FERC Acts To Ensure That Utility Cost-Based Rates Include An Adequate Return On Equity

In June, the Federal Energy Regulatory Commission ("FERC" or "Commission") issued Opinion No. 531, which details three significant changes to the way FERC determines the rate of return on equity ("ROE") in public utility rate cases.¹ First, FERC modified its longstanding discounted cash flow ("DCF") model for calculating ROE.² Second, FERC ended its practice of applying a post-hearing adjustment to ROE based on changes in United States Treasury bond yields.³ Third, FERC decided that the ROE of the group of public utilities in question should not be set at the "point of central tendency" established by the range of reasonable ROEs, but instead should be set at the point halfway between the range's point of central tendency and the range's highest point.⁴ Each of these changes is explained below.