The Federal Energy Regulatory Commission on March 21 issued two notices of inquiry (NOI) in which the Commission seeks comments on possible improvements to its electric transmission incentives policy and opens an examination of whether, and if so how, to revise its policies on determining the return on equity (ROE) used in setting rates charged by utilities it regulates.
FERC Commissioners acted on the NOIs at the Commission’s monthly open meeting at its headquarters in Washington, D.C.
“Today, we are initiating two inquiries that I’ve been keen to begin,” said FERC Chairman Neil Chatterjee. “A broad look at our return on equity policies and an examination of our transmission incentives policies,” he said.
“As I announced in November, I believe these policies are overdue for a fresh look with input from all interested stakeholders, not just those that happen to be parties to a pending complaint proceeding,” Chatterjee said.
Transmission incentives NOI
The Energy Policy Act of 2005 amended the Federal Power Act (FPA) to add Section 219, which directs FERC to use transmission incentives to help ensure reliability and reduce the cost of delivered power by reducing transmission congestion.
In July 2006, FERC implemented FPA Section 219 by issuing Order No. 679, which established a number of incentive rate treatments, including ROE adders to compensate for the risks and challenges faced by a specific project, for forming a transmission-only company, or for joining a regional transmission organization or independent system operator.
Order No. 679 also established several risk-reducing incentives, such as allowing the use of hypothetical capital structures and recovery of 100 percent of prudently incurred costs of abandoned projects .
The transmission incentives NOI requests stakeholder comment on a wide range of issues related to the Commission’s transmission incentives policy (Docket No. PL19-3-000).
For example, the NOI asks whether transmission incentives, rather than being based on the risks and challenges of a proposed transmission project, instead should be based on a project’s benefits. It also examines whether transmission incentives could better encourage enhancements to existing facilities and asks how evolving transmission technologies could be more thoughtfully considered in the context of the Commission’s transmission incentives policy.
With respect to transmission incentives that are adders to ROE, the NOI looks at the requirements for, the level of, and the design of these incentives, as well as their relationship to the calculation of base ROEs.
With respect to non-ROE adder, risk-reducing transmission incentives, the NOI examines the design and value of some of these incentives, and whether there may be other potential risk reducing transmission incentives.
The NOI also looks at how FERC should approach granting incentives, including whether some incentives should be granted on a generic basis rather than the current case-by-case approach; whether there should be more analysis of the combinations of incentives and levels of any ROE adders; and whether additional structure and guidance regarding the Commission’s approach should be added to the evaluation process.
NOI on ROEs
The second NOI seeks information and stakeholder views regarding whether, and if so how, the Commission should modify how it determines the ROE to be used in designing jurisdictional rates charged by “public utilities,” as well as interstate natural gas and oil pipelines (Docket No. PL19-4-000).
FERC refers to electric utilities it regulates as “public” utilities; however, these are not municipal utilities, but rather investor-owned utilities.
The NOI follows the U.S. Court of Appeals for the District of Columbia Circuit’s decision in Emera Maine v. Federal Energy Regulatory Commission, reversing and vacating Opinion No. 531.
In Opinion 531, the Commission adopted a two-step discounted cash flow (DCF) approach to calculate the base ROE for electric utilities.
The court held, among other things, that the Commission inadequately justified its decision under section 206 of the FPA to set the New England Transmission Owners’ ROE at the midpoint of the upper half of the zone of reasonableness produced by its two-step DCF analysis.
FERC is seeking comment on potential modifications to its approach to determining a just and reasonable base ROE for public utilities, as well as interstate natural gas and oil pipelines.
The Commission is seeking comments on the following topics:
- The role of the Commission’s base ROE in investment decision-making and what objectives should guide the Commission’s approach;
- Whether uniform application of FERC’s base ROE policy across the electric, interstate natural gas pipeline and oil pipeline industries is appropriate;
- The performance of the DCF model;
- The composition of proxy groups;
- The financial model choice;
- The mismatch between market-based ROE determinations and book-value rate base;
- How the Commission determines whether an existing ROE is unjust and unreasonable under the first prong of FPA section 206; and
- The mechanics and implementation of the models.
Commissioners comment on NOIs
“The policies we put in place for transmission today will have a huge impact on shaping the grid of tomorrow,” Chatterjee said.
“Given the complexity and scale of building new transmission projects, the decisions my colleagues and I make now will have impacts for decades to come,” he said.
“What all this boils down to is the fact that getting these policies right will be critical to ensuring that the energy revolution we’re currently undergoing results in more reliable services and lower prices for customers,” the FERC Chairman went on to say.
“To that end, I think the two NOIs we are issuing today are an important step towards getting our transmission policies right,” Chatterjee said.
He believes that the transmission incentives NOI “really tees up the question of what kinds of transmission projects does the Commission want to incent. In particular, I think it asks very important questions about whether the Commission should be focused on incentivizing projects with risks and challenges or thinking more broadly about the reliability and economic benefits that transmission projects can provide.”
Commissioner Cheryl LaFleur said that with respect to the transmission incentives NOI, “I believe it’s a good time to take a fresh look at our incentives policies” to see if reforms are needed to better align FERC’s policies with the goals set forth in Section 219 of the FPA.
“At bottom, Section 219 was by its very terms intended to help attract investment in transmission needed to serve customers and we should be vigilant that the Commission’s policies accomplish those objectives while ensuring just and reasonable rates,” she said.
Commissioner Richard Glick said that “both of these NOIs reflect the healthy tension that exists with regard to the Commission’s transmission policies.”
On the one hand, FERC wants to encourage investments in transmission that can produce important benefits such as greater reliability and reduced congestion, among other things, he noted.
“On the other hand, we have a responsibility under the Federal Power Act to ensure that transmission rates do not exceed just and reasonable rates,” Glick said.
“In other words, we want to provide the right investment environment for companies seeking to build transmission or improve the efficiency of their existing facilities, but we don’t want these companies to charge excessive rates.”
Glick said that he is particularly interested in “seeing some of the comments submitted on our incentive policy. As everyone knows, Section 219 of the Federal Power Act authorizes the Commission to grant transmission owners certain incentives. But it is not clear to me that, in some cases, that the incentives that we are handing out are actually incenting anything.”
He said that if “we are going to design the right approach, we need to be reasonably certain the incentives are necessary or whether the investments in question would occur anyway. In other words, we shouldn’t be handing out what some people refer to as FERC candy, without actually achieving something beneficial in return.”
Deadline for comments
Initial comments on the NOIs will be due 90 days after the date of the NOI’s publication in the Federal Register. Reply comments will be due 120 days after the date of publication in the Federal Register.
The NOI proceedings will likely address a number of issues that were the subject of a resolution approved by American Public Power Association members at the Association’s Legislative Rally in Washington, D.C., in late February.
In the resolution, the Association urges FERC to implement and enforce transmission planning, cost recovery, and incentive policies to contain rising transmission costs.
