FERC Proposes Changes to Electric Transmission Incentives

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On March 20, 2020, the Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR) to revise its regulations regarding transmission incentives for electric utilities.

The NOPR is intended to address changes in transmission planning, development, operations, and maintenance since FERC issued Order No. 679 in 2006, which implemented incentive-based rates for electric transmission under Section 219 of the Federal Power Act (FPA).

Most significantly, FERC proposes:

  • Removing the existing risks and challenges test and evaluating incentive requests based solely on benefits to consumers;
  • Expanding the type of return on equity (ROE) incentives available to include incentives for demonstrated economic and reliability benefits and advanced transmission technologies;
  • Replacing the “zone of reasonableness” limitation on total ROE incentives with a 250 basis-point cap on total ROE incentives;
  • Increasing the ROE adder for participation in an Independent System Operator (ISO) or Regional Transmission Organization (RTO) to 100 basis points, regardless of whether ISO/RTO participation is voluntary; and
  • Removing stand-alone transmission company (Transco)-specific incentives.

As FERC’s first comprehensive look at its transmission incentive policy since 2012, the NOPR suggests that FERC is now open to a broader application of ROE incentives to promote the expansion of the nation’s electric transmission grid. This move is likely to be welcomed by investor-owned utilities, particularly in light of the ongoing uncertainty involving FERC’s method for setting base ROEs for transmission.

However, some questions remain, such as how FERC will implement the more discretionary elements of the proposal (e.g. evaluating potential reliability benefits offered by projects). Consumer advocate groups who have argued for years that transmission rates are too high are likely to strongly oppose the proposed changes. The proposal to expand the ISO/RTO participation ROE adders is particularly noteworthy in light of recent legal challenges to such adders and FERC Commissioner Glick’s comments questioning whether such ISO/RTO participation adders remain money well spent.

Given the relatively low chance that FERC will issue a final rule prior to the 2020 election, this suggests that the proposal could face significant headwind if a change in administration occurs.

Anyone seeking to comment on the NOPR must do so 90 days after publication in the Federal Register, which has not yet occurred. Publication timelines for rulemakings vary, and may be impacted by current COVID-19-related challenges. 

Focus on Consumer Benefits from Projects Rather Than Project Risks and Challenges

Currently, an applicant seeking transmission rate incentives must demonstrate a nexus between the requested incentive and the risks and challenges associated with the investment itself. The NOPR proposes to remove this requirement and instead focus FERC’s decision to grant incentives on the benefits to consumers of transmission investment consistent with the FPA Section 219 statutory standards ensuring reliability and reducing transmission congestion.

ROE Incentives for Projects With Demonstrated Economic and Reliability Benefits

Economic Benefits

FERC proposes to offer a series of ROE incentives based on benefit-to-cost ratios, with benefits calculated by looking to the adjusted production costs, similar measures of congestion reduction, or certain other non-duplicative, quantifiable benefits. Comments are requested on whether additional types of economic benefits should be considered.

Stakeholders are also invited to comment on current RTO/ISO practices that could prevent an applicant from using modeling results to seek an economic benefit incentive, the availability of data for projects outside of an RTO or ISO, and what supporting information and analysis an applicant’s benefit-to-cost study should include. FERC suggests providing a rebuttable presumption that RTO and ISO-derived economic benefits should be included in the determination of an applicant’s benefits.

The NOPR proposes separate cost-benefit thresholds for small system modifications and significant transmission expansions, with $25 million in project costs (adjusted annually for inflation) serving as the dividing line. For projects with benefit-to-cost ratios in the top 25 percent of projects examined over a sample period, FERC proposes a 50 basis-point adder.

Similarly, FERC proposes granting an additional 50 basis-point adder for projects that demonstrate, at the time of project completion, a benefit-to-cost ratio in the top 10 percent of sampled projects.

Reliability Benefits

FERC also proposes a separate ROE incentive of up to 50 basis points for projects that provide significant and demonstrable reliability benefits. Such benefits would include, but are not limited to, those that:

  • Significantly increase import or export capability between balancing authorities;
  • Result in an Interconnection Reliability Operating Limit being downgraded to a routine System Operating Limit;
  • Improve the bulk power system’s ability to operate reliably during foreseen and unforeseen contingencies beyond North American Electric Reliability Corporation (NERC) requirements or local planning criteria;
  • Eliminate the need for one or more remedial action schemes on the system; and
  • Use specified network management technologies.

FERC also proposes granting the ROE reliability incentive to transmission projects that provide resilience benefits. These resilience benefits could include the hardening of transmission assets during adverse weather events or natural disasters, or facilities designed for the purposes of disaster recovery.

ROE Incentives Can Exceed Zone of Reasonableness, Subject to a 250 Basis-Point Cap

The NOPR proposes to discard the requirement that any future ROE incentives would be subject to the total ROE remaining within the zone of reasonableness in favor of a 250 basis-point cap on total ROE incentives. FERC believes that “changing investment conditions” warrant this change, and that the existing limit on ROE incentives (i.e., the top of the zone of reasonableness) may no longer be adequate to attract new investment in transmission facilities.

This change would also recognize that a utility’s base ROE and transmission ROE incentives serve different functions. The NOPR also requests comment on whether FERC should allow applicants, on a case-by-case basis, to request removal of the zone of reasonableness conditions placed on previously granted ROE incentives.

Advanced Transmission Technology Incentives

FERC proposes an incentive ROE adder of up to 100 basis-points for the deployment of transmission technologies that enhance reliability, efficiency, capacity, and improve the operation of new or existing transmission facilities as determined on a case-by-case basis. This incentive is limited to the costs of the transmission technologies, so the amount included in the 250 basis-point ROE cap would be calculated on a weighted average, based on the cost of the technology relative to the cost of the entire transmission project.

The NOPR also proposes to permit certain initial costs relating to deploying advanced technologies to be deferred as a regulatory asset and included in rate base for purposes of determining a public utility’s ROE. These initial costs could be deferred up to two years, beginning at the procurement stage exclusive of planning activities, to be amortized over a five-year period. This regulatory asset treatment would only be permitted one time per technology per applicant.

FERC proposes that pilot programs for advanced transmission technologies will receive a rebuttable presumption that they are eligible for these incentives. A pilot program would be a public utility-led deployment of an eligible transmission technology, with costs below $25 million, that has not been deployed to or operated on more than five percent of the applicant’s system, and has a maximum duration of two years from installation to completion. Certain completed pilot programs would also be eligible for this presumption.

Increase to RTO/ISO Participation Adder

FERC proposes increasing and standardizing the incentive to utilities that participate in an RTO or ISO to a 100 basis-point adder, across the board adder (subject to the proposed 250 basis-point cap).

All utilities that join and remain in an RTO or ISO would be eligible for a 100 basis-point adder, regardless of whether their participation is voluntary. This transmission incentive could apply to newly-joined utilities and those that already receive the current participation incentive of 50 basis-points.

Elimination of Transco-Specific Incentives

The NOPR proposes to eliminate the currently available incentives specific to Transcos. FERC believes that circumstances have changed significantly since these incentives were introduced in Order No. 679 and the key reasoning underpinning them no longer applies. Transcos would still be eligible to request incentives that are available to all public utilities.

FERC requests comments on how it should treat previously-granted Transco incentives.

Retention of Non-ROE Transmission Incentives

FERC proposes to retain the existing general non-ROE incentives and the rebuttable presumption of eligibility for projects approved through a regional planning process or which have received state siting approvals. FERC proposes to revise the start date for the abandoned plant recovery incentive to the date that transmission projects are selected in a regional planning process for purposes of cost allocation, eliminating a potential lag between regional plan selection and FERC approval of the incentive.

Metrics to Evaluate the Effectiveness of Incentives

The NOPR proposes several revisions to FERC Form 730, which is the means for reporting project-specific transmission incentives. FERC also proposes to require submission of Form 730 regardless of project size, except for utilities receiving only the RTO/ISO participation incentive, which utilities would need to report only projects that exceed $3 million.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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