FERC recently took two actions regarding its transmission rate incentives policies.  FERC proposed to scale back an earlier proposed increase in the return on equity (ROE) premium allowed in the rates of transmission owners that join Transmission Organizations such as RTOs/ISOs and proposed to clamp limits on its term.  The Commission also scheduled a workshop to address performance-based incentives for transmission technology deployment.  Both actions were taken in the context of a March 2020 Notice of Proposed Rulemaking (NOPR) aimed at, in part, awarding rate incentives for certain beneficial transmission investments.

With respect to limiting the ROE premium, all three Republican commissioners issued separate statements.  Commissioner Christie voted in favor of the proposal but issued a concurrence basically taking aim at any premium added to a utility’s allowed ROE.  Commissioners Chatterjee and Danly both dissented from the proposal, arguing that it is inconsistent with the relevant statutory provision and cuts against FERC’s policy objectives.

FERC’s actions should be of interest to utilities, transmission-only companies, market participants who pay transmission rates, customers and investors interested in developing transmission projects.

Background

In 2005, Congress added section 219 to the Federal Power Act (FPA) directing FERC to provide by rule incentive-based rates (1) for new electric transmission facilities that either ensure reliability or reduce the cost of delivered power by reducing transmission congestion, and (2) for utilities and other transmission providers that join a Transmission Organization (TO), such as a Regional Transmission Organization (RTO).[1]  FERC generally approves rate incentives for investments in transmission projects that present special risks or challenges, not routine investments.  FERC also awards a 50-basis point adder to the ROE in the rates of transmission owners that join a TO in recognition of the benefits, risks, and associated obligations of such membership (the TO Incentive).

As discussed in a prior post to this blog, in March, 2020, FERC issued a Notice of Proposed Rulemaking (2020 NOPR) that proposed, among other things, to (1) discard the risks and challenges approach for evaluating incentive requests and instead focus on the benefits of new transmission investment, and (2) increase the TO Incentive from 50 to 100 basis points.  FERC observed that planning, operating, and maintaining transmission infrastructure had changed considerably and that the types of needed transmission projects, and the rate treatments to incent them, must evolve to reflect the changes.

Modifying the TO Incentive

In a recent Supplemental NOPR, a divided FERC seeks comments on an additional proposal that would keep the TO Incentive at 50 basis points and subject it to a three-year term limit.

The Supplemental NOPR notes that although ratepayer benefits and utility risks and  responsibilities from Transmission Organization participation have increased, many benefits accrue to transmission owners, such as access to more developed organized markets.  Accordingly, the current 50-basis points TO Incentive, not the 100-basis points proposal in the 2020 NOPR, continues to appropriately correspond to the benefits of utilities joining TOs.

FERC also proposes to limit the term of the TO Incentive to a period of three years after a utility turns over operational control of its transmission facilities to the TO.  The Commission notes that the statute only directs an incentive for entities that “join” a TO, and thus FERC has latitude to limit the incentive to encourage joining, rather than remaining in, a TO.  According to the NOPR, an indefinite incentive may not be needed to incentivize a utility to join a TO, and may not appropriately balance utility and ratepayer interests, given the substantial benefits of TO membership to participating utilities and the large impact the incentive has on ratepayers.  The proposed 3-year limit would apply to transmission owners whose rates now include the TO Incentive.  Those owners would need to remove the incentive from their rates if the proposed term limit is adopted.

The Supplemental NOPR also requests comments on whether the TO Incentive should be limited to utilities that join a TO voluntarily.  For example, should the incentive apply where participation in the TO is mandated by the state and/or other relevant electric retail regulatory authority?  In addition, FERC wants comments on alternative, non-ROE incentives that are more appropriate for the TO Incentive.

The Supplemental NOPR only addresses the TO Incentive and does not address the other proposals in the 2020 NOPR.

Concurrence

Commissioner Christie says the Supplemental NOPR “moves in the right direction.” He takes aim at any premium added to a utility’s allowed ROE: “ROE adders needlessly burden consumers with substantial additional costs without demonstrable evidence that they actually incentivize the particular action they are aimed at incentivizing.”  In addition, Commissioner Christie notes that the public utility cost-of-service model is aimed at preventing the exercise of market power by charging a price higher than the market price, and adding basis points to the allowed ROE “makes the regulator not the guardian against market power, but the facilitator of it.”  Commissioner Christie agrees with the Supplemental NOPR’s request for proposals for alternative, non-ROE incentives.

Dissents

Commissioners Chatterjee and Danly dissented from the Supplemental NOPR.

Commissioner Chatterjee, who was FERC chair when the 2020 NOPR was issued, disagrees with the proposed limits on the TO Incentive.  He says that FPA section 219 does not limit incentives to utilities that “newly” or “voluntarily” join a TO and thus the proposal is inconsistent with the statute.  In addition, the Supplemental NOPR does not address FERC’s prior findings to not limit the incentive to new TO members.  Commissioner Chatterjee also argues that the proposal is contrary to the current Administration’s federal clean energy goals, which will require “robust organized markets and an enormous amount of investment in transmission.”  He says RTOs provide a platform for a successful energy transition but can only remain viable if existing utility members remain in RTOs, and lowering overall ROEs “may push investment away from transmission projects and towards other sectors of the economy or to lower risk projects.”

Commissioner Danly dissents on somewhat similar grounds.  He argues that the Supplemental NOPR is inconsistent with the statute, which directs FERC to provide incentives to a utility “that joins” a TO, not to encourage utilities “to join” a TO or that “voluntarily” joins a TO.  In addition, Commissioner Danly argues the proposal “contradicts fourteen years of precedent interpreting unchanged statutory text.”  He also argues that reducing the benefits to utilities that join TOs “is not the signal we should be sending to utilities that, to date, have resisted RTO participation.”

Comments on the Supplemental NOPR are due 30 days after the date of publication in the Federal Register, and reply comments are due 45 days after such publication.

The transmission incentive workshop

FERC also announced a September 10, 2021 workshop “to discuss certain performance-based ratemaking approaches, particularly shared savings, that may foster deployment of transmission technologies”  More specifically, the workshop will address how to calculate ex ante and ex post benefit analyses for transmission technologies seeking incentives and issues associated with modeling approaches for various transmission technologies.  More details will be provided in a supplemental notice.

 

[1] The term Transmission Organization includes an RTO, Independent System Operator,  “independent transmission provider, or other organization finally approved by the Commission for the operation of transmission facilities.”

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Photo of Bud Earley Bud Earley

Bud Earley, a non-lawyer senior advisor, provides analysis and advice on a wide range of federal and state energy regulatory issues, including transaction and rate issues, regional transmission organization (RTO) tariffs and rules, interconnection, retail choice and demand response for electricity customers…

Bud Earley, a non-lawyer senior advisor, provides analysis and advice on a wide range of federal and state energy regulatory issues, including transaction and rate issues, regional transmission organization (RTO) tariffs and rules, interconnection, retail choice and demand response for electricity customers, a natural gas pipelines and hydroelectric facility licenses, and LNG export authorizations.

Working with Covington teams, Mr. Earley has provided expert advice and analysis to investment firms, utilities, independent power producers, project developers, customers, marketers and U.S. and international energy companies,

Prior to joining Covington, Mr. Earley served for over 30 years in various staff positions at the Federal Energy Regulatory Commission (FERC). While at the FERC, Mr. Earley was instrumental in developing and applying policies regarding the transition of the electric utility industry to competition, including policies regarding independent power producers, transmission access, standard generator interconnection procedures, organized electricity markets, mergers and market-based rates.