FERC to examine competitive transmission incentives

Wednesday, March 23, 2016

The Federal Energy Regulatory Commission has scheduled a Commissioner-led technical conference for this summer to discuss issues related to competitive transmission development processes.  At issue will be the use of cost containment provisions, the relationship of competitive transmission development to transmission incentives, and other ratemaking issues.

As part of the Energy Policy Act of 2005, Congress added section 219 to the Federal Power Act.  Section 219 directs the Commission to establish, by rule, incentive-based rate treatments to promote capital investment in certain transmission infrastructure.  The Commission's Order No. 679 sets forth processes by which a public utility may seek transmission rate incentives pursuant to section 219.  To qualify, an applicant must show that "the facilities for which it seeks incentives either ensure reliability or reduce the cost of delivered power by reducing transmission congestion" and also demonstrate a nexus between the incentives being sought and the investment being made.  Order No. 679-A clarified that this nexus test is satisfied when an applicant demonstrates that the total package of incentives requested is tailored to address the demonstrable risks or challenges faced by the applicant.

But a case decided earlier this year has led the Commission to reevaluate broader policy considerations relating to the role of cost containment proposals in competitive transmission development.   In a January 8, 2016 order, NextEra Energy Transmission West, LLC, 154 FERC ¶ 61,009, the Commission partially rejected a request by a public utility transmission owner for certain transmission rate incentives pursuant to section 219 and Order No. 679.  That case involved proposed transmission development under the California Independent System Operator Corporation (CAISO)'s competitive transmission developer selection process adopted to comply with Order No. 1000.

Most controversial in the "NEET West" case was a conditional adder to the utility's return on equity that would be triggered if the return on equity fell below the 10 percent that was the foundation for the utility's competitive bids for transmission project development.  On the specific facts and circumstances of that case, the Commission found that the utility had not provided adequate support for the "conditional ROE incentive" and therefore denied it.

But in ruling on the NEET West case, the Commission noted that "this case highlights broader policy considerations related to the potential benefits of cost containment proposals in the context of competitive transmission development." In the NEET West order, the Commission signaled its intent to convene a technical conference in the future to explore further such issues, including how they relate to a 2012 Policy Statement issued by the Commission providing additional guidance regarding its evaluation of applications for transmission rate incentives under section 219 of the Federal Power Act and Order No. 679.

The first specific issue identified in the NEET West order involves the relationship between an expectation stated in the Policy Statement and risks associated with cost containment proposals. The Policy Statement requires an applicant seeking an incentive ROE to demonstrate that the proposed project faces risks and challenges that are not either already accounted for in the applicant’s base ROE or addressed through risk-reducing incentives.  The Commission expressed interest in exploring more broadly "why cost containment-related risks would not be accounted for in a base ROE level below 10 percent and yet would be accounted for in a base ROE of 10 percent" as NEET West argued.

The second specific issue involves "whether and how risks voluntarily assumed through submittal of a cost containment proposal relate to the second expectation set forth in the Policy Statement." The Commission expects an applicant seeking an ROE incentive based on a project’s risks and challenges to demonstrate that it is taking appropriate steps and using appropriate mechanisms to minimize its risks during project development.  But it noted that NEET West "voluntarily submitted cost caps to make its bids to CAISO more attractive, which exposes NEET West’s shareholders to risks they would not have faced absent the cost caps."  The Commission expressed intent to explore "whether and how voluntarily assuming this type of risk is consistent with minimization of risk envisioned by the Policy Statement."

On March 17, the Commission denied a request by ITC Grid Development for a declaratory order on whether cost-capped bids that won a competitive transmission project selection process should automatically be considered just and reasonable.  But that same day, the Commission issued a Notice of Technical Conference in Docket No. AD16-18-000.  In a footnote, the notice states that topics to be discussed include, but are not limited to, those that the Commission described in its NEET West order.

The technical conference to explore these and related issues has now been scheduled for June 27 and 28, 2016, at the Commission ’s headquarters at 888 First Street, NE, Washington, DC 20426.

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