Dive Brief:

• The Federal Energy Regulatory Commission on Wednesday rejected a complaint brought by the Iowa Coalition for Affordable Transmission, which sought a lower equity ratio for ITC Midwest. A lower ratio could have led to lower rates for ITC Midwest’s transmission assets in Iowa, Minnesota, Illinois and Missouri. 
• The coalition failed to show ITC Midwest, part of ITC Holdings, a Fortis and GIC Private company, no longer met the commission’s three-prong test to determine whether an operating company can use its actual capital structure when setting its rates, FERC said.
• The decision is a favorable outcome for ITC and transmission-owning utilities, according to Paul Patterson, a Glenrock Associates equity analyst. “All things being equal, it could lead to higher levels of equity deployed in the capital structure of other FERC-regulated entities,” he said Thursday in an email.

Dive Insight:

The complaint centered on ITC Midwest’s equity ratio, which is used to help set its transmission rates.

When ITC Midwest bought Interstate Power and Light’s transmission assets in 2007, FERC permitted the company to use its actual capital structure with a target 60% equity-to-debt ratio to calculate formula rates for transmission.

That ratio should be lowered to 53% from 60%, a change that would save ratepayers $114 million over four years, according to the complaint brought by IPL, an Alliant Energy utility, the Iowa Office of Consumer Advocate, the Resale Power Group of Iowa, the Large Energy Group, and the Iowa Business Energy Coalition.

The Iowa Utilities Board and the Minnesota Department of Commerce supported the complaint.

The equity ratio issue has long-term implications for Minnesota ratepayers as transmission owners throughout the Midcontinent Independent System Operator region consider adding significant amounts of new high-voltage transmission into their rate base, the Minnesota DOC, which represents ratepayers, said in comments to FERC.

The coalition failed to convince FERC that ITC Midwest no longer met the commission’s three-prong test to determine whether an operating company can use its actual capital structure when setting rates. 

The three prongs are met if the company: issues its own debt without guarantees; has its own bond rating; and has a capital structure within the range of FERC-approved capital structures, according to the commission.

The coalition failed to show that ITC Midwest’s owners, ITC Holdings, or Fortis, guarantee ITC Midwest’s debt and would be required to assume the company’s debt obligations if there was a default, FERC said.

The coalition also failed to show ITC Midwest’s debt is guaranteed by ITC Holdings or Fortis, according to FERC.

“The commission has stated that it is common for a subsidiary to have financial connections with parent companies, and the mere existence of financial connections between such companies does not preclude the use of the subsidiary’s capital structure,” FERC said.