[Federal Register Volume 84, Number 60 (Thursday, March 28, 2019)]
[Notices]
[Pages 11769-11777]
[FR Doc No: 2019-05893]

-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. PL19-4-000]

Inquiry Regarding the Commission's Policy for Determining Return
on Equity

AGENCY: Federal Energy Regulatory Commission, Department of Energy.

ACTION: Notice of inquiry.

-----------------------------------------------------------------------

SUMMARY: Following the decision of the U.S. Court of Appeals for the
District of Columbia Circuit in Emera Maine v. Federal Energy
Regulatory Commission, the Commission seeks information and stakeholder
views to help the Commission explore whether, and if so how, it should
modify its policies concerning the determination of the return on
equity (ROE) to be used in designing jurisdictional rates charged by
public utilities. The Commission also seeks comment on whether any
changes to its policies concerning public utility ROEs should be
applied to interstate natural gas and oil pipelines.

DATES: Initial Comments are due June 26, 2019, and Reply Comments are
due July 26, 2019.

ADDRESSES: Comments, identified by docket number, may be filed in the
following ways:
     Electronic Filing through http://www.ferc.gov. Documents
created electronically using word processing software should be filed
in native applications or print-to-PDF format and not in a scanned
format.
     Mail/Hand Delivery: Those unable to file electronically
may mail or hand-deliver comments to: Federal Energy Regulatory
Commission, Secretary of the Commission, 888 First Street NE,
Washington, DC 20426.
     Instructions: For detailed instructions on submitting
comments, see the Comment Procedures Section of this document.

FOR FURTHER INFORMATION CONTACT:
Jeremy Hessler (Legal Information), Office of the General Counsel, 888
First Street NE, Washington, DC 20426,<PHONE_NUMBER>,
<EMAIL_ADDRESS>Adam Pollock (Technical Information), Office of Energy Market
Regulation, Federal Energy Regulatory Commission, 888 First Street NE,
Washington, DC 20426,<PHONE_NUMBER><EMAIL_ADDRESS>Scott Everngam (Technical Information), Office of Energy Market
Regulation, Federal Energy Regulatory Commission, 888 First Street NE,
Washington, DC 20426,<PHONE_NUMBER><EMAIL_ADDRESS>Tony Dobbins (Technical Information), Office of Energy Policy and
Innovation, Federal Energy Regulatory Commission, 888 First Street NE,
Washington, DC 20426,<PHONE_NUMBER><EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:
    1. In this Notice of Inquiry (NOI), the Commission seeks
information and stakeholder views regarding whether, and if so how, it
should modify its policies concerning the determination of the return
on equity (ROE) to be used in designing jurisdictional rates charged by
public utilities. The Commission also seeks comment on whether any
changes to its policies concerning public utility ROEs should be
applied to interstate natural gas and oil pipelines.
    2. This NOI follows the decision of the U.S. Court of Appeals for
the District of Columbia Circuit (D.C. Circuit) in Emera Maine v.
FERC,\1\ reversing and vacating Opinion No. 531.\2\ In that decision,
the court held, among other things, that the Commission had failed to
justify its decision under section 206 of the Federal Power Act (FPA)
\3\ to set the ROE of the New England Transmission Owners \4\ at the
midpoint of the upper half of the zone of reasonableness produced by
the two-step Discounted Cash Flow (DCF) analysis. While the court did
not expressly question the Commission's

finding that anomalous capital market conditions justified an ROE above
the midpoint of the DCF zone of reasonableness, the court concluded
that the Commission failed to point to record evidence supporting the
conclusion that its solution to the anomalous capital market
conditions--setting the base ROE at the upper midpoint rather than the
midpoint--was just and reasonable.\5\
---------------------------------------------------------------------------

    \1\ 854 F.3d 9 (DC Cir. 2017) (Emera Maine).
    \2\ Coakley, Mass. Attorney Gen. v. Bangor Hydro-Elec. Co.,
Opinion No. 531, 147 FERC ] 61,234, order on paper hearing, 149 FERC
] 61,032 (2014), order on reh'g, 150 FERC ] 61,165 (2015).
    \3\ 16 U.S.C. 824e.
    \4\ The New England Transmission Owners include Bangor Hydro-
Elec. Co.; Cent. Me. Power Co.; New England Power Co. d/b/a Nat'l
Grid; N.H. Transmission LLC d/b/a NextEra; NSTAR Elect. & Gas Corp.;
Ne. Utilities Serv. Co.; United Illuminating Co.; Unitil Energy
Systems, Inc. and Fitchburg Gas & Elec. Light Co.; and Vt. Transco,
LLC. Opinion No. 531, 147 FERC ] 61,234 at P 1 n.3.
    \5\ Emera Maine, 854 F.3d at 28-29.
---------------------------------------------------------------------------

    3. The Commission recognizes the potentially significant and
widespread effect of our ROE policies upon public utilities. The
importance of ROE policy for public utilities extends beyond the
particular interests of the parties to the Emera Maine proceeding.
Accordingly, this NOI seeks further information as the Commission re-
evaluates our ROE policies following the Emera Maine decision. Initial
Comments are due June 26, 2019, and Reply Comments are due July 26,
2019.

I. Background

A. The DCF Model

    4. The Supreme Court has held that ``the return to the equity owner
should be commensurate with the return 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.'' \6\
Since the 1980s, the Commission has used the DCF model to develop a
range of returns earned on investments in companies with corresponding
risks for purposes of determining the ROE for regulated entities.
---------------------------------------------------------------------------

    \6\ Fed. Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 605
(1944) (Hope); see also Bluefield Waterworks & Improvement Co. v.
Pub. Serv. Comm'n, 262 U.S. 679, 692-693 (1923) (Bluefield);
Duquesne Light Co. v. Barasch, 488 U.S. 299, 314 (1989).
---------------------------------------------------------------------------

    5. The DCF model was originally developed in the 1950s as a method
for investors to estimate the value of securities, including common
stocks. It is based on the premise that ``a stock's price is equal to
the present value of the infinite stream of expected dividends
discounted at a market rate commensurate with the stock's risk.'' \7\
With simplifying assumptions, the DCF model results in the investor
using the following formula to determine share price:
---------------------------------------------------------------------------

    \7\ Canadian Ass'n of Petroleum Producers v. FERC, 254 F.3d 289,
293 (DC Cir. 2001); see also Composition of Proxy Groups for
Determining Gas and Oil Pipeline Return on Equity, 123 FERC ]
61,048, at P 58 (2008) (Proxy Group Policy Statement).

---------------------------------------------------------------------------
    P = D/(k-g),

where P is the price of the stock at the relevant time, D is the
current dividend, k is the discount rate (or investors' required
return), and g is the expected growth rate in dividends.
    6. For ratemaking purposes, the Commission rearranges the DCF
formula to solve for k, the discount rate, so that:

    k = D/P + g.

    Under the resulting DCF formula, the investor's required return is
estimated to equal current dividend yield (dividends divided by share
price) plus the projected future growth rate of dividends. The term
``k'' represents the investor's required return for investing in the
firm (i.e., the cost of equity).\8\ The Commission's practice has been
to set a regulated firm's rate of return, or ``r'' to equal ``k'' the
investor's required return for investing in the firm.
---------------------------------------------------------------------------

    \8\ See Opinion No. 531, 147 FERC ] 61,234 at P 15.
---------------------------------------------------------------------------

    7. During the decades that the Commission has used the DCF model,
the Commission periodically has made changes in its implementation of
the model with respect to the industries that it regulates. In Opinion
No. 531, the Commission used the same two-step, constant-growth DCF
model in public utility cases as it had used in natural gas and oil
pipeline cases for the last 20 years.\9\ For the dividend yield
component of that model, the Commission derives a single, average
dividend yield based on the indicated dividend and the average of the
monthly high and low stock prices over a six-month period.\10\ The
Commission then uses a two-step method to estimate a single constant
growth rate in dividends.\11\
---------------------------------------------------------------------------

    \9\ Id. P 8.
    \10\ See, e.g., Portland Natural Gas Transmission Sys., Opinion
No. 510, 134 FERC ] 61,129, at PP 232-34 (2011).
    \11\ Opinion No. 531, 147 FERC ] 61,234 at P 17.
---------------------------------------------------------------------------

    8. In order to project short-term growth in dividends, the
Commission uses security analysts' three-year to five-year earnings
forecasts, as published by the Institutional Brokers Estimate System
(IBES). The Commission has held that earnings forecasts made by
investment analysts are the best available estimates of short-term
dividend growth based on a finding that they are relied on by investors
when making their investment decisions.\12\
---------------------------------------------------------------------------

    \12\ See, e.g., Transcon. Gas Pipe Line Corp., Opinion No. 414-
B, 85 FERC ] 61,323, at 62,269 & n.34 (1998) (citing an article
entitled ``Using Analysts' Growth Forecasts to Estimate Shareholders
Required Rates of Return'' in Financial Management, Spring 1986,
pages 58-67); Proxy Group Policy Statement, 123 FERC ] 61,048 at PP
73-77.
---------------------------------------------------------------------------

    9. The use of a long-term growth estimate for dividends originated
in the Commission's 1994 decision in Ozark Gas Transmission System.\13\
In that decision, the Commission explained:
---------------------------------------------------------------------------

    \13\ 68 FERC ] 61,032 (1994) (Ozark).

    In the constant growth DCF model used by both parties in this
proceeding, dividends are expected to grow indefinitely at the rate
of (g). The indefinite future used by the DCF model is 50 years or
more . . . . While we concede that it is more difficult to project
growth for many years from the present time, we conclude that a
projection limited to five years, with no evidence of what is
anticipated beyond that point, is not consistent with the DCF model
and cannot be relied on in a DCF analysis.\14\
---------------------------------------------------------------------------

    \14\ Id. at 61,105. The Commission chose 50 years to represent
the indefinite future because the present value of a one-dollar
dividend received 50 years in the future and discounted at 12
percent is less than one cent. Id. at n.32.

    In Opinion No. 396-B, issued in 1997, the Commission held that the
long-term growth in the United States economy as a whole, as measured
by gross domestic product (GDP), is the most reasonable projection of
long-term growth rates for interstate natural gas pipelines.\15\ The
Commission stated, ``[i]t is reasonable to expect that, over the long-
run, a regulated firm will grow at the rate of the average firm in the
economy, because regulation will generally prevent the firm from being
extremely profitable during good periods, but also protects it somewhat
during bad periods.'' \16\ The D.C. Circuit affirmed the Commission's
decision to use GDP to estimate long-term growth in dividends.\17\
---------------------------------------------------------------------------

    \15\ Opinion No. 396-B, 79 FERC at 62,382-83, reh'g denied,
Opinion No. 396-C, 81 FERC ] 61,036 (1997).
    \16\ Id.
    \17\ Williston Basin Interstate Pipeline Co., v. FERC, 165 F.3d
54, 64 (D.C. Cir. 1999), finding that ``[t]he testimony adduced at
the hearing demonstrated that major investment houses used an
economy-wide approach to project long-term growth, that such an
approach was supported by practical economic considerations, and
that existing industry-specific approaches imperfectly reflected
investor expectations and made unfounded economic assumptions.''
Nonetheless, finding the record evidence inadequate to support the
Commission's use of certain GDP data, the court remanded the case
for further proceedings on this issue. Subsequently, the Commission
has used an average of three GDP growth projections.
---------------------------------------------------------------------------

    10. When the Commission first required use of a long-term growth
estimate, the Commission averaged the short-term IBES growth estimate
with the long-term GDP growth estimate in determining the overall
constant dividend growth rate.\18\ However, in 1998, in Opinion No.
414-A, the Commission changed the weighting scheme in order to give
two-thirds weight to short-term forecasts and one-

third weight to long-term forecasts. The Commission explained,
---------------------------------------------------------------------------

    \18\ Opinion No. 396-B, 79 FERC at 62,383, reh'g denied, Opinion
No. 396-C, 81 FERC ] 61,036.

    While determining the cost of equity nevertheless requires that
a long-term evaluation be taken into account, long-term projections
are inherently more difficult to make, and thus less reliable, than
short-term projections. Over a longer period, there is a greater
likelihood for unanticipated developments to occur affecting the
projection. Given the greater reliability of the short-term
projection, we believe it is appropriate to give it greater weight.
However, continuing to give 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.\19\
---------------------------------------------------------------------------

    \19\ Opinion No. 414-A, 84 FERC at 61,423-24.

    The D.C. Circuit affirmed this two-thirds/one-third weighting for
determining the overall dividend growth estimate.\20\
---------------------------------------------------------------------------

    \20\ Canadian Ass'n of Petroleum Producers v. FERC, 254 F.3d at
297. Since Opinion No. 414-A, the Commission has made no changes in
its two-step DCF methodology used for natural gas and oil pipelines,
except to require that, if a master limited partnership (MLP) is
included in the proxy group, its long-term growth rate should be
one-half the GDP growth estimate. Proxy Group Policy Statement, 123
FERC ] 61,048 at P 106. The Commission explained that MLPs have less
growth potential than corporations, because they generally
distribute to partners an amount in excess of their reported
earnings. Id. P 12.
---------------------------------------------------------------------------

    11. Prior to Opinion No. 531, the Commission determined public
utility ROEs using a one-step, constant-growth DCF model, which
considered only short-term growth projections for a public utility.\21\
In 2000, the Commission decided not to adopt the two-step DCF
methodology for public utilities, primarily because they were only just
beginning the process of restructuring. Under those circumstances, the
Commission determined that investors would be unlikely to place much
weight on long-term forecasts because the uncertainties regarding the
future were so great.\22\ However, in Opinion No. 531, the Commission
found that investor uncertainty due to the type of changes anticipated
in 2000 had diminished. Accordingly, the Commission concluded that the
time had come to apply the same DCF methodology in public utility cases
as it utilizes in natural gas and oil pipeline cases.\23\ Most
importantly, the Commission found that including a long-term estimate
of dividend growth in the constant growth DCF model would bring the
public utility ROE approach into full alignment with the underlying
theory of the DCF model.\24\ As it found with respect to natural gas
and oil pipelines, the Commission found that it is reasonable to
project that public utilities, which transmit electricity to supply
energy to the national economy, will have long-term growth consistent
with the growth of the economy as a whole.\25\ The Commission also
found that the use of a 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. Finally, using the same
long-term growth projection for all public utilities produces a
narrower zone of reasonableness, consistent with the fact different
firms in a regulated industry would not ordinarily be expected to have
widely varying levels of profitability.
---------------------------------------------------------------------------

    \21\ See Opinion No. 531, 147 FERC ] 61,234 at PP 24-31
(describing the one-step method).
    \22\ Opinion No. 445, 92 FERC at 61,261-62.
    \23\ Opinion No. 531, 147 FERC ] 61,234 at PP 35-36.
    \24\ Incorporating a long-term growth estimate in the DCF
methodology is consistent with the underlying theory of the constant
growth DCF model because
    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 in 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 services
growth rates, converge to a level consistent with the growth rate of
the aggregate economy.
    Roger A. Morin, New Regulatory Finance 308 (Public Utilities
Reports, Inc. 2006) (Morin).
    \25\ See Opinion No. 531, 147 FERC ] 61,234 at P 40.
---------------------------------------------------------------------------

    12. No party in the Opinion No. 531 proceeding objected to the
Commission's adoption of the two-step DCF model for public utilities,
and the Commission also applied that model, without objection, in
Opinion No. 551, addressing a complaint that the MISO Transmission
Owners' ROE is unjust and unreasonable.\26\
---------------------------------------------------------------------------

    \26\ Ass'n of Businesses Advocating Tariff Equity v.
Midcontinent Indep. Sys. Operator, Inc., 156 FERC ] 61,234 (2016).
---------------------------------------------------------------------------

B. Other Financial Models

    13. Although the Commission has used the DCF model to determine
ROEs for public utilities and natural gas and oil pipelines since the
1980s, investors use other financial models in addition to the DCF
model to evaluate investments. In a number of recent proceedings,
discussed further below, the Commission has considered certain other
financial models when determining the just and reasonable ROE for
public utilities. These other financial models include the Capital
Asset Pricing Model (CAPM), Expected Earnings Model, and Risk Premium
method, which are described below.
1. The CAPM Model
    14. Investors use CAPM analysis as a measure of the cost of equity
relative to risk.\27\ 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 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.'' \28\ The risk-free rate is
represented by a proxy, typically the yield on 30-year U.S. Treasury
bonds.\29\ 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.\30\ A CAPM analysis is
backward-looking if the expected return is determined based on
historical, realized returns.\31\ A CAPM analysis is forward-looking if
the expected return is based on a DCF analysis of a large segment of
the market.\32\ 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.\33\
---------------------------------------------------------------------------

    \27\ Morin at 146-147.
    \28\ Id. at 150.
    \29\ Id. at 151.
    \30\ Id. at 155-162.
    \31\ Id. at 155-156.
    \32\ Id. at 159-160.
    \33\ Id. at 150, 155.
---------------------------------------------------------------------------

2. Expected Earnings
    15. 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.\34\ The forward-looking approach is often referred to
as an ``Expected Earnings'' analysis. The returns on book equity that
investors expect to receive from a group of companies with risks
comparable to those of a particular utility 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.\35\
---------------------------------------------------------------------------

    \34\ See Opinion No. 531-B, 150 FERC ] 61,165 at P 125.
    \35\ Id. P 128.
---------------------------------------------------------------------------

3. Risk Premium
    16. The Risk Premium methodology, in which interest rates are 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.'' \36\ As
the Commission found in Opinion No. 531, investors' required risk
premiums expand with low interest rates and shrink at higher interest
rates. The link between interest rates and risk premiums provides a
helpful indicator of how the interest rate environment affects
investors' required rates of return.
---------------------------------------------------------------------------

    \36\ Opinion No. 531, 147 FERC ] 61,234 at P 147 (citing Morin
at 108).
---------------------------------------------------------------------------

    17. Multiple approaches have been advanced to determine the equity
risk premium for a utility.\37\ 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.\38\ 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.'' \39\
---------------------------------------------------------------------------

    \37\ See generally Morin at 107-130.
    \38\ Id. at 110.
    \39\ Id. at 123.
---------------------------------------------------------------------------

C. Opinion Nos. 531 and 551 and Anomalous Market Conditions

    18. Since the financial crisis of 2008-2009, the Commission has
grappled with whether the DCF model continues to produce ROEs for
public utilities consistent with the Hope and Bluefield capital
attraction standards.\40\ In both Opinion Nos. 531 and 551, the
Commission concluded that the capital market conditions prevailing
after the financial crisis--in particular, the low yields on bonds,
including U.S. Treasury bonds--rendered the Commission less confident
that a mechanical application of the midpoint of the DCF-produced zone
of reasonableness would provide a risk-appropriate ROE, as required by
Hope and Bluefield. The Commission therefore considered a series of
alternative valuation methodologies (i.e., CAPM analysis, Expected
Earnings analysis, and Risk Premium analysis), as well as the ROEs
allowed by state public utility commissions, ``to gain insight into the
potential impacts of these unusual capital market conditions on the
appropriateness of using [the midpoint of the DCF zone of
reasonableness].'' \41\ The Commission concluded that the comparisons
to the other valuation methodologies supported setting the New England
Transmission Owners' ROE above the midpoint of the DCF zone of
reasonableness. After determining that the just and reasonable base ROE
should be above the midpoint, the Commission stated that it has
traditionally used measures of central tendency to determine an
appropriate return in ROE cases. Moreover, in cases involving placement
of the base ROE above the central tendency of the zone of
reasonableness, the Commission has used the central tendency of the top
half of the zone.\42\ Accordingly, in both Opinion Nos. 531 and 551,
the Commission set the ROE at the midpoint of the upper half of the
zone of reasonableness (upper midpoint).\43\ In Opinion No. 531, the
upper midpoint of the 7.03 percent to 11.74 percent zone of
reasonableness was 10.57 percent.\44\ In Opinion No. 551, the upper
midpoint of the 7.23 percent to 11.35 percent zone of reasonableness
was 10.32 percent.\45\
---------------------------------------------------------------------------

    \40\ Hope, 320 U.S. 591; Bluefield, 262 U.S. 679.
    \41\ Opinion No. 531, 147 FERC ] 61,234 at P 145.
    \42\ Id. PP 151-152; Opinion No. 551, 156 FERC ] 61,234 at PP
275-276.
    \43\ The Commission sets the ROE for a group of utilities at the
midpoint or upper midpoint of the zone of reasonableness, but the
ROE for a single entity at the median or upper median. See S.
California Edison Co. v. FERC, 717 F.3d 177, 181-182 (D.C. Cir.
2013).
    \44\ Opinion No. 531, 147 FERC ] 61,234 at P 142.
    \45\ Opinion No. 551, 156 FERC ] 61,234 at P 67.
---------------------------------------------------------------------------

D. The Emera Maine Decision

    19. Various parties sought review of Opinion No. 531 in the D.C.
Circuit. The New England Transmission Owners argued that the Commission
failed to demonstrate that their existing 11.14 base ROE was unjust and
unreasonable. The customer representatives argued that the Commission
had failed to show that the new 10.57 base ROE was just and reasonable.
In Emera Maine, the D.C. Circuit agreed with both the New England
Transmission Owners and customer representatives and vacated and
remanded Opinion No. 531 et seq.
    20. As an initial matter, the court rejected the New England
Transmission Owners' argument that an ROE within the DCF-produced zone
of reasonableness could not be deemed unjust and unreasonable. The
court explained that the zone of reasonableness established by the DCF
is not ``coextensive'' with the ``statutory'' zone of reasonableness
envisioned by the FPA.\46\ Accordingly, the court concluded that the
fact that the New England Transmission Owners' existing ROE fell within
the zone of reasonableness produced by the DCF did not necessarily
indicate that it was just and reasonable for the purposes of the
FPA.\47\
---------------------------------------------------------------------------

    \46\ Emera Maine, 854 F.3d at 22-23.
    \47\ Id. at 23.
---------------------------------------------------------------------------

    21. Nevertheless, the court agreed with the New England
Transmission Owners that the Commission had not adequately shown that
their existing ROE was unjust and unreasonable. The court 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.'' \48\ Thus, the
fact that the New England Transmission Owners' existing ROE did not
equal the just and reasonable ROE that the Commission would have set
using the current DCF analysis inputs did not necessarily indicate that
the New England Transmission Owners' existing ROE fell outside the
statutory zone of reasonableness.\49\ As such, the D.C. Circuit
concluded that Opinion No. 531 ``failed to include an actual finding as
to the lawfulness of [the New England] Transmission Owners' existing
base ROE'' and that its conclusion that their existing ROE was unjust
and unreasonable was itself arbitrary and capricious.\50\
---------------------------------------------------------------------------

    \48\ Id. at 23, 26.
    \49\ 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.'').
    \50\ Id.
---------------------------------------------------------------------------

    22. The court also agreed with the customer representatives that
the Commission failed to adequately demonstrate that the new base ROE
it established was just and reasonable. The Court did not express
concerns regarding the Commission's decision to ``abandon its
traditional use of the midpoint of the zone of reasonableness in
setting [the New England] Transmission Owners' base ROE'' based on the
anomalous capital market conditions and its resulting evaluation of
alternative methodologies for

calculating the cost of equity.\51\ The court stated that ``the
alternative benchmarks and additional record evidence may have shown
that some upward adjustment was warranted.'' \52\
---------------------------------------------------------------------------

    \51\ Id. at 27; see also id. at 30 (``[W]hile the evidence in
this case may have supported an upward adjustment from the midpoint
of the zone of reasonableness, FERC failed to provide any reasoned
basis for selecting 10.57 percent as the new base ROE.'').
    \52\ Id. at 30 (quotation marks omitted).
---------------------------------------------------------------------------

    23. Nevertheless, the court concluded that the Commission failed to
point to evidence in the record supporting the conclusion that its
solution to the anomalous capital market conditions--i.e., setting the
base ROE at the upper midpoint rather than at the midpoint--was just
and reasonable. The court explained that the Commission expressly did
not rely on the alternative methodologies to support its determination
that a 10.57 percent base ROE was just and reasonable. The court also
observed that the Commission's explanation that it had previously set
the just and reasonable base ROE at a measure of central tendency for
the upper part of the DCF-produced zone of reasonableness was inapt
because, in those cases, the Commission had first determined that those
utilities were not of average risk, whereas the Commission found that
the New England Transmission Owners were of average risk. The court
therefore remanded the proceeding so that the Commission could further
explain why the base ROE it selected is just and reasonable.

E. Post-Emera Maine Proceedings

    24. Following the decision in Emera Maine, the Commission issued
two orders proposing a methodology for addressing the issues that were
remanded to the Commission in Emera Maine and establishing a paper
hearing on whether and how this methodology should apply to the four
complaint proceedings concerning both the New England and MISO
transmission owners' ROE.\53\ In those orders, 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 the Commission's decision will accurately reflect how investors
make their investment decisions.\54\
---------------------------------------------------------------------------

    \53\ See Martha Coakley v. Bangor Hydro-Elec. Co., 165 FERC ]
61,030 (2018) (Coakley Briefing Order); Ass'n of Businesses
Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc.,
165 FERC ] 61,118 (2018) (MISO Briefing Order).
    \54\ Coakley Briefing Order, 165 FERC ] 61,030 at P 34; MISO
Briefing Order, 165 FERC ] 61,118 at P 36.
---------------------------------------------------------------------------

    25. Specifically, the Commission proposed to rely on three
financial models that produce zones of reasonableness--the DCF model,
CAPM model, 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. The Commission explained that the Risk Premium
model produces a single numerical point rather than a range; therefore,
it cannot be used with the other three financial models in establishing
a composite zone of reasonableness.\55\ The Commission proposed a
framework for using that composite zone of reasonableness in evaluating
whether an existing base ROE remains just and reasonable.\56\
---------------------------------------------------------------------------

    \55\ Coakley Briefing Order, 165 FERC ] 61,030 at P 36; MISO
Briefing Order, 165 FERC ] 61,118 at P 38.
    \56\ Coakley Briefing Order, 165 FERC ] 61,030 at P 36; MISO
Briefing Order, 165 FERC ] 61,118 at P 38.
---------------------------------------------------------------------------

    26. 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 relying on four financial
models--the DCF model, CAPM model, Expected Earnings model, and Risk
Premium model--to produce four separate base ROE estimates that would
then be averaged to produce a specific just and reasonable base ROE.
    27. The Commission established a paper hearing in the Coakley and
MISO complaint proceedings \57\ and directed the participants in those
proceedings to submit briefs regarding this proposed new approach and
how to apply it to those proceedings.\58\
---------------------------------------------------------------------------

    \57\ Coakley Briefing Order, 165 FERC ] 61,030 at P 31; MISO
Briefing Order, 165 FERC ] 61,118 at P 20.
    \58\ Coakley Briefing Order, 165 FERC ] 61,030 at P 31; MISO
Briefing Order, 165 FERC ] 61,118 at P 20; see also Arkansas Pub.
Serv. Comm'n, 165 FERC ] 61,119 (2018).
---------------------------------------------------------------------------

II. Request for Comments

    28. As part of ensuring that the Commission continues to meet our
statutory obligations, the Commission, on occasion, engages in public
inquiry to gauge whether there is a need to add to, modify, or
eliminate certain policies or regulatory requirements. In this
proceeding, the Commission seeks comments on potential modifications to
our approach to determining a just and reasonable ROE. Although the
Commission requested briefing on some of the issues below in the
Coakley and MISO Briefing Orders, this proceeding will provide all
interested stakeholders with the opportunity to comment on the
Commission's ROE policy in light of the decision in Emera Maine.
    29. The Commission seeks comments on eight general topics as part
of this inquiry: (A) The role of the Commission's base ROE in
investment decision-making and what objectives should guide the
Commission's approach; (B) whether uniform application of our base ROE
policy across the electric, interstate natural gas pipeline and oil
pipeline industries is appropriate and advisable; (C) performance of
the DCF model, (D) proxy groups; (E) financial model choice; (F)
mismatch between market-based ROE determinations and book-value rate
base; (G) how the Commission determines whether an existing ROE is
unjust and unreasonable under the first prong of the FPA section 206;
and (H) model mechanics and implementation.
    30. In the following sections, we outline these eight topics and
enumerate questions that commenters may consider in addressing each
topic. Commenters need not address every topic or answer every question
enumerated below.

A. Role and Objectives of the Commission's Base ROE Policy

    31. The Commission seeks comment on the role of base ROE in
investment decision-making and what objectives should guide the
Commission's approach to our base ROE policy apart from the basic Hope/
Bluefield standard.
    A1. To what extent would the ROE methodology described in the
Coakley and MISO Briefing Orders impact the predictability of ROE
determinations and the costs for market participants of making or
intervening in such proceedings?
    A2. How would using the ROE methodology described in the Coakley
and MISO Briefing Orders affect an investor's ability to forecast the
ROE the Commission would establish in a litigated proceeding and the
ability of participants to propose, contest, and settle base ROEs as
compared to using only the DCF methodology?
    A3. Currently, public utilities in different Independent System
Operators (ISOs) or RTOs may receive different ROEs, despite all using
national proxy groups, due primarily to differences in when FPA section
205 or 206 proceedings were initiated. Are such variations justified,
and, if not, should

the Commission consider applying the same ROE to all utilities in RTOs/
ISOs based on the most recent proceeding?
    A4. Should the ROE reflect the cost of capital at the time of the
investment or be subject to adjustment to reflect the contemporary ROE
required by investors?
    A4.a. Should the Commission consider a ``vintage approach,'' with
ROE fixed for the life of the asset at the time that each asset was
completed?
    A4.b. Would such a ``vintage approach'' need to be coupled with an
annual national default ROE for investments made in that year, so as to
minimize the need for numerous annual litigated ROE proceedings for
each public utility that made an investment during that year? What
procedure should be used to determine such a default ROE?

B. ROEs for Different Commission-Regulated Industries

    32. The Commission seeks comment on whether to apply a single ROE
policy across electric, interstate natural gas and oil pipeline
industries.
    B1. In Opinion No. 531, the Commission found that the same DCF
methodology should be used to determine an ROE for all its regulated
industries, including public utilities, as well as gas and oil
pipelines. If the Commission departs from our sole use of a two-step
DCF methodology for public utilities, should the new method or methods
also be used to determine natural gas and oil pipeline ROEs?
    B2. The Risk Premium methodology approved in Opinion Nos. 531 and
551 relied to a large extent on ROEs set forth in numerous settlements
involving public utility formula rates approved by the Commission over
the preceding 15 or 20 years. Natural gas and oil pipelines have stated
rates and settlements of their rate cases are typically ``black box''
settlements that do not specify an agreed-upon ROE. How could the Risk
Premium methodology be implemented in natural gas or oil pipeline rate
cases where there is no history of ROE settlements from which to
develop a risk premium study of the type used in Opinion Nos. 531 and
551?
    B3. Given the tendency of the Expected Earnings methodology to
produce more high-end outliers than the other methodologies, would
there be a sufficient number of natural gas and oil pipeline proxy
members to implement the Expected Earnings methodology for gas and oil
pipelines?
    B4. What, if any, differences between public utilities on the one
hand and natural gas and oil pipelines on the other would justify using
different methodologies to determine their ROEs? \59\
---------------------------------------------------------------------------

    \59\ See Trailblazer Pipeline Co. LLC, 166 FERC ] 61,141, at P
48 (2019) (setting for hearing the issue of whether it would be
appropriate to apply alternatives to the DCF for natural gas
pipelines and whether appropriate data that would support those
alternatives are available).
---------------------------------------------------------------------------

C. Performance of the DCF Model

    33. The Commission seeks comment on the robustness of the DCF model
over time and under differing investment conditions.
    C1. The DCF model assumes stock prices are equal to the present
value of projected future cash flows. Is there evidence of situations
when these assumptions are inaccurate?
    C2. Have current and projected proxy company earnings over the last
10 to 20 years increased in a manner that would justify any increases
in their stock prices over the same period, consistent with DCF model
assumptions?
    C3. How does the DCF methodology perform over a wide range of
interest rate conditions?
    C3.a. What specific assumptions of the DCF model, if any, do not
work well in low or high interest rate environments?
    C3.b. Is there evidence that the volatility of price-to-earnings
ratios over the last 10 to 20 years, assumed to be constant in the DCF
methodology, has been driven by the wide swings in interest rates over
this period? If so, would the constant P/E assumption impact the award
of reasonable ROEs?

D. Proxy Groups

    34. The Commission seeks comment on the appropriate guidelines for
proxy group composition, elimination of outliers, and placement of base
ROE within a zone of reasonableness.
    D1. Should proxy groups for electric utilities, as well as natural
gas and oil pipelines, consist only of companies with corresponding
regulated businesses?
    D1.a. For companies with a combination of regulated and unregulated
businesses, should a company be required to derive a certain percentage
of its revenues from the applicable regulated business in order for
that company to be included in the proxy group that is used to
determine an ROE for a company in that regulated business?
    D1.b. Are the corresponding proxy groups sufficiently large given
the continued consolidation in the industries?
    D2. Should risk be considered both in the proxy group selection and
in the placement within the zone of reasonableness?
    D2.a. Should the Commission's approach to proxy group selection
change depending on which financial models it considers when
determining the just and reasonable ROE and, if so, how?
    D3. Should the Commission consider non-energy companies when
selecting proxy groups?
    D3.a. What non-energy industries or securities have comparable risk
to public utilities and natural gas and oil pipelines, if any?
    D3.b. Do certain non-energy industries or securities feature fewer
outliers?
    D4. What, if any, are appropriate high- and low-end outlier tests?
    D4.a. The Commission currently excludes from the proxy group
companies whose ROE fails to exceed the average 10-year bond yield by
approximately 100 basis points. Should the low-end outlier test
continue to be based on a fixed value relative to the costs of debt or
(a) should it be based on its value relative to the median (i.e., less
than 50 percent of the median); or (b) still reflect the cost of debt
but vary based on interest rates?
    D4.b. How, if at all, should the Commission's approach to outliers
vary among different financial models?
    D5. How, if at all, does the Commission's use of credit ratings in
ROE determinations incentivize public utilities to behave in certain
ways, such as issuing more debt, and does this affect public utilities'
credit ratings?
    D6. What would be the impact of the Commission modifying the credit
rating screen to include all investment-grade utilities in the proxy
group?
    D7. To what extent do credit ratings correspond to the ROE required
by investors?
    D8. The Commission excludes from the proxy group companies with
merger activity during the six-month study period that is significant
enough to distort study inputs. Should the Commission continue using
our existing merger screen?
    D8.a. If so, should the Commission revise its standards for what
conduct constitutes merger and acquisition activity?
    D9. What circumstances or factors, if any, warrant an adjustment
from the midpoint/median to other points within the zone of
reasonableness (e.g., lower or upper midpoint/median)?
    D10. The Commission currently uses midpoints to determine the
central tendency of the zone of reasonableness when determining RTO-
wide ROEs.

Should the Commission adopt a policy of using medians for this purpose?
    D10.a. Would the use of multiple ROE methodologies, as proposed in
the Coakley Briefing Order, undercut the Commission's current rationale
for using the midpoint in RTO-wide base ROE?
    D10.b. Should the size of the proxy group be considered in this
decision?
    D11. Can the Commission continue to construct proxy groups of
sufficient size for natural gas and oil pipeline companies using the
DCF methodology, or in general for the alternative methodologies,
particularly considering the increased amount of merger and acquisition
activity involving master limited partnerships (MLPs) and the multiple
recent conversions of MLPs to C-corporations?

E. Financial Model Choice

    35. In addition to the DCF model, the Commission seeks comment on
other financial models that investors use to evaluate utility equities,
the strengths and weaknesses of each of those models, and whether the
Commission should weigh certain financial models over other models
based on their respective characteristics.
    E1. What models do investors use to evaluate utility equities?
    E2. What role do current capital market conditions play in the
choice of model used by investors to evaluate utility equities?
    E2.a. If capital market conditions factor into the choice of model,
how do investors determine and evaluate those conditions?
    E3. Are any models thought to be superior or inferior to others? If
so, why?
    E4. How are alternative models redundant or complementary with each
other and/or the DCF model?
    E5. To what extent do alternative models avoid any deficiencies of
the DCF model and/or operate better in diverse capital market
conditions?
    E6. To the extent that investors use multiple models, should the
Commission combine them in its analysis or use the ``best'' one that
would apply in all market conditions?
    E7. If the Commission were to consider multiple models, how should
it weigh them?
    E8. To what extent is it reasonable for the Commission to use a
simplified version of a model that does not reflect all the variables
that investors consider?
    E8.a. Is the use of a simplified model justified for ease of
administration and predictability of result?
    E9. How, if at all, should the Commission consider state ROEs?
    E9.a. How and why do state ROEs vary by state?
    E9.b. How are certain state ROEs more or less comparable to
Commission ROEs?
    E10. If the Commission considers state ROEs, how should it compare
FERC-jurisdictional transmission ROEs with state ROEs that apply to
utilities that are (a) distribution and transmission companies; or (b)
distribution, generation, and transmission companies?
    E11. To what extent, if any, should the Commission exercise
judgment in using financial models to set ROEs under various capital
market conditions?

F. Mismatch Between Market-Based ROE Determinations and Book-Value Rate
Base

    36. The DCF and CAPM models determine a percentage ROE based on
market prices of the proxy companies. That percentage ROE is then
applied to the book value of the rate base to calculate the monetary
ROE included in a utility's cost of service. For the last three
decades, the market-to-book ratios of the companies that the Commission
uses in proxy groups have generally been substantially in excess of
one. The Commission seeks comment on the mismatch between market-based
ROE determinations and book-value rate base and whether this mismatch
is a problem, and how the Commission should address this issue.
    F1. Does the mismatch between market-based ROE determinations and a
book value rate base support current market values? Is this mismatch a
problem?
    F2. Why have most or all utility market-to-book ratios consistently
exceeded one?
    F3. How should the ROE level be set relative to the cost of equity?
    F4. Should the Commission revise our use of these models to account
for the mismatch between market-based ROE determinations and book-value
rate base? If so, how? For example, should the Commission adjust the
dividend yield used in the DCF model to represent a yield on book value
rather than a yield on stock price?
    F5. Should the Commission consider adjusting ROEs to account for
market-to-book ratios above or below one? Would doing so introduce
circularity into Commission ROEs by setting the ROE at whatever level
of earnings the market expected, rather than making an independent
assessment of the appropriate ROE? \60\
---------------------------------------------------------------------------

    \60\ See Orange & Rockland Utilities, Inc., 44 FERC ] 61,253, at
61,952 (1998).
---------------------------------------------------------------------------

G. First Prong of ROE Determination

    37. In the Coakley and MISO Briefing Orders, the Commission
proposed that, in order to find an existing ROE unjust and unreasonable
under the first prong of FPA section 206, the 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. For average
risk utilities, the range of presumptively just and reasonable ROEs
would be the quartile of the zone of reasonableness centered on the
central tendency of the overall zone of reasonableness. For below or
above average risk utilities, that range would be the quartile of the
zone of reasonableness centered on the central tendency of the lower or
upper half of the zone of reasonableness, respectively. The Commission
seeks comment on how the Commission determines whether an existing ROE
is unjust and unreasonable under the first prong of FPA section 206 and
whether the quartile approach that the Commission proposed in the
Coakley and MISO Briefing Orders is reasonable.
    G1. How should the Commission determine if existing ROEs are just
and reasonable?
    G2. Is the quartile approach that the Commission proposed in the
Coakley and MISO Briefing Orders appropriate? If not, how should the
Commission revise this methodology?
    G3. When a successive complaint is filed while the current ROE is
being adjudicated (i.e., a pancake complaint), should the subsequent
complainant be required to make a prima facie showing of sufficient
change in market conditions to meet the Coakley and MISO Briefing
Order's proposed determination of whether an existing ROE remains just
and reasonable? If so, what type of information or showing should the
complainant provide to demonstrate that market conditions have changed,
and what standard should the Commission apply when assessing whether to
deny the subsequent complaint without setting it for hearing?
    G4. In single utility rate cases, the Commission determines the
central tendency of the zone of reasonableness based on the median of
the proxy group ROEs. Is the approach outlined in the Coakley and MISO
briefing orders appropriate in single utility rate cases given that the
proxy company ROEs tend to cluster near the center of the

zone of reasonableness, making the middle quartile relatively narrow?
    G4.a. Would it be reasonable to determine the central tendencies of
the upper and lower halves of the zone of reasonableness for single
utilities based on a midpoint analysis, so as to produce approximately
equal ranges of presumptively just and reasonable ROEs for below
average, average, and above average risk utilities?

H. Model Mechanics and Implementation

    38. The Commission seeks comment on the mechanics and
implementation of the DCF, CAPM, Expected Earnings, and Risk Premium
models. Specifically, the Commission seeks comment on general issues
that affect multiple models, such as the underlying data that the
models rely on, and also seeks comment on the mechanics specific to
each of the four respective models.
1. General Issues/Issues That Affect Multiple Models
    H.1.1. Are IBES data a good proxy for ``investor consensus?''
    H.1.1.a. If not, are there better alternatives, such as Bloomberg,
Zacks, S&P Capital, Morningstar, and Value Line?
    H.1.1.b. Should the Commission combine data from multiple sources?
    H1.1.c. What weight, if any, should be given to an estimate if the
number and identity of analysts contributing to the estimate is not
available?
    H.1.2. To what extent does model risk affect all ROE methodologies?
    H.1.3. The DCF model incorporates data at the parent/holding
company level (e.g., stock price). The Commission adjudicates cases at
the operating company level, for which there is no public data like
stock prices, growth rates, and betas. What impact does this disparity
have on the results of the DCF and other models?
    H.1.4. Should the Commission continue to rely on the efficient
market hypothesis, which underlies the DCF and CAPM models? Why or why
not?
    H.1.4.a. If yes, should the Commission continue to employ outlier
screens, M&A screens, etc., for the DCF and CAPM models since these
models need to incorporate all relevant information?
    H.1.5. Should growth rates be based on Value Line, IBES, or
alternative estimates?
    H.1.6. Should the same growth rate sources be used across models,
if more than one model is used to determine the ROE?
2. Model-Specific Questions
a. DCF
    H.2.a.1. Should the Commission continue to use a dividend DCF model
or should the Commission use a different DCF model, for example, one
based on free cash flow?
    H.2.a.2. Could terminal stock value be used in place of long-term
growth projections? If so, how should terminal stock value be
determined?
    H.2.a.3. Do investment analysts project earnings/dividends growth
beyond five years, and if not, why not, and is GDP an appropriate proxy
for long-term growth?
    H.2.a.4. How should the Commission weight short-term and long-term
earnings/dividend growth projections?
    H.2.a.5. The Commission uses a constant growth DCF model. Should
the Commission consider using a multi-stage DCF model? If so, how would
the Commission determine the length of each stage of a proxy company's
growth?
    H.2.a.6. Are six months of average high/low historical monthly
stock prices an appropriate measure for the current stock price ``P''?
b. CAPM
    H.2.b.1. If the market risk premium is determined by applying the
DCF methodology to a representative market index, should a long-term
growth rate be used, as in the Commission's two-step DCF methodology?
    H.2.b.2. Beta is a measure of a security's risk relative to the
broader market, such as the S&P 500, not of its absolute risk. Do
CAPM's assumptions break down if both utility stocks and the broader
market become riskier over time on an absolute basis, but the relative
increase in risk in utility stocks rises more slowly?
    H.2.b.3. What are appropriate data sources for the beta value?
    H.2.b.4. Should the Commission employ more sophisticated versions
of the CAPM model that consider more variables instead of only beta,
such as the Fama-French Model? \61\
---------------------------------------------------------------------------

    \61\ The Fama and French Model is an asset pricing model that
takes into consideration that value and small-cap stocks outperform
markets on a regular basis. The model initially considered two
factors in addition to the CAPM model: The size risk and value risk
factors to the market risk factor in CAPM. Later in 2015, two
additional factors were added: Profitability and investment. See
generally Eugene F. Fama, et al. ``Common risk factors in the
returns on stocks and bonds,'' Journal of Financial Economics
(1993); Eugene F. Fama, et al. ``A Five-Factor Asset Pricing
Model,'' Journal of Financial Economics (2015).
---------------------------------------------------------------------------

c. Expected Earnings
    H.2.c.1. Should the use of utilities in the proxy group for the
Expected Earnings model be predicated on the Expected Earnings analysis
being forward-looking?
    H.2.c.2. What, if any, concerns regarding circularity are there
with using the Expected Earnings analysis to determine the base ROE, as
opposed to using the analysis for corroborative purposes?
    H.2.c.2.i. If there are circularity concerns, are there ways to
mitigate these concerns for the Expected Earnings analysis? If these
concerns exist, are these concerns more significant than those
surrounding the DCF methodology, which effectively separates Expected
Earnings and ROE into its dividend yield and growth rate subcomponents?
d. Risk Premium
    H.2.d.1. Should the analysis be historical or forward-looking?
    H.2.d.2. Is a Risk Premium analysis compatible with a finding of
anomalous capital market conditions? Why or why not?
    H.2.d.3. Unlike the financial models discussed above, the Risk
Premium analysis produces a single ROE rather than a zone of
reasonableness. Does this characteristic require the Commission to use
the Risk Premium model differently than the other models?
    H.2.d.3.i. Is there a method by which the Risk Premium ROE could be
adjusted upward for an above average utility or downward for a below
average risk utility? If not, is it reasonable to consider the results
of a Risk Premium analysis when determining the ROE of an above or
below average risk utility?
    H.2.d.3.ii. Is it appropriate to use a Risk Premium analysis when
conducting the first prong of the section 206 evaluation?

III. Comment Procedures

    39. The Commission invites interested persons to submit comments on
the matters and issues proposed in this notice, including any related
matters or alternative proposals that commenters may wish to discuss.
Comments are due June 26, 2019, and Reply Comments are due July 26,
2019. Comments must refer to Docket No. PL19-4-000, and must include
the commenter's name, the organization they represent, if applicable,
and their address.
    40. The Commission encourages comments to be filed electronically
via the eFiling link on the Commission's website at http://www.ferc.gov. The Commission accepts most standard

word-processing formats. Documents created electronically using word-
processing software should be filed in native applications or print-to-
PDF format and not in a scanned format. Commenters filing
electronically do not need to make a paper filing.
    41. Commenters that are not able to file comments electronically
must send an original of their comments to: Federal Energy Regulatory
Commission, Secretary of the Commission, 888 First Street NE,
Washington, DC 20426.
    42. All comments will be placed in the Commission's public files
and may be viewed, printed, or downloaded remotely as described in the
Document Availability section below. Commenters on this proposal are
not required to serve copies of their comments on other commenters.

IV. Document Availability

    43. In addition to publishing the full text of this document in the
Federal Register, the Commission provides all interested persons an
opportunity to view and/or print the contents of this document via the
internet through the Commission's Home Page (http://www.ferc.gov) and
in the Commission's Public Reference Room during normal business hours
(8:30 a.m. to 5:00 p.m. eastern time) at 888 First Street NE, Room 2A,
Washington, DC 20426.
    44. From the Commission's Home Page on the internet, this
information is available on eLibrary. The full text of this document is
available on eLibrary in PDF and Microsoft Word format for viewing,
printing, and/or downloading. To access this document in eLibrary, type
the docket number excluding the last three digits of this document in
the docket number field.
    45. User assistance is available for eLibrary and the Commission's
website during normal business hours from the Commission's Online
Support at<PHONE_NUMBER> (toll free at 1-866-208-3676) or email at
<EMAIL_ADDRESS>or the Public Reference Room at (202) 502-
8371, TTY<PHONE_NUMBER>. Email the Public Reference Room at
<EMAIL_ADDRESS>
    By direction of the Commission.

    Issued: March 21, 2019.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2019-05893 Filed 3-27-19; 8:45 am]
BILLING CODE 6717-01-P


requires EPA to develop an accountable process to ensure " meaningful and timely input by tribal officials in the development of regulatory policies that have tribal implications." The proposed rule does not have tribal implications, as specified in Executive Order 13175. It will not have substantial direct effects on tribal governments, on the relationship between the Federal government and Indian tribes, or on the distribution of power and responsibilities between the Federal government and Indian tribes. No tribal governments own dry cleaning facilities subject to the MACT standards for dry cleaning facilities. Thus, Executive Order 13175 does not apply to the proposed rule. The EPA specifically solicits additional comment on this proposed rule from Tribal officials.

G. Executive Order 13045: Protection of Children from Environmental Health and Safety Risks Executive Order 13045 ( 62 FR 19885, April 23, 1997) 95 applies to any rule that: ( 1) Is determined to be " economically significant" as defined under Executive Order 12866, and ( 2) concerns an environmental health or safety risk that EPA has reason to believe may have a disproportionate effect on children. If the regulatory action meets both criteria, the Agency must evaluate the environmental health or safety risk of the planned rule on children and explain why the planned regulation is preferable to other potentially effective and reasonably feasible alternatives considered by the Agency.

The proposed rule is not subject to the Executive Order because it is not economically significant as defined in Executive Order 12866, and because the Agency does not have reason to believe the environmental health or safety risks addressed by this action present a disproportionate risk to children. This conclusion is based on our assessment of the information on PCE effects on human health and exposures associated with dry cleaner operations. The public is invited to submit or identify peer reviewed studies and data that assessed results of early life exposures to PCE dry cleaner emissions.

H. Executive Order 13211: Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use The proposed rule is not a " significant energy action" 96 defined in Executive Order 13211 ( 66 FR 28355, May 22, 2001)

because they are not likely to have a significant adverse effect on the supply, distribution, or use of energy.

The proposed rule would have a negligible impact on energy consumption because less than 1 percent of the industry would have to install additional emission control equipment to comply. The cost of energy distribution should not be affected by the proposed rule at all since the standards do not affect energy distribution facilities. We also expect that there would be no impact on the import of foreign energy supplies, and no other adverse outcomes are expected to occur with regards to energy supplies. Further,

we have concluded that the proposed rule is not likely to have any significant adverse energy effects.

I. National Technology Transfer Advancement Act Section 112( d) of the National Technology Transfer and Advancement Act ( NTTAA) of 1995 ( Public Law No. 104 113,

12( d) ( 15 U. S. C. 272 note), directs EPA to use voluntary consensus standards ( VCS) in its regulatory activities unless to do so would be inconsistent with applicable law or otherwise impractical. The VCS are technical standards ( e. g., materials specifications, test methods, sampling procedures, and business practices) that are developed or adopted by VCS bodies. The NTTAA directs EPA to provide Congress, through OMB, explanations when the Agency decides not to use available and applicable VCS.

The proposed rule does not involve technical standards.

Therefore, EPA is not considering the use of any VCS. Perchloroethylene Emissions From Dry Cleaning Facilities    Page 98 of 109 List of Subjects in 40 CFR Part 63 Environmental Protection, Air pollution control, Hazardous substances, Reporting and Recordkeeping requirements.

Dated:

Stephen L. Johnson, Administrator. 99 For the reasons stated in the preamble, title 40,

chapter I, of the Code of Federal Regulations is proposed to be amended as follows:

PART 63[ AMENDED]

1. The authority citation for part 63 continues to read as follows:

Authority: 42 U. S. C. 7401, et seq.

Subpart M    [ AMENDED]

2. Section 63.320 is amended by revising paragraphs ( b), ( c), ( d), and ( e) to read as follows:

§ 63.320 Applicability.

* * * * *

( b) The compliance date for a new dry cleaning system depends on the date that construction or reconstruction commences.

( 1) Each dry cleaning system that commences construction or reconstruction on or after December 9, 1991 and before [ INSERT THE DATE OF PUBLICATION OF THE PROPOSED RULE IN THE FEDERAL REGISTER], shall be in compliance with the provisions of this subpart except § 63.322( o) beginning on September 22, 1993 or immediately upon startup, whichever is later, except for dry cleaning systems complying with section 112( i)( 2) of the Clean Air Act; and shall be in compliance with the provisions of § 63.322( o) beginning on 100 [ 90 DAYS AFTER DATE FINAL RULE IS PUBLISHED IN THE FEDERAL REGISTER] or immediately upon startup, whichever is later,

except as provided by § 63.6( b)( 4).

( 2) Each dry cleaning system that commences construction or reconstruction on or after [ INSERT DATE OF PUBLICATION OF THE PROPOSED RULE IN THE FEDERAL REGISTER]

and before [ INSERT DATE FINAL RULE IS PUBLISHED IN THE FEDERAL REGISTER], shall be in compliance with the provisions of this subpart except § 63.322( o) immediately upon startup and shall be in compliance with the provisions of § 63.322( o) beginning on [ INSERT DATE FINAL RULE IS PUBLISHED IN THE FEDERAL REGISTER] or immediately upon startup, whichever is later.

( 3) Each dry cleaning system that commences construction or reconstruction on or after [ INSERT DATE FINAL RULE IS PUBLISHED IN THE FEDERAL REGISTER], shall be in compliance with provisions of this subpart, including § 63.322( o) immediately upon startup.

( c) Each dry cleaning system that commenced construction or reconstruction before December 9, 1991, and each new transfer machine system and its ancillary equipment that commenced construction or reconstruction on or after December 9, 1991 and before September 22, 1993 shall comply with § § 63.322( c), ( d), ( i), ( j), ( k), ( l), and ( m);

63.323( d); and 63.324( a), ( b), ( d)( 1), ( d)( 2), ( d)( 3), 101 ( d)( 4), and ( e) beginning on December 20, 1993, and shall comply with other provisions of this subpart except § 63.322( o) by September 23, 1996; and shall comply with § 63.322( o) by [ INSERT DATE 90 DAYS AFTER DATE FINAL RULE IS PUBLISHED IN THE FEDERAL REGISTER].

( d) Each existing dry to dry machine and its ancillary equipment located in a dry cleaning facility that includes only dry to dry machines, and each existing transfer machine system and its ancillary equipment, and each new transfer machine system and its ancillary equipment installed between December 9, 1991 and September 22, 1993, as well as each existing dry to dry machine and its ancillary equipment,

located in a dry cleaning facility that includes both transfer machine system( s) and dry to dry machine( s) is exempt from § § 63.322, 63.323, and 63.324, except paragraphs 63.322( c), ( d), ( i), ( j), ( k), ( l), ( m), ( o)( 1), and ( o)( 4);

63.323( d); and 63.324 ( a), ( b), ( d)( 1), ( d)( 2), ( d)( 3),

( d)( 4), and ( e) if the total perchloroethylene consumption of the dry cleaning facility is less than 530 liters ( 140 gallons) per year. Consumption is determined according to § 63.323( d).

( e) Each existing transfer machine system and its ancillary equipment, and each new transfer machine system and its ancillary equipment installed between December 9,

1991 and September 22, 1993, located in a dry cleaning 102 facility that includes only transfer machine system( s), is exempt from § § 63.322, 63.323, and 63.324, except paragraphs 63.322( c), ( d), ( i), ( j), ( k), ( l), ( m), ( o)( 1), and ( o)( 4),

63.323( d), and 63.324 ( a), ( b), ( d)( 1), ( d)( 2), ( d)( 3),

( d)( 4), and ( e) if the perchloroethylene consumption of the dry cleaning facility is less than 760 liters ( 200 gallons)

per year. Consumption is determined according to § 63.323( d).

* * * * *

3. Section 63.321 is amended by revising the definition of filter, and adding definitions for halogenated hydrocarbon detector, perchloroethylene gas analyzer,

residence, and vapor leak to read as follows:

§ 63.321 Definitions.

* * * * *

Filter means a porous device through which perchloroethylene is passed to remove contaminants in suspension. Examples include, but are not limited to, lint filter, button trap, cartridge filter, tubular filter,

regenerative filter, prefilter, polishing filter, and spin disc filter.

Halogenated hydrocarbon detector means a portable device capable of detecting vapor concentrations of perchloroethylene of 25 parts per million by volume and 103 indicating a concentration of 25 parts per million by volume or greater by emitting an audible or visual signal that varies as the concentration changes.

* * * * *

Perchloroethylene gas analyzer means a flame ionization detector, photoionization detector, or infrared analyzer capable of detecting vapor concentrations of perchloroethylene of 25 parts per million by volume.

* * * * *

Residence means any dwelling or housing in which people reside excluding short term housing that is occupied by the same person for a period of less than 180 days ( such as a hotel room).

* * * * *

Vapor leak means a perchloroethylene vapor concentration exceeding 25 parts per million by volume ( 50 parts per million by volume as methane) as indicated by a halogenated hydrocarbon detector or perchloroethylene gas analyzer.

* * * * *

4. Section 63.322 is amended by revising paragraphs ( e)( 3), ( k), and ( m) and adding paragraph ( o) to read as follows:

§ 63.322 Standards.

* * * * * 104 ( e) * * *

( 3) Shall prevent air drawn into the dry cleaning machine when the door of the machine is open from passing through the refrigerated condenser.

* * * * *

( k) The owner or operator of a dry cleaning system shall inspect the system weekly for perceptible leaks while the dry cleaning system is operating. Inspection with a halogenated hydrocarbon detector or perchloroethylene gas analyzer also fulfills the requirement for inspection for perceptible leaks. The following components shall be inspected:

* * * * *

( m) The owner or operator of a dry cleaning system shall repair all leaks detected under paragraph ( k) or ( o)( 1) of this section within 24 hours. If repair parts must be ordered, either a written or verbal order for those parts shall be initiated within 2 working days of detecting such a leak. Such repair parts shall be installed within 5 working days after receipt.

* * * * *

( o) Additional requirements:

( 1) The owner or operator of a dry cleaning system shall inspect the components listed in paragraph ( k) of this section for vapor leaks monthly while the component is in 105 operation.

( i) Area sources shall conduct the inspections using a halogenated hydrocarbon detector or perchloroethylene gas analyzer that is operated according to the manufacturer's instructions. The operator shall place the probe inlet at the surface of each component interface where leakage could occur and move it slowly along the interface periphery.

( ii) Major sources shall conduct the inspections using a perchloroethylene gas analyzer operated according to EPA Method 21.

( 2) The owner or operator of a dry cleaning system at any major source shall route the air perchloroethylene gasvapor stream contained within each dry cleaning machine through a refrigerated condenser and shall pass the airperchloroethylene gas vapor stream from inside the dry cleaning machine drum through a carbon adsorber or equivalent control device immediately before or as the door of the dry cleaning machine is opened. The carbon adsorber must be desorbed in accordance with manufacturer's instructions.

( 3) The owner or operator of each dry cleaning system installed after [ INSERT THE DATE OF PUBLICATION OF THE PROPOSED RULE IN THE FEDERAL REGISTER] at an area source shall route the air perchloroethylene gas vapor stream contained within each dry cleaning machine through a 106 refrigerated condenser and pass the air perchloroethylene gas vapor stream from inside the dry cleaning machine drum through a carbon adsorber or equivalent control device immediately before the door of the dry cleaning machine is opened. The carbon adsorber must be desorbed in accordance with manufacturer's instructions.

( 4) The owner or operator of any dry cleaning system shall eliminate any emission of perchloroethylene during the transfer of articles between the washer and the dryer( s) or reclaimer( s).

( 5) The owner or operator shall eliminate any emission of perchloroethylene from any dry cleaning system that is installed after [ INSERT DATE OF PUBLICATION OF THE PROPOSED RULE IN THE FEDERAL REGISTER] and that is located in a building with a residence.

5. Section 63.323 is amended by revising paragraphs ( b) introductory text, ( b)( 1), ( b)( 2), and ( c) to read as follows:

§ 63.323 Test methods and monitoring.

* * * * *

( b) When a carbon adsorber is used to comply with § 63.322( a)( 2) or exhaust is passed through a carbon adsorber immediately upon machine door opening to comply with § 63.322( b)( 3) or § 63.323( o)( 2), the owner or operator shall measure the concentration of perchloroethylene in the 107 exhaust of the carbon adsorber weekly with a colorimetric detector tube or perchloroethylene gas analyzer. The measurement shall be taken while the dry cleaning machine is venting to that carbon adsorber at the end of the last dry cleaning cycle prior to desorption of that carbon adsorber or removal of the activated carbon to determine that the perchloroethylene concentration in the exhaust is equal to or less than 100 parts per million by volume. The owner or operator shall:

( 1) Use a colorimetric detector tube or perchloroethylene gas analyzer designed to measure a concentration of 100 parts per million by volume of perchloroethylene in air to an accuracy of ± 25 parts per million by volume; and ( 2) Use the colorimetric detector tube or perchloroethylene gas analyzer according to the manufacturer's instructions; and * * * * *

( c) If the air perchloroethylene gas vapor stream is passed through a carbon adsorber prior to machine door opening to comply with § 63.322( b)( 3) or § 63.323( o)( 2), the owner or operator of an affected facility shall measure the concentration of perchloroethylene in the dry cleaning machine drum at the end of the dry cleaning cycle weekly with a colorimetric detector tube or perchloroethylene gas 108 analyzer to determine that the perchloroethylene concentration is equal to or less than 300 parts per million by volume. The owner or operator shall:

( 1) Use a colorimetric detector tube or perchloroethylene gas analyzer designed to measure a concentration of 300 parts per million by volume of perchloroethylene in air to an accuracy of ± 75 parts per million by volume; and ( 2) Use the colorimetric detector tube or perchloroethylene gas analyzer according to the manufacturer's instructions; and ( 3) Conduct the weekly monitoring by inserting the colorimetric detector or perchloroethylene gas analyzer tube into the open space above the articles at the rear of the dry cleaning machine drum immediately upon opening the dry cleaning machine door.

* * * * *

6. Section 63.324 is amended by revising paragraphs ( d)( 3), ( d)( 5), and ( d)( 6) to read as follows:

§ 63.324 Reporting and recordkeeping requirements.

* * * * *

( d) * * *

( 3) The dates when the dry cleaning system components are inspected for leaks, as specified in § 63.322( k), ( l), or ( o)( 1), and the name or location of dry cleaning system 109 components where leaks are detected;

* * * * *

( 5) The date and temperature sensor monitoring results, as specified in § 63.323 if a refrigerated condenser is used to comply with § 63.322( a) or ( b); and ( 6) The date and monitoring results, as specified in § 63.323, if a carbon adsorber is used to comply with § 63.322( a)( 2), ( b)( 3), or ( o)( 2).

* * * * *