The Minnesota Public Utilities Commission has authorized Minnesota Energy Resources Corporation to increase rates by $3.1 million, finding a 9.70% rate of return on equity (ROE) to be reasonable and appropriate based on a review of several two-growth Discounted Cash Flow (DCF) analyses presented by parties in the case. Explaining its decision to identify its choice of a DCF method in setting ROE, the commission said that not all models are equally probative, and not every application of the same model is equally probative. In this case, the commission said that it examined several methods in addition to the DCF, including Capital Asset Pricing Model (CAPM) and Risk Premium analyses and concluded that the DCF model is best based in the evidence presented by the parties. It found that the transparency and objectivity of the DCF model make it the “strongest, most credible model” and that the most reasonable way to identify a fair ROE is to use its results as a baseline and to use the results of other models to check, inform, and refine those results. The commission explained that the DCF model calls for fewer subjective judgments than the CAPM and Risk Premium models, emphasizing that two of its three inputs--dividends and market equity prices--are uncontested, publicly-reported facts, and the third input, projected growth rates, generally come from a limited number of recognized professional resources. It pointed out that the CAPM and Risk Premium methods, on the other hand, require expert judgment at nearly every turn—-determining the term of the risk-free, interest-bearing investment used as a benchmark, determining the time frame for calculating growth rates, determining the beta that represents market volatility, determining the historical periods over which to measure returns. Almost none of these inputs are simple matters of fact and public record, the commission noted. Re Minnesota Energy Resources Corp., Docket No. G-011/GR-17-563, Dec. 26, 2018 (Minn.P.U.C.).
Ohio: Battery Storage Pilot
The Ohio Public Utilities Commission has adopted a settlement agreement resolving a number of high profile cases in the Duke Energy Ohio electric service territory. The order resolves Duke Energy Ohio’s distribution rate case, electric security plan, reliability standard case, and power purchase agreement. Under the approved agreement, Duke is authorized to establish a pilot battery storage project. The purpose of the project would be to defer circuit investments and/or address distribution reliability issues. The agreement allows the company to invest up to $20 million, which would be recovered through a special rate rider. The project will be subject to pre-approval from the Commission and ongoing monitoring. As a result of other aspects of the agreement, Duke’s base distribution rates will be lowered by more than $19 million annually with an established rate of return on equity (ROE) of 9.84%. In addition, the utility’s electric security plan (ESP) will continue to set default generation rates through competitive auctions through May 2025. Duke will continue to make grid modernization investments and capital improvements during the term of the ESP, subject to annual cost caps and ongoing Commission review. The grid modernization efforts are aimed at allowing competitive electric suppliers and third parties access to usage data, enabling them to offer innovative products and services to their customers. Re Duke Energy Ohio, Inc., Case Nos. 17-32-EL-AIR et al., Dec. 19, 2018 (Ohio P.U.C.).