SKRMETTA: It’s Not Just The Rate, Equity Matters!

As a state regulator, I’m pleased to say our commission passionately worked to make certain that Louisiana ratepayers avoided huge price increases on transmission costs.  When I started my term, I pledged to watch out for Louisiana ratepayers and let’s face it, I don’t think I’m unique as I believe all utility regulators, both state and federal, feel the same way.

So you can appreciate my distress when, in a relatively recent case, FERC seemingly failed to show similar diligence in assessing appropriate transmission rates for customers. Electric transmission rates may seem like a small part of customers’ bills, but it’s clear some transmission companies see big dollar signs!  Hundreds of millions of dollars of ratepayer money could be seized by companies each year if some company executives had their way.  One transmission company executive laid out the problem quite succinctly.

“While incumbent utility managers publically bemoan regulation, privately they love it.  Where else can one muster double-digit equity returns with de minimis downside risks?” Joe Welch, CEO, ITC, a pure play transmission company, wrote in his book, Competitive Electricity Markets: The Power of Choice.

And while such candor from Mr. Welch is appreciated, it is doubly alarming. When state regulators set a transmission company’s return on equity (ROE), they set a fair rate of return for each dollar of equity invested in the grid (the value of their transmission assets less any debt they’ve levered against those assets).  It doesn’t matter if the debt and equity are held in the local operating company or the holding company, or just hidden in their back pocket.  We look at the total consolidated business. We’ve done it this way for a very long time and will continue to do so, because it’s that true equity we define so that all ratepayers may count on its accuracy which allows for the financial stability of our grid while making sure ratepayers are treated fairly.

And now, as independent transmission companies move to buy transmission assets from integrated utilities, state regulators are being asked by companies to permanently hand over economic (price) jurisdiction to our federal counterparts at FERC.  FERC has a very different approach.

It appears from a relatively recent federal decision that FERC only looks at the local operating company.   So gaming the system seems as easy as perhaps setting up a shell holding company that does nothing but own shares in the actual transmission operating business.   Then the company pledges those shares to borrow more money, effectively borrowing from themselves, and FERC assumes that debt doesn’t exist.  Voila! Double Leverage. FERC seemingly will let you charge equity rates for what is actually holding company debt. There are not many places you can get equity on debt. To the best of my knowledge few, if any, state regulators allow such a practice.

You have to ask why FERC looks at double leverage differently than state regulators? Perhaps, it’s just a legacy of how it regulated other businesses and the agency hasn’t adapted to the new transmission landscape where there is indeed a clear need to look behind the current fog of FERC equity. This is a serious ratepayer matter and it requires appropriate fair scrutiny.  How can anyone forget the economic impacts of the financial engineering malaise in the Western markets of the US?  Will this be another financial crisis as we saw in 2000 where Congress holds hearings after the fact?

“The industry has simply outgrown its earlier need for state-level regulation.”  (Competitive Electricity Markets: The Power of Choice), that statement in Mr. Welch’s book certainly should set off alarm bells.   The ITC filing that recently came before the Louisiana PSC offered the case for state regulators to give up jurisdiction of the transmission assets and give it to FERC, ultimately raising rates for our customers. The action would have ultimately cost our ratepayers millions of dollars.  Add to that the FERC’s approach to equity in its ITC proceeding and that was the frosting on the cake. The action was unsupportable.

So, it’s not surprising that some Wall Street investment analysts see this brave new world of transmission only companies developing our grid as an attractive opportunity for investors. In a recent May 2014 financial analyst meeting, a senior official of an energy investment company volunteered that double leverage made transmission “very attractive even if there was a 200 to 300 basis point cut in ROEs.”  When pressed to give a hard number on the leveraging he expected based on projected FERC rates, the analyst stated “20 to 30 percent, which pushes effective debt/equity to 80/20.” It is an alarmingly candid assessment of how planned financial engineering can inure to the sole benefit of stockholders and at the full expense of ratepayers.

Until FERC makes a stand and acts to change its rules to disallow double leverage, or until Congress brings together the political will to force them to do so, we, as state commissioners, are seemingly the only lines of economic defense for ratepayers.  FERC has the tools to stop this raid on ratepayers, yet they have chosen to not use them and simply allow transmission companies to make a run on ratepayers’ cash by allowing them to charge phantom equity rates.

Not a single transmission line to be transferred from state to FERC jurisdiction should be allowed without explicit and permanent assurance that our ratepayers will never pay for double leverage on that line.  It’s that simple.  Our state regulator colleagues appreciate and understand the opportunity for abuse when allowing double leverage. It is why most say “no” when asked to accept it.  FERC should do the same!

Eric Skrmetta is Chairman of the Louisiana Public Service Commission. This piece originally appeared at

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