’s calculations instead of 

their own. MISO TOs contrast Trial Staff’s workpapers and those of CAPs’ witness to 

suggest that Trial Staff’s calculations should be used, but they do not address whether the 

calculations that they submitted themselves are inappropriate and if so, why. MISO TOs’ 

dividend yield calculations were one of the two sets of calculations that the Presiding 

Judge stated constituted the “consensus approach” that he adopted. MISO TOs’ failure to 

address why their own calculations are no longer appropriate further weakens the case for 

reversing the Presiding Judge’s decision on this issue. 

In light of the lack of clarity in the record as to why the dividend calculations from 

Trial Staff and those adopted by the Presiding Judge are different, we find that there is 

not a sufficient basis on which to reverse the Presiding Judge’s decision to adopt the 

calculations that were used by a greater number of expert witnesses in this proceeding. 

Accordingly, we affirm the Presiding Judge’s decision regarding the dividend yields for 

OGE Energy and PNM Resources to be used in the DCF analysis and deny MISO TOs’ 

exceptions on this issue. 

 

https://www.prnewswire.com/news-releases/pnm-resources-board-increases-dividendpayment-declares-quarterly-common-stock-dividend-300191646.html. 

1041 See OMS-JCA Br. Opposing Exceptions at 27. 
Docket Nos. EL14-12-003 and EL15-45-000 - 251 - 

2. Outlier Tests and Final DCF Analysis 

We affirm the Presiding Judge’s DCF analysis in Initial Decision (II) in the 

Second Complaint proceeding, with one exception. As discussed above in section V.C, 

we have held that only the IBES short-term growth projection should be used for 

calculating the (1+.5g) adjustment to the dividend yield, instead of the composite growth 

rate used by the Presiding Judge. Accordingly, as shown in Appendix B to this order, we 

have revised the Presiding Judge’s DCF analysis of the starting proxy group to reflect the 

revised calculation of the dividend yield. 

We now turn to the issue of whether, for purposes of determining the DCF zone of 

reasonableness, any company in the starting proxy group should be excluded as a low- or 

high-end outlier. The Presiding Judge excluded Edison International, Entergy, 

FirstEnergy, and Public Service Enterprise Group.1042 

As described above, in their brief responding to the Briefing Order, MISO TOs 

propose a revised low-end outlier test. In the Second Complaint proceeding, MISO TOs’ 

proposed revised test would exclude all companies whose ROEs are less than 191 basis 

points above the average yield for Baa utility bonds from the proxy group. This revised 

test would exclude companies with ROEs below 7.32 percent.1043 Based on this revised 

test, MISO TOs propose to exclude from the DCF proxy group three companies in 

addition to the three that the Presiding Judge excluded. The additional three companies 

are OGE Energy Corp., CenterPoint Energy, and IDACORP, Inc.1044 

We reject MISO TOs’ proposal to exclude CenterPoint Energy and IDACORP, 

Inc. from the DCF proxy group. In section X of this order, we rejected MISO TOs’ 

proposed revised low-end outlier test. Instead, we adopted a revised low-end outlier test 

under which we exclude from the proxy group companies with ROEs that do not exceed 

the Baa bond yield by at least 20 percent of the risk premium from the CAPM analysis. 

In the Second Complaint proceeding, the risk premium from the CAPM analysis is 8.85 

percent. Twenty percent of that risk premium is 177 basis points. Adding 177 basis 

 1042 Initial Decision (II), 155 FERC ¶ 63,030 at P 171 and P 174 n.75; id. P 54 

(“This Initial Decision adopts the proxy group and the DCF results developed by the 

CAPs in Appendix I.”); CAPs Reply Br. (II) at n.300 (citing CAPs, March 30, 2016 

Initial Brief of the CAPs at 45 (“Applying the Commission’s low-end outlier screen, 

CAPs witnesses eliminated four companies from their respective proxy groups: Edison 

International, FirstEnergy Corp., Public Service Enterprise Group, and Entergy Corp.”). 

1043 MISO TOs Initial Br. (II), App. 2 at 27. 

1044 Id. at 27-28 and Attachment 3. 
Docket Nos. EL14-12-003 and EL15-45-000 - 252 - 

points to the 5.41 percent Baa bond yield produces a low-end outlier threshold in the 

Second Complaint proceeding of 7.18 percent. That low-end outlier threshold is higher 

than the 6.41 percent low-end outlier threshold that the Presiding Judge applied, and 

excludes one additional company from the proxy group—OGE Energy Corp.—whose 

DCF ROE is 6.75 percent. 

The Presiding Judge did not exclude any company from the DCF proxy group on 

the ground that it is a high-end outlier, nor does any participant seek to exclude any 

company on that ground. Under the high-end outlier test we have adopted in this order, 

we would exclude any DCF ROE that is more than 150 percent of the median of the 

starting proxy group DCF ROEs. In this case, the median of the starting proxy group 

DCF ROEs is 8.70 percent.1045 One-hundred-fifty percent of that median is 13.01 

percent. PNM Resources’ DCF ROE of 10.71 percent is well below that amount. 

Accordingly, we do not exclude any company from the DCF proxy group as a high endoutlier. Based on this discussion, we conclude that the DCF zone of reasonableness is 

7.20 percent to 10.71 percent.1046 

D. CAPM Proxy Group and Analysis 

We affirm the Presiding Judge’s CAPM analysis in Initial Decision (II) in the 

Second Complaint proceeding, with one exception related to the market risk premium. In 

section VII.C above, we have held that only the IBES short-term growth projection 

should be used in the one-step DCF analysis of the dividend paying members of the S&P 

500, which is consistent with the Presiding Judge’s approach in Initial Decision (II).1047 

However, we have also held that companies with negative ROEs or ROEs above 20 

percent should be excluded from that analysis. Accordingly, we have revised the CAPM 

analysis of the starting proxy group approved by the Presiding Judge to reflect this 

revision.1048

 1045 See Appendix C. 

1046 Id. 

1047 See Initial Decision (II), 155 FERC ¶ 63,030 at P 412. 

1048 The results of the CAPM analysis incorporating this revision and the other 

revisions and clarifications discussed above (i.e., use of the one-step DCF, size 

adjustment, and only IBES growth rates) are reflected in page 6 of Attachment A to Trial 

Staff’s Initial Briefs. See Trial Staff Initial Br. (I), Attachment A to App. 2 at 6; Trial 

Staff Initial Br. (II), Attachment A to App. 2 at 6. 
Docket Nos. EL14-12-003 and EL15-45-000 - 253 - 

We now turn to the issue of whether, for purposes of determining the CAPM zone 

of reasonableness, any company in the starting proxy group should be excluded from the 

CAPM proxy group as a low- or high-end outlier. The Presiding Judge did not exclude 

any company from the proxy group on these grounds, not does any participant contend 

that any company is a low or high-end outlier. As discussed in the preceding section, we 

have determined that the low-end outlier threshold in the Second Complaint proceeding is 

7.18 percent. The company in the starting proxy group with the lowest ROE is Pacific 

Gas and Electric Company, with an ROE of 8.35 percent.1049 Because that ROE is well 

above the 7.18 percent low-end outlier threshold, we do not exclude any company from 

the CAPM proxy group as a low-end outlier. 

Under the high-end outlier test that we have adopted in this order, we would 

exclude from the CAPM proxy group any ROE that is more than 150 percent of the 

median of the starting proxy group CAPM ROEs. In this case, the median of the starting 

proxy group CAPM ROEs is 10.51 percent.1050 One-hundred-fifty percent of that 

median is 15.77 percent. The company with the highest CAPM ROE in the starting 

proxy group has an ROE of 12.63 percent,1051 well below the 15.77 percent high-end 

outlier threshold. Accordingly, we are not excluding any company from the CAPM 

proxy group as a high end-outlier. Based on this discussion, we conclude that the CAPM 

zone of reasonableness is 8.35 percent to 12.63 percent.1052

E. Composite Zone of Reasonableness and FPA section 206 Findings 

Based on the findings above concerning the DCF and CAPM zones of 

reasonableness in the Second Complaint proceeding, we find that the composite zone of 

reasonableness based on the most recent financial data in the record of the Second 

Complaint proceeding is from 7.78 percent to 11.66 percent. The midpoint and the lower 

and upper midpoints of that zone of reasonableness are 9.72 percent, 8.72 percent, and 

10.7 percent respectively. This results in a range of presumptively just and reasonable 

ROEs for the MISO TOs in the Second Complaint proceeding of 9.23 percent to 10.20 

percent. As discussed above, the issue to be addressed in the Second Complaint is 

whether the ROE established in the First Complaint remained just and reasonable during 

the applicable test period as addressed by the evidence presented by the participants in 

 1049 See Appendix C; Trial Staff Initial Br. (II), Attachment A to App. 2 at 6. 

1050 See Appendix C; Trial Staff Initial Br. (II), Attachment A to App. 2 at 6. 

1051 See Appendix C; Trial Staff Initial Br. (II), Attachment A to App. 2 at 6. 

1052 See Appendix C; Trial Staff Initial Br. (II), Attachment A to App. 2 at 6. 
Docket Nos. EL14-12-003 and EL15-45-000 - 254 - 

the Second Complaint.1053 The MISO TOs’ 9.88 ROE established upon resolution of the 

First Complaint proceeding falls within the range of presumptively just and reasonable 

ROEs that applies in the Second Complaint. We find that this presumption has not been 

rebutted by the evidence in the Second Complaint proceeding. We see no evidence in the 

record, such as state ROEs, ROEs of non-utility companies, and other methodologies 

demonstrating serving to rebut this presumption. Accordingly, we cannot find that the 

MISO TOs’ ROE established in the First Complaint proceeding and in effect as of the 

date of this order is unjust and unreasonable under the first prong of FPA section 206. 

For that reason, we cannot establish a new just and reasonable ROE in the Second 

Complaint proceeding to be in effect prospectively from the date of this order. 

XVIII. Refunds in Second Complaint Proceeding 

Our holding in the preceding section that we cannot establish a new just and 

reasonable ROE in the Second Complaint proceeding to be in effect prospectively raises 

the question of whether we can nevertheless order refunds for the Second Complaint’s 

15-month refund period. That period includes the 15 months from February 12, 2015 to 

May 11, 2016, and thus precedes the September 28, 2016 date when the 9.88 percent 

ROE established in the First Complaint proceeding took effect. Thus, during the entire 

15-month refund period, the pre-existing 12.38 percent ROE was in effect. 

A. CAPs 

CAPs assert that section 206 provides for “refunds of any amounts paid . . . in 

excess of those which would have been paid under the just and reasonable rate” and 

through the 15-month refund period for the Second Complaint, the “amounts paid” by 

transmission customers were based on the 12.38 percent base ROE. They argue that, 

therefore, even assuming the First Complaint results in an ROE reduction and that 

reduced ROE is found to be just and reasonable based on the record in the Second 

Complaint proceeding, MISO transmission customers would continue to be entitled to 

refunds of the difference between the 12.38 percent rate they actually paid for the refund 

period and the reduced ROE found to be just and reasonable in the First Complaint and 

Second Complaint proceedings.1054 

CAPs argue that the base ROE established as a result of the outcome of the First 

Complaint should be applied only to the prospective relief aspect of the Second 

Complaint. In other words, they contend that the base ROE determined in the First 

Complaint could result in denying prospective relief in the Second Complaint, but that 

 1053 Briefing Order, 165 FERC ¶ 61,118 at P 61. 

1054 CAPS Reply Br. (II) at 10-11. 
Docket Nos. EL14-12-003 and EL15-45-000 - 255 - 

this should not necessarily result in a determination that the Second Complaint should 

yield no refunds during its applicable refund period. CAPs assert that, instead, refunds 

should apply to that period for the difference between the just and reasonable ROE 

determined in the Second Complaint proceeding (including if that remains the just and 

reasonable ROE determined in the First Complaint proceeding) and the 12.38 percent that 

was the existing base ROE for purposes of the Second Complaint.1055 

CAPs contend that MISO TOs should not be allowed to keep revenues from the 

Second Complaint period, with no refund obligation, when those revenues reflect rates 

that incorporated a 12.38 percent ROE that was found to be unjust and unreasonable.1056 

They argue that this would be inconsistent with the principle that the FPA “meant to 

afford consumers a complete, permanent and effective bond of protection from excessive 

rates and charges.”1057

CAPs also assert that the Commission erroneously contemplates using its “broad 

remedial authority” to correct “legal error” only with respect to the First Complaint 

outcome that will apply from September 28, 2016 going forward and not with respect to 

the Second Complaint. They argue that, to the extent that resolution of the Second 

Complaint results in a reduced ROE, the finally-determined ROE should be given effect 

from the date that the Commission would have been able to resolve the Second 

Complaint had Opinions Nos. 531 and 551 been properly decided. CAPs submit that the 

fair estimate of that date is the one estimated for that event in the Second Complaint 

Hearing Order, which was May 31, 2017. CAPs contend that the “legal error” doctrine 

should apply to the Second Complaint because its resolution was delayed by the legal 

errors in the vacated Opinion No. 531 and the time that the Commission has subsequently 

taken to process the remand and related proceedings.1058 

B. MISO TOs 

MISO TOs argue that, because the existing ROE resulting from resolution of the 

First Complaint remains just and reasonable for the study period applicable to the Second 

Complaint, the Second Complaint must be dismissed and therefore it cannot provide the 

 1055Id. at 86-87. 

1056 Id. at 12-13. 

1057 Id. at 13 (citing Atl. Refining Co. v. Pub. Serv. Comm’n, 360 U.S. 378, 388 

(1959)). 

1058 CAPs Initial Br. (II) at 87-89. 
Docket Nos. EL14-12-003 and EL15-45-000 - 256 - 

basis for refunds under section 206.1059 MISO TOs contend that, because the Second 

Complaint must be dismissed, no action by the Commission in response to the Second 

Complaint can establish a rate to be “thereafter observed,” which is a prerequisite to the 

Commission’s ability to order refunds under FPA section 206. MISO TOs further argue 

that the Second Complaint cannot give rise to refunds because that would exceed the 

refund period limitation prescribed by section 206(b). They assert that, because refunds 

arising by virtue of the Second Complaint, if any, will be based on the ROE determined 

in the First Complaint proceeding, that outcome of that proceeding cannot legally serve 

as the predicate for refund liability for a period of thirty consecutive months from 

November 12, 2013 (the First Complaint refund effective date), through May 11, 2016 

(the end of the Second Complaint refund period).1060 

MISO TOs contend that CAPs’ proposed May 31, 2017 date for relief resulting 

from the Second Complaint on the theory of “legal error” is moot because the Second 

Complaint will be dismissed based on the ROE established in the First Complaint. They 

argue that the ROE established in the First Complaint will be effective as of September 

28, 2016, with refunds due for the 15-month refund period established in the First 

Complaint, and the Second Complaint will be dismissed, therefore the “legal error” 

theory provides no basis for relief in the Second Complaint proceeding. MISO TOs 

argue that, even if the Second Complaint would not be dismissed, the legal error theory 

does not apply to the Second Complaint because the Commission has not made any 

findings with respect to the Second Complaint and therefore there has been no 

Commission action in the Second Complaint proceeding that can be said to constitute 

legal error.1061

C. Commission Determination 

As discussed above, the question on this issue is whether the Commission can 

order refunds of the 12.38 percent ROE that was in effect during the 15-month refund 

period in the Second Complaint proceeding despite the fact that the Commission is not 

granting any prospective relief with respect to the 9.88 percent ROE that is in effect as of 

the date we are acting on the Second Complaint. 

Resolution of this issue requires the Commission to determine the extent of the 

refund authority granted the Commission by the following language of FPA section 

206(b): 

 1059 MISO TOs Reply Br. (II) at 87-88. 

1060 Id. at 89-90. 

1061 Id. at 91-93. 
Docket Nos. EL14-12-003 and EL15-45-000 - 257 - 

At the conclusion of any proceeding under this section, the 

Commission may order refunds of any amounts paid, for the 

period subsequent to the refund date through a date fifteen 

months after such refund effective date, in excess of those 

which would have been paid under the just and reasonable 

rate, charge, classification, rule, regulation, practice, or 

contract which the Commission orders to be thereafter 

observed and in force: Provided, That if the proceeding is not 

concluded within fifteen months after the refund effective 

date and if the Commission determines at the conclusion of 

the proceeding that the proceeding was not resolved within 

the fifteen-month period primarily because of dilatory 

behavior by the public utility, the Commission may order 

refunds of any or all amounts paid for the period subsequent 

to the refund effective date and prior to the conclusion of the 

proceeding.1062 

As discussed below, we find that the Commission cannot order refunds in the 

Second Complaint proceeding because of the limits of our statutory authority under FPA 

section 206. The language of section 206(b) states that “[a]t the conclusion of any 

proceeding under this section” the Commission may order refunds for amounts paid 

during the 15-month refund period in excess of “what would have been paid under” the 

just and reasonable rate that “the Commission orders to be thereafter observed and in 

force.” We interpret this language to mean that refunds may be ordered in a complaint 

proceeding only when the Commission grants prospective relief in that proceeding—i.e., 

the Commission sets a new just and reasonable rate which it “orders to be thereafter 

observed and in force.” Here, as discussed above, we cannot find the 9.88 percent ROE 

in effect as of the date we are acting on the Second Complaint to be unjust and 

unreasonable and therefore we are not ordering any new just and reasonable rate “to be 

thereafter observed and in force.” Having not ordered a new just and reasonable rate to 

be thereafter observed, there are no “amounts paid . . . in excess of” that rate that the 

Commission can order to be refunded. 

In addition, we find that ordering refunds in the Second Complaint proceeding 

despite the fact that we are granting no prospective relief would exceed the statutory 

authority granted to us in FPA section 206 because it would effectively extend the 15-

month refund period for the First Complaint. Section 206 explicitly limits the length of 

time that public utilities may be subject to potential refunds as a result of a Commission 

determination in a proceeding to 15 months after the refund effective date in that 

 1062 16 U.S.C. § 824e(b) (2018). 
Docket Nos. EL14-12-003 and EL15-45-000 - 258 - 

proceeding. Moreover, Congress indicated that the 15-month refund period was intended 

to limit the refund exposure of public utilities.1063 Here, in the First Complaint 

proceeding, we have found the MISO TOs’ pre-existing 12.38 percent ROE unjust and 

unreasonable and ordered that ROE reduced to 9.88 percent effective September 28, 2016 

and ordered refunds for the November 12, 2013 to February 11, 2015 15-month refund 

period in the First Complaint proceeding. In the Second Complaint proceeding, we are 

not granting any prospective relief and allowing the 9.88 percent ROE determined in the 

First Complaint proceeding to continue. Accordingly, we find that ordering refunds in 

the Second Complaint proceeding on the basis of our ROE determination in the First 

Complaint proceeding, would exceed our statutory authority under FPA section 206 

because it would effectively extend the refund period in the First Complaint proceeding 

beyond the statutory 15-month limit. 

Moreover, section 206(b) indicates that Congress contemplated the possibility that 

the Commission could order refunds for periods outside of a proceeding’s 15-month 

refund period, but only provided for that possibility in one instance that is not applicable 

here. Specifically, section 206(b) provides that, if a proceeding is not concluded within 

15 months after the refund effective date, the Commission may order refunds for periods 

beyond the 15-month period if “the proceeding was not resolved within the fifteen-month 

period primarily because of dilatory behavior by the public utility.” The statute provides 

only this one exception to the 15-month refund period limitation and that exception does 

not apply to the Second Complaint. Accordingly, because any refunds that would be 

ordered in the Second Complaint proceeding would be refunds that were triggered by the 

Commission’s determination in the First Complaint proceeding, the 15-month refund 

period in that First Complaint proceeding would apply, and there is no exception in the 

statute that would allow the Commission to order refunds beyond the 15-month refund 

period in that proceeding, there having been no dilatory behavior by the MISO TOs in 

either proceeding. The existence of this single explicit exception to the 15-month refund 

period limitation also indicates that Congress contemplated the possibility that a 

complainant may not necessarily receive refunds to make it completely whole if the 15-

month refund period has expired, for example if conclusion of a complaint proceeding 

takes longer than 15 months but the delay is not primarily because of dilatory behavior by 

the public utility. Accordingly, while it may appear unusual at first glance to evaluate a 

complaint on the basis of whether an existing base ROE remains just and reasonable, but 

then deny the refunds that would be owed if that ROE actually was in effect, the statute 

explicitly contemplates that even successful complainants may not be made completely 

whole by refunds. 

 1063 S. Rep. No. 100-491, at 6 (1988) (describing the fifteen-month refund period 

as a limit on “the time period during which refund liability can accrue.”). 
Docket Nos. EL14-12-003 and EL15-45-000 - 259 - 

In addition, the legislative history indicates that Congress was aware that section 

206 proceedings typically required two years to resolve but nonetheless adopted only a 

15-month refund period.1064 This further indicates that Congress was aware that even 

successful complainants may not be made completely whole by the refunds provided for 

in section 206. This is also consistent with other language in the legislative history which 

provides that the 15-month period is intended limit a respondent’s refund liability, 

without reference to the success or merits of a complaint. Specifically, the Senate Report 

on the Regulatory Fairness Act states that 

While giving FERC the discretionary authority to grant 

refunds, the Committee amendment in several respects limits 

the time period during which refund liability can accrue. In 

general, refunds may only be ordered for amounts paid in 

excess of lawful rates during the period within 15 months of 

the refund effective date.1065

This approach is consistent with Commission precedent. In San Diego Gas & 

Electric,

1066 the Commission stated that “Under FPA section 206, as amended by the 

Regulatory Fairness Act, upon instituting a proceeding under section 206, the 

Commission establishes a refund effective date and may order refunds, commencing with 

the refund effective date and for up to 15 months thereafter, if it finds an existing rate to 

be unjust, unreasonable or unduly discriminatory or preferential.”1067 As described in 

that case, the Commission can only order refunds if it finds an existing rate to be unjust, 

unreasonable or unduly discriminatory or preferential. We are not finding an existing 

rate to be unjust, unreasonable or unduly discriminatory or preferential in the Second 

Complaint proceeding and we cannot order refunds in that proceeding. 

As a result, we will dismiss the Second Complaint and not order MISO TOs to 

make any refunds for the applicable 15-month refund period in that proceeding. In light 

of this determination, we find that CAPs’ request that any relief that is granted in the 

Second Complaint be granted effective as of May 31, 2017 because of the legal error 

doctrine is moot. The ROE established in the First Complaint will be effective as of 

September 28, 2016, with refunds due for the 15-month refund period established in the 

 1064 See id. (“Resolution of section 206 proceedings requires two years on 

average.”). 

1065 Id. 

1066 San Diego Gas & Elec. Co. v. Sellers of Energy and Ancillary Servs., 127 

FERC ¶ 61,191 (2009). 

1067 Id. P 17 (emphasis added). 
Docket Nos. EL14-12-003 and EL15-45-000 - 260 - 

First Complaint, and the Second Complaint will be dismissed; therefore, no relief will be 

granted in the Second Complaint proceeding. In other words, dismissal of the Second 

Complaint means that there will be no refund obligation associated with the Second 

Complaint, thus the Commission need not determine the time period applicable to that 

refund obligation, and the legal error doctrine is inapplicable. 

XIX. Conclusion 

For the reasons discussed above, we adopt the revised methodology described 

above for determining whether an existing base ROE is unjust and unreasonable under 

the first prong of FPA section 206, and for determining a new just and reasonable 

replacement base ROE under the second prong of FPA section 206 when an existing 

ROE has been shown to be unjust and unreasonable. Applying this revised methodology 

to the First Complaint proceeding results in a finding that MISO TOs’ 12.38 percent 

ROE, which is pending before us on rehearing of Opinion No. 551, is unjust and 

unreasonable, thus resulting in us granting the First Complaint, and finding that 9.88 

percent is a just and reasonable replacement ROE for MISO TOs. Accordingly, we grant 

in part and deny in part rehearing of Opinion No. 551 and require the MISO TOs to adopt 

a 9.88 percent ROE effective September 28, 2016, the date Opinion No. 551 required the 

MISO TOs to adopt a 10.32 percent ROE. As a result, we require MISO TOs to provide 

refunds, with interest for the First Complaint proceeding’s 15-month refund period from 

November 12, 2013 through February 11, 2015, as discussed in the body of this order. 

Applying this revised methodology to the Second Complaint proceeding results in 

a finding that the MISO TOs’ 9.88 percent ROE established in the First Complaint 

proceeding to be effective prospectively from September 28, 2016, remains just and 

reasonable. Accordingly, we affirm in part and reverse in part Initial Decision (II) in the 

Second Complaint proceeding, grant in part and deny in part the exceptions to Initial 

Decision (II) as discussed above, and dismiss the Second Complaint. As a result, we find 

that no refunds should be issued as a result of the resolution of the Second Complaint, as 

discussed above. 

The Commission orders: 

(A) Rehearing of Opinion No. 551 is granted in part and denied in part, as 

discussed in the body of this order. 

(B) MISO TOs’ base ROE is set at 9.88 percent with a total or maximum ROE 

including incentives not to exceed 12.24 percent, effective as of September 28, 2016, as 

discussed in the body of this order. 

(C) MISO and MISO TOs are directed to provide refunds, with interest 

calculated pursuant to 18 C.F.R. § 35.19a (2019), within thirty (30) days of the date of 

this order, for the 15-month refund period for the First Complaint from November 12, 
Docket Nos. EL14-12-003 and EL15-45-000 - 261 - 

2013 through February 11, 2015 and for the period from September 28, 2016 to the date 

of this order, as discussed in the body of this order. 

(D) MISO and MISO TOs are directed to file a refund report 

detailing the principal amounts plus interest paid to each of their customers within fortyfive (45) days of the date of this order. 

(E) The Initial Decision in the Second Complaint proceeding is affirmed in part 

and reversed in part, as discussed in the body of this order. 

(F) The Second Complaint is dismissed, as discussed in the body of this order. 

 

By the Commission. Commissioner Glick is dissenting in part with a separate statement 

 attached. 

( S E A L ) 

Nathaniel J. Davis, Sr., 

Deputy Secretary. 

 
Docket Nos. EL14-12-003 and EL15-45-000 - 262 - 

Appendix A 

 

Unadjusted 

Dividend 

Yield 

ShortTerm LongTerm 

Dividend 

Yield 

Adjustment 

Adjusted 

Dividend 

Yield 

DCF 

Results 

Line Company    Yahoo! 

Finance GDP Composite 

Growth One-Step      

1 Public Service 

Enterprise Group 3.74% 2.95% 4.39% 3.43% 101.48% 3.80% 7.23% 

2 Consolidated 

Edison, Inc. 4.14% 2.38% 4.39% 3.05% 101.19% 4.19% 7.24% 

3 OGE Energy 

Corp. 3.09% 4.00% 4.39% 4.13% 102.00% 3.15% 7.28% 

4 IDACORP Inc. 3.04% 4.00% 4.39% 4.13% 102.00% 3.10% 7.23% 

5 PPL Corporation 4.39% 2.23% 4.39% 2.95% 101.12% 4.44% 7.39% 

6 CenterPoint 

Energy, Inc. 4.69% 1.91% 4.39% 2.74% 100.96% 4.73% 7.47% 

7 Westar Energy 

Inc. 3.74% 3.40% 4.39% 3.73% 101.70% 3.80% 7.53% 

8 Portland General 

Electric Co. 3.11% 4.70% 4.39% 4.60% 102.35% 3.18% 7.78% 

9 DTE Energy Co. 3.38% 4.51% 4.39% 4.47% 102.26% 3.46% 7.93% 

10 PG&E Corp. 3.39% 4.71% 4.39% 4.60% 102.36% 3.47% 8.07% 

11 SCANA Corp. 3.91% 4.30% 4.39% 4.33% 102.15% 3.99% 8.32% 

12 The Southern Co. 4.62% 3.32% 4.39% 3.68% 101.66% 4.70% 8.37% 

13 Xcel Energy Inc. 3.68% 4.69% 4.39% 4.59% 102.35% 3.77% 8.36% 

14 NorthWestern 

Corp. 3.60% 5.00% 4.39% 4.80% 102.50% 3.69% 8.49% 

15 Duke Energy 

Corp. 4.05% 4.49% 4.39% 4.46% 102.25% 4.14% 8.60% 

16 

American 

Electric Power 

Co. Inc. 

3.68% 5.08% 4.39% 4.85% 102.54% 3.77% 8.62% 

17 NextEra Energy, 

Inc. 2.94% 6.27% 4.39% 5.64% 103.14% 3.03% 8.68% 

18 Vectren Corp. 3.46% 5.50% 4.39% 5.13% 102.75% 3.56% 8.69% 

19 Alliant Energy 

Corp. 3.50% 5.45% 4.39% 5.10% 102.73% 3.60% 8.69% 

20 Avista Corp. 3.93% 5.00% 4.39% 4.80% 102.50% 4.03% 8.82% 

21 Pinnacle West 

Capital Corp. 3.74% 5.30% 4.39% 5.00% 102.65% 3.84% 8.84% 
Docket Nos. EL14-12-003 and EL15-45-000 - 263 - 

22 Empire District 

Electric Co. 4.12% 5.00% 4.39% 4.80% 102.50% 4.22% 9.02% 

23 Dominion 

Resources, Inc. 3.58% 5.89% 4.39% 5.39% 102.95% 3.69% 9.08% 

24 

Eversource 

Energy 

(Northeast 

Utilities) 

3.27% 6.60% 4.39% 5.86% 103.30% 3.38% 9.24% 

25 El Paso Electric 

Co. 3.01% 7.00% 4.39% 6.13% 103.50% 3.12% 9.25% 

26 Ameren Corp. 3.91% 5.85% 4.39% 5.36% 102.93% 4.02% 9.39% 

27 CMS Energy 

Corp. 3.35% 6.73% 4.39% 5.95% 103.37% 3.46% 9.41% 

28 ALLETE Inc. 3.85% 6.00% 4.39% 5.46% 103.00% 3.97% 9.43% 

29 Sempra Energy 2.59% 7.93% 4.39% 6.75% 103.97% 2.69% 9.44% 

30 Great Plains 

Energy, Inc. 3.65% 6.37% 4.39% 5.71% 103.19% 3.77% 9.48% 

31 Black Hills Corp. 3.28% 7.00% 4.39% 6.13% 103.50% 3.39% 9.52% 

32 Otter Tail Corp. 4.06% 6.00% 4.39% 5.46% 103.00% 4.18% 9.65% 

33 Exelon 3.64% 6.81% 4.39% 6.00% 103.41% 3.76% 9.77% 

34 PNM Resources 2.85% 8.56% 4.39% 7.17% 104.28% 2.97% 10.14% 

35 UIL Holdings 3.59% 7.79% 4.39% 6.66% 103.90% 3.73% 10.39% 

36 ITC Holdings 

Corp. 1.76% 11.66% 4.39% 9.24% 105.83% 1.86% 11.10% 

37 TECO Energy 4.61% 7.68% 4.39% 6.58% 103.84% 4.79% 11.37% 

38 Unitil Corp. Merger 

39 MGE Energy Merger 

40 Edison 

International 2.66% 0.37% 4.39% 1.71% 100.19% 2.66% 4.37% 

41 FirstEnergy Corp. 3.97% -0.64% 4.39% 1.04% 99.68% 3.96% 4.99% 

42 Entergy Corp. 4.21% -0.48% 4.39% 1.14% 99.76% 4.20% 5.34% 

 

Moodys Baa Utility Bonds 4.65% 

Low With Outlier Test 7.23% 

High with Outlier Test 11.37% 

Midpoint 9.30% Median Including Utilities Excluded with Outlier 

Test 8.68% 

High-End Outlier Test 13.02% 

Low-End Outlier Test 6.47% 

 
Docket Nos. EL14-12-003 and EL15-45-000 - 264 - 

Appendix B 

 

 

ShortTerm LongTerm 

Dividend 

Yield 

Adjustme

nt 

Line Company 

Unadjusted 

Dividend 

Yield 

Yahoo! 

Finance GDP Composite One-Step 

Adjusted 

Dividend 

Yield 

DCF 

Results 

19 PNM Resources, Inc. 2.92% 9.30% 4.35% 7.65% 104.65% 3.06% 10.71% 

23 Sempra Energy 2.84% 9.35% 4.35% 7.68% 104.68% 2.97% 10.66% 

25 WEC Energy Group, Inc. 3.58% 7.55% 4.35% 6.48% 103.78% 3.72% 10.20% 

15 NorthWestern Corp. 3.61% 6.81% 4.35% 5.99% 103.41% 3.73% 9.72% 

16 Otter Tail Corp. 4.05% 6.00% 4.35% 5.45% 103.00% 4.17% 9.62% 

3 Ameren Corporation 3.96% 6.00% 4.35% 5.45% 103.00% 4.08% 9.53% 

11 El Paso Elec. Co. 3.20% 7.00% 4.35% 6.12% 103.50% 3.31% 9.43% 

7 CMS Energy Corp. 3.36% 6.72% 4.35% 5.93% 103.36% 3.47% 9.40% 

12 Eversource Energy 3.39% 6.57% 4.35% 5.83% 103.29% 3.50% 9.33% 

1 ALLETE, Inc. 4.16% 5.00% 4.35% 4.78% 102.50% 4.26% 9.05% 

2 Alliant Energy 3.72% 5.55% 4.35% 5.15% 102.78% 3.82% 8.97% 

9 Dominion Resources, Inc. 3.72% 5.49% 4.35% 5.11% 102.75% 3.82% 8.93% 

17 PG&E Corp. 3.50% 5.80% 4.35% 5.32% 102.90% 3.60% 8.92% 

5 Avista Corp. 3.98% 5.00% 4.35% 4.78% 102.50% 4.08% 8.86% 

18 

Pinnacle West Capital 

Corp. 3.92% 4.95% 4.35% 4.75% 102.48% 4.02% 8.77% 

21 PPL Corp. 4.67% 3.74% 4.35% 3.94% 101.87% 4.76% 8.70% 

10 DTE Energy Co. 3.75% 5.00% 4.35% 4.78% 102.50% 3.84% 8.63% 

13 Great Plains Energy 3.83% 4.80% 4.35% 4.65% 102.40% 3.92% 8.57% 

22 SCANA Corp. 3.90% 4.45% 4.35% 4.42% 102.23% 3.99% 8.40% 

4 

Amer. Elec. Power Co., 

Inc. 3.84% 4.47% 4.35% 4.43% 102.24% 3.93% 8.36% 

27 Xcel Energy, Inc. 3.68% 4.68% 4.35% 4.57% 102.34% 3.77% 8.34% 

24 Vectren Corp. 3.10% 5.00% 4.35% 4.78% 102.50% 3.18% 7.96% 

20 

Portland General Electric 

Co. 3.33% 4.11% 4.35% 4.19% 102.06% 3.40% 7.59% 

8 Consol. Edison, Inc. 4.08% 2.95% 4.35% 3.42% 101.48% 4.14% 7.56% 

26 Westar Energy Inc. 3.70% 3.50% 4.35% 3.78% 101.75% 3.76% 7.55% 

14 IDACOPR, Inc. 3.03% 4.00% 4.35% 4.12% 102.00% 3.09% 7.21% 

6 CenterPoint Energy, Inc. 5.47% 0.40% 4.35% 1.72% 100.20% 5.48% 7.20% 

28 OGE Energy Corp. 3.81% 2.17% 4.35% 2.90% 101.09% 3.85% 6.75% 

31 

Public Service Enterprise 

Group 6.28% 

30 FirstEnergy Corp. 5.38% 

29 Edison International 3.92% 
Docket Nos. EL14-12-003 and EL15-45-000 - 265 - 

32 Black Hills Corp. Merger 

33 Cleco Corp. Merger 

34 Duke Energy Corp. Merger 

35 Empire District Merger 

36 Exelon Corp. Merger 

37 Hawaii Elec. Ind. Inc. Merger 

38 ITC Holdings Merger 

39 NextEra Energy Inc. Merger 

40 Pepco Holdings Inc. Merger 

41 Southern Co. Merger 

42 TECO Energy Inc. Merger 

43 UIL Energy Merger 

 

Moodys Baa Utility Bonds 5.41% 

Low With Outlier Test 7.20% 

High with Outlier Test 

10.71

% 

Midpoint 8.95% 

Median Including Utilities Excluded with Outlier Test 8.70% 

High-End Outlier Test 

13.05

% 

Low-End Outlier Test 7.18% 
Docket Nos. EL14-12-003 and EL15-45-000 - 266 - 

Appendix C

MISO I DCF Zone Lower Zone Middle Zone Upper Zone 

Median 

LowEnd Tes(5) 

Lower Upper 

1/8 Range Lower Upper Lower Upper Lower Upper

DCF (1) 7.23% 11.37% 0.52% 7.75% 8.79% 8.79% 9.82% 9.82% 10.86% 8.65% 6.4CAPM (2) 7.80% 13.09% 0.66% 8.46% 9.78% 9.78% 11.11% 11.11% 12.43% 10.30% 6.4Average 7.52% 12.24% 0.59% 8.11% 9.29% 9.29% 10.47% 10.47% 11.65% Midpoint 9.88% 

MISO II DCF Zone Lower Zone Middle Zone Upper Zone 

Median 

LowEnd Tes

Lower Upper 

1/8 Range Lower Upper Lower Upper Lower Upper

DCF (3) 7.20% 10.71% 0.44% 7.64% 8.52% 8.52% 9.39% 9.39% 10.27% 8.7% 7.1CAPM (4) 8.35% 12.63% 0.54% 8.89% 9.96% 9.96% 11.03% 11.03% 12.10% 10.51% 7.1Average 7.78% 11.67% 0.49% 8.26% 9.24% 9.24% 10.21% 10.21% 11.18% Midpoint 9.72% 

(1) See Appendix A (2) See p 6 of Attachment A of Trial Staff Initial Brief in Docket No. EL14-12 

(3) See Appendix B (4) See p 6 of Attachment A of Trial Staff Initial Brief in Docket No. El15-45 (5) 4.65% Baa Bond Yield found in Order No. 551 + 20% x 9.12 CAPM Risk Premium (6) 150% of the median (7) 5.41% Baa bond from MISO II Initial Decision + 20% x 8.85 CAPM risk premium 
 

UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

Association of Businesses Advocating Tariff Equity 

Coalition of MISO Transmission Customers 

Illinois Industrial Energy Consumers 

Indiana Industrial Energy Consumers, Inc. 

Minnesota Large Industrial Group 

Wisconsin Industrial Energy Group 

 v. 

Midcontinent Independent System Operator, Inc. 

ALLETE, Inc. 

Ameren Illinois Company 

Ameren Missouri 

Ameren Transmission Company of Illinois 

American Transmission Company LLC 

Cleco Power LLC 

Duke Energy Business Services, LLC 

Entergy Arkansas, Inc. 

Entergy Gulf States Louisiana, LLC 

Entergy Louisiana, LLC 

Entergy Mississippi, Inc. 

Entergy New Orleans, Inc. 

Entergy Texas, Inc. 

Indianapolis Power & Light Company 

International Transmission Company 

ITC Midwest LLC 

Michigan Electric Transmission Company, LLC 

MidAmerican Energy Company 

Montana-Dakota Utilities Co. 

Northern Indiana Public Service Company 

Northern States Power Company-Minnesota 

Northern States Power Company-Wisconsin 

Otter Tail Power Company 

Southern Indiana Gas & Electric Company 

Docket No. EL14-12-003 
Docket Nos. EL14-12-003 and EL15-45-000 - 2 - 

Arkansas Electric Cooperative Corporation 

Mississippi Delta Energy Agency 

Clarksdale Public Utilities Commission 

Public Service Commission of Yazoo City 

Hoosier Energy Rural Electric Cooperative, Inc. 

 v. 

ALLETE, Inc. 

Ameren Illinois Company 

Ameren Missouri 

Ameren Transmission Company of Illinois 

American Transmission Company LLC 

Cleco Power LLC 

Duke Energy Business Services, LLC 

Entergy Arkansas, Inc. 

Entergy Gulf States Louisiana, LLC 

Entergy Louisiana, LLC 

Entergy Mississippi, Inc. 

Entergy New Orleans, Inc. 

Entergy Texas, Inc. 

Indianapolis Power & Light Company 

International Transmission Company 

ITC Midwest LLC 

Michigan Electric Transmission Company, LLC 

MidAmerican Energy Company 

Montana-Dakota Utilities Co. 

Northern Indiana Public Service Company 

Northern States Power Company-Minnesota 

Northern States Power Company-Wisconsin 

Otter Tail Power Company 

Southern Indiana Gas & Electric Company 

Docket No. EL15-45-000 

 

(Issued November 21, 2019) 

GLICK, Commissioner, dissenting in part: 

Although I join most of today’s order, I dissent in part because I disagree with the 

Commission’s decision not to order refunds of rates that we all agree were unjust and 

unreasonable. I fully support the Commission’s conclusion that the MISO Transmission 
Docket Nos. EL14-12-003 and EL15-45-000 - 3 - 

Owners’ (MISO TOs) pre-existing 12.38 percent ROE was unjust and unreasonable and 

its decision to fix the new just and reasonable ROE at 9.88 percent. Hopefully these 

determinations will provide some much-needed certainty to all MISO stakeholders. That 

being said, I disagree with the Commission’s refusal to order refunds of the unjust and 

unreasonable rates collected during the refund period for the second of the two 

complaints pending before us. The law permits us to order those refunds and I see no 

reason to deprive customers of the full protections afforded by the Federal Power Act 

(FPA). 

* * * 

It helps to have the basic facts in one place. On November 12, 2013, multiple 

parties filed a complaint (First Complaint) alleging that the MISO TOs’ 12.38 percent 

ROE was unjust and unreasonable.1

 The Commission set the matter for hearing and 

established a refund effective date of November 12, 2013 (the date the First Complaint 

was filed),2

 meaning that the 15-month refund period for the First Complaint lasted until 

February 12, 2015.3

 On February 12, 2015, a different set of parties filed another 

complaint (Second Complaint) against the MISO TOs’ ROE. The Commission again set 

the matter for hearing and established a refund effective date of February 12, 2015,4

meaning that the 15-month refund period for the Second Complaint lasted until May 12, 

2016. On December 22, 2015, an Administrative Law Judge issued an initial decision 

recommending that the Commission grant the First Complaint and establish a new just 

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

Inc., 169 FERC ¶ 61,129, at P 3 (2019) (Order). The authorized base ROE for the 

ATCLLC zone was 12.20 percent, but I will follow the Order’s practice of referring to 

the MISO-wide ROE as 12.38. Id. P 3 & n.11. The overall ROE that the MISO TOs 

could earn—i.e., the sum of the base ROE and any incentives—was capped at 15.96. Id. 

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

Inc., 149 FERC ¶ 61,049, at P 188 (2014), order on reh’g, 156 FERC ¶ 61,060 (2016). 

3

 As discussed further below, pursuant to the Regulatory Fairness Act, Pub. L. No. 

100-473, § 2, 102 Stat 2299 (1988) (codified at 16 U.S.C. § 824e(b)), as part of any 

proceeding under section 206 of the FPA, the Commission shall establish a refund 

effective date and, at the conclusion of that proceeding, it may order refunds for the 

difference between an unjust and unreasonable rate in effect during the period up to 15 

months following the refund effective date and the new just and reasonable rate fixed by 

the Commission. 

4 Ark. Elec. Coop. Corp. v. ALLETE, Inc., 151 FERC ¶ 61,219, at P 1 (2015), 

order on reh’g, 156 FERC ¶ 61,061 (2016) (Second Complaint Rehearing Order). 
Docket Nos. EL14-12-003 and EL15-45-000 - 4 - 

and reasonable ROE.5

 On June 30, 2016, a second Administrative Law Judge issued an 

initial decision, this time on the Second Complaint, again finding the MISO TOs’ ROE to 

be unjust and unreasonable and establishing a new just and reasonable ROE.6

 And on 

September 28, 2016, the Commission issued Opinion No. 551, which largely affirmed the 

initial decision on the First Complaint, finding that the MISO TOs’ 12.38 percent ROE 

was unjust and unreasonable and establishing a new just and reasonable ROE of 10.32 

percent.7

 That is where things stood when the United States Court of Appeals for the 

District of Columbia Circuit issued its decision in Emera Maine v. FERC,

8

 which vacated 

the Commission’s decision in Opinion No. 531—on which Opinion No. 551 was based. 

Today’s order responds to Emera Maine by granting rehearing of Order No. 551 

and (1) establishing a new process for evaluating whether an existing ROE is unjust and 

unreasonable, (2) applying that process to these proceedings to find that the MISO TOs’ 

12.38 percent ROE was unjust and unreasonable, and then (3) setting a new just and 

reasonable ROE of 9.88 percent. I join my colleagues on all three determinations. 

Nevertheless, I dissent in part because today’s order requires the MISO TOs to pay 

refunds only for the First Complaint, and not the Second Complaint, even though it is 

undisputed that the unjust and unreasonable 12.38 percent ROE was in effect for the 

entire refund period established for the Second Complaint. I see nothing in section 

206(b) of the FPA that prevents us from providing MISO customers with relief from that 

unjust and unreasonable ROE. 

Section 206(b) provides that, at the conclusion of a proceeding under section 206, 

“the Commission may order refunds of any amounts paid [during the 15-month refund 

period] in excess of those which would have been paid under the just and reasonable rate, 

charge, classification, rule, regulation, practice, or contract which the Commission orders 

to be thereafter observed and in force.”9 All that text requires is that the Commission 

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

Inc., 153 FERC ¶ 63,027 (2015). 

6 Ark. Elec. Coop. Corp. v. ALLETE, Inc., 155 FERC ¶ 63,030 (2016). 

7 Ass’n of Businesses Advocating Tariff Equity v. Midcontinent Indep. Sys. 

Operator, Inc., Opinion No. 551, 156 FERC ¶ 61,234, at P 9 (2016). 

8

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

9

 16 U.S.C. § 824e(b). The full text of the relevant portion of section 206(b) is: 

At the conclusion of any proceeding under this section, the Commission 

may order refunds of any amounts paid, for the period subsequent to the 

refund effective date through a date fifteen months after such refund 
Docket Nos. EL14-12-003 and EL15-45-000 - 5 - 

find that customers paid an unjust and unreasonable rate during the refund period and that 

the Commission identify a replacement just and reasonable rate, so that it can calculate 

refunds equal to the difference between the two rates. Both conditions are satisfied here. 

After all, there is no dispute that all parties were on notice that the Commission 

would require refunds in the event that it found the existing 12.38 percent ROE unjust 

and reasonable.10 And there similarly is no dispute among my colleagues that the MISO 

TOs’ 12.38 percent ROE was unjust and unreasonable and substantially in excess of the 

9.88 percent just and reasonable ROE that the Commission is establishing pursuant to 

section 206. Applying the plain text of section 206(b), I believe that the Commission had 

ample authority to order refunds pursuant to the Second Complaint and should have done 

so here.11 In addition, interpreting Section 206(b) to permit refunds in this instance is 

both more consistent with the FPA’s primary purpose of protecting consumers12 and 

 

effective date, in excess of those which would have been paid under the just 

and reasonable rate, charge, classification, rule, regulation, practice, or 

contract which the Commission orders to be thereafter observed and in 

force: Provided, That if the proceeding is not concluded within fifteen 

months after the refund effective date and if the Commission determines at 

the conclusion of the proceeding that the proceeding was not resolved 

within the fifteen-month period primarily because of dilatory behavior by 

the public utility, the Commission may order refunds of any or all amounts 

paid for the period subsequent to the refund effective date and prior to the 

conclusion of the proceeding. 

10 Cf. La. Pub. Serv. Comm’n v. FERC, 482 F.3d 510, 520 (D.C. Cir. 2007). 

11 The Commission relies on its decision in San Diego Gas & Electric for the 

proposition that it can only order refunds when it grants a particular complaint. Order, 

169 FERC ¶ 61,129 at P 572 (quoting San Diego Gas & Elec. Co. v. Sellers of Energy 

and Ancillary Servs., 127 FERC ¶ 61,191 (2009)). But the quoted language merely 

restates the statutory text (albeit embellished with italics) without shedding any light on 

the Commission’s authority to order refunds for subsequent pancaked complaints, which 

was not at issue in that decision. 

12 See, e.g., California ex rel. Lockyer v. FERC, 383 F.3d 1006, 1017 (9th Cir. 

2004); City of Chicago, Ill. v. FPC, 458 F.2d 731, 751 (D.C. Cir. 1971) (“[T]he primary 

purpose of the Natural Gas Act is to protect consumers.” (citing, inter alia, City of 

Detroit v. FPC, 230 F.2d 810, 815 (1955)); see also S. Rep. 100-491, 5-6 (1988) (“The 

Committee intends the Commission to exercise its refund authority under section 206 in a 

manner that furthers the long-term objective of achieving the lowest cost for consumers 

consistent with the maintenance of safe and reliable service.”). 
Docket Nos. EL14-12-003 and EL15-45-000 - 6 - 

more equitable given that the only reason we are faced with this question is that the 

Commission did not act on the First Complaint in the 15-month period before the Second 

Complaint was filed. 

The Commission, by contrast, reads into the text of section 206(b) a pair of 

implicit limitations on its refund authority. But neither limitation is as well-founded as 

today’s order would have you believe. First, the Commission interprets the presence of 

the word “thereafter” in section 206(b) “to mean that refunds may be ordered in a 

complaint proceeding only when the Commission grants prospective relief in that 

proceeding.”13 In other words, if the Commission does not fix a new just and reasonable 

ROE pursuant to each pancaked complaint, then it cannot order refunds of unjust and 

unreasonable rates collected during the relevant refund periods. I believe that the 

“thereafter observed and in force” language is better read as a reference to the identical 

language in section 206(a).14 Under my reading, all the “thereafter observed and in 

force” language does is clarify that the ceiling on the Commission’s refund authority 

pursuant to section 206(b) is the difference between the rate in effect during the refund 

period and the just and reasonable rate that the Commission subsequently established 

pursuant to subsection 206(a).15 Accordingly, where the Commission finds that the rate 

that prevailed in the refund period exceeded the just and reasonable rate, the Commission 

has the authority to order refunds for the difference. That straightforward interpretation 

has the unremarkable result of allowing the Commission to protect customers by ordering 

refunds for any duly established refund period in which a public utility collected a rate in 

excess of the just and reasonable rate. 

That brings us to the Commission’s second limitation. The Commission contends 

that ordering refunds for the Second Complaint would, in essence, be an end run around 

the 15-month limit on refunds established in section 206(b).16 But the Commission has 

repeatedly held that the FPA permits successive or “pancaked” complaints and those 

complaints are “‘entirely new proceeding[s]’” and not “‘duplicative proceeding[s] 

 13 Order, 169 FERC ¶ 61,129 at P 568. 

14 See 16 U.S.C. § 824e(a) (requiring the Commission to establish a new just and 

reasonable rate to be “thereafter observed and in force” whenever it finds that an existing 

rate is unjust and unreasonable or unduly discriminatory or preferential). 

15 That interpretation makes even more sense when you consider that section 

206(b) was added more than 50 years after section 206(a), which was part of the original 

FPA, and so it would have been necessary to clarify how the amendment worked in 

conjunction with the pre-existing language. 

16 Order, 169 FERC ¶ 61,129 at P 569. 
Docket Nos. EL14-12-003 and EL15-45-000 - 7 - 

intended solely to expand the amount of refund protection beyond 15 months.’”17 

Accordingly, under the Commission’s own interpretation of section 206, ordering refunds 

for the Second Complaint is not an end run around the 15-month limit on the refund 

period, but rather is consistent with customers’ right under the FPA to file multiple 

complaints under section 206. 

It may be that allowing refunds for pancaked complaints creates undue and unfair 

uncertainty for public utilities. But those policy considerations should not—and, in my 

opinion, do not—control our interpretation of the text of section 206(b). Perhaps 

Congress should consider revising section 206 to prohibit pancaked complaints. But it is 

not our job to do Congress’ work for it. Unless and until Congress amends the FPA to 

prohibit pancaked complaints, the Commission should not permit its dislike of pancaked 

complaints to deprive customers of the full protections provided by the FPA. 

For these reasons, I respectfully dissent in part. 

______________________________ 

Richard Glick 

Commissioner 

 17 Second Complaint Rehearing Order, 156 FERC ¶ 61,061 at P 33 (quoting 

Southern Co. Servs. Inc., 83 FERC ¶ 61,079, 61,386 (1998)).