Electricity Markets

FERC must keep electricity transmission costs reasonable and fair to all

In some regions, particularly those with regional transmission organizations and independent system operators, electricity transmission costs have risen significantly in the past several years, imposing a significant burden on transmission customers, including public power utilities.

The Edison Electric Institute projects that investor-owned utilities and standalone transmission companies will invest a record $23.7 billion in transmission assets in 2018. This figure is approximately 15 percent more than the 2016 transmission investment ($20.6 billion), and nearly double the level of investment just seven years ago ($12.0 billion). An analysis prepared by the Brattle Group confirms this sharp increase in transmission spending in recent years, calculating that investments by transmission owners from 2013 to 2017 exceeded $70 billion in the RTO and ISO regions alone.

While much of this transmission investment is for legitimate reasons such as accommodating new renewable generation and upgrading aging infrastructure, the American Public Power Association urges the Federal Energy Regulatory Commission to adopt and enforce policies that support reasonable transmission rates.

For example, FERC should ensure that proposed transmission projects receive adequate scrutiny in regional transmission planning processes and that the authorized equity returns included in cost-based transmission rates are not excessive. The Brattle Group study found that nearly half of the 2013-2017 transmission investment in RTO and ISO regions was not subject to the full RTO/ISO regional transmission planning process. An open and transparent planning process helps ensure that proposed transmission infrastructure is truly needed and will benefit customers. And getting needed transmission built should not require piling additional incentives on top of already generous returns.

The Association is closely following recent FERC pronouncements regarding the Commission’s policies on allowed equity returns and transmission incentives. 

In an October 16, 2018 order, FERC proposed a new approach for calculating the allowed return on equity (ROE) to be included in the rates of transmission owners in ISO-New England.  Application of this new approach could result in higher allowed ROEs and could increase the level of incentive ROE that transmission owners are permitted to collect.  At its November open meeting, FERC directed that this new approach be considered in other pending proceedings.

Chairman Chatterjee also announced at the November meeting that the Commission intends to consider whether it should make additional changes to both its calculation of base ROEs and its long-established policies on transmission incentives. Chairman Chatterjee said that FERC’s incentive policies were overdue for a “fresh look,” with input from all interested stakeholders, not just those involved in the pending ROE proceedings. He said it was “high time” to see if the Commission’s ROE and incentive policies are producing “the level and type of transmission investment the nation needs.”

As FERC undertakes this review, the Association urges the Commission to adhere to its statutory obligation under Federal Power Act sections 205 and 206 to ensure that transmission rates are just and reasonable and not unduly discriminatory and preferential. For an incentive rate to meet this standard, the costs of the incentive must not outweigh the expected benefits. Incentives must be carefully designed to encourage the desired behavior, and not be greater than what’s needed to achieve the desired result. FERC must abide by the long-standing principle that the level of return follows the level of risk.

While it’s important for transmission owners to earn a fair rate of return on their investments in infrastructure, many are receiving overly generous returns of 10 to 12 percent. Rates of return should reflect actual market risks and not have the unintended consequence of encouraging building or over-building just to generate revenue. Return on equity rates must reflect current economic conditions, and any additional incentives must be awarded judiciously and only as needed to promote beneficial transmission investment.

FERC must support policies and rates that get needed transmission built in a way that reduces overall costs to consumers.