Electricity Markets

FERC urged to keep consumers front of mind with grid changes

As the Federal Energy Regulatory Commission considers possible changes to its electric transmission incentives policy, it is vital that the federal agency consider the possible effects on consumers in the process, a large group of state utility regulators, industrial power customers, public power utilities, consumer advocates and related associations said.

The June 26 initial comments were filed at FERC in response to a notice of inquiry issued by FERC in March. The American Public Power Association signed on to the comments, along with several other parties, which are collectively referred to as “Joint Commenters.”

In the transmission incentives NOI, FERC sought stakeholder comment on a wide range of issues related to the Commission’s transmission incentives policy (Docket No. PL19-3-000).  

Among other issues, the transmission incentives NOI asks whether transmission incentives, rather than being tailored to the risks and challenges of a proposed transmission project, instead should be based on a project’s expected 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 in the form of adders to the return on equity (ROE) that transmission owners are allowed to recover in their rates, 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 Energy Policy Act of 2005 amended the Federal Power Act to add Section 219, which directed FERC to use transmission incentives to benefit consumers by helping 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 an RTO or ISO.

Overall, the Joint Commenters said that the existing framework established under Order No. 679 and a 2012 Policy Statement for evaluating applications for project-specific incentives remains generally sound.

Improvements needed to current framework, group says

“While the Commission’s rules and policies for evaluating project-specific transmission incentive requests are generally appropriate, Joint Commenters recommend a number of improvements to the current framework, designed largely to better harmonize the Commission’s transmission planning and incentive policies,” the Association and the other entities said in their comments in the transmission incentives NOI proceeding.

Joint Commenters also recommended more substantial changes to the Commission’s policies for granting non-project-specific incentives, including the 50 -basis point ROE adder that FERC generally awards to transmission owners that participate in a Commission-approved regional transmission organization or independent system operator.  The Joint Commenters also challenged FERC’s policies for granting ROE adders to transmission-only companies, or Transcos. The ROE adders for RTO/ISO participation and for Transcos should be eliminated entirely, or at least substantially reformed, the Joint Commenters argued.

The Joint Commenters said that if the Commission maintains some form of Transco incentive, it should only be available to entities that are fully independent of market participants, and the incentive should not apply to assets acquired by Transcos.

“Where such changes are needed to the Commission’s incentive rate policies, it is because the current approach does not adhere to the requirements of FPA section 219 and well-established principles governing just and reasonable incentive rates, including that incentives must benefit consumers, must not be more than necessary to encourage the desired outcomes, and must not be awarded to encourage actions that utilities are already obligated to take.”

The Joint Commenters argued that FERC’s current rules and policies for RTO participation adders and incentive adders for Transcos “do not adhere to the applicable statutory and judicial requirements for incentive rates, and to the extent that these generous ROE adders were ever justified, they are no longer supportable in their current form.”

Transmission investment is on the rise

Meanwhile, the Association and the other commenters said that there is no demonstrable need to liberalize the Commission’s basic approach to considering project-specific incentives – particularly ROE adders – to promote transmission investment at this time. 

The Joint Commenters noted that the incentive rate provisions of FPA section 219 were enacted in 2005 in response to a long decline in transmission investment. But this decline in investment “has been arrested and reversed in the nearly fourteen years since the Energy Policy Act of 2005 went into effect.”

They went on to say that industry statistics indicate that investment in transmission facilities has been at record levels in recent years, suggesting that transmission owners are not forgoing transmission development opportunities for want of more robust incentives. 

Impact on customers

The Association and the other parties said that the increase in transmission investment in recent years has caused a corresponding rise in the transmission costs paid by customers in many regions of the country.

“These transmission cost increases have imposed a significant burden on consumers, and the Commission should not add to this burden by making it easier for applicants to receive incentives, particularly return-enhancing incentives, that are not needed to promote beneficial transmission development.”

Indeed, a recurring theme in the parties’ transmission incentives NOI comments is the need for FERC to keep consumers front of mind as the agency mulls possible transmission incentive changes.

For example, the Joint Commenters said that if the Commission were to change its rules and grant incentives based on an “expected benefits” or “project characteristics” approach, it should condition any approval of project-specific incentives upon:

  • The project being approved in the regional transmission planning process;
  • The submission of evidence demonstrating that there is a causal relationship between each incentive sought and the consumer benefits to be derived from that incentive; and
  • A demonstration through a cost-benefit analysis that the benefits to be gained by consumers materially exceed the costs of the requested incentives.

Also, as part of its application for an incentive, a public utility should be required to submit a measurement and verification plan designed to track and quantify the consumer benefits generated by its project as well as compare actual data against the projections included in the initial application, the Association and the other commenters said.

Other key positions

Other key positions staked out by the Joint Commenters are as follows:

  • Eliminating the Commission’s current requirement to show that incentives are needed to address the risks and challenges of a particular project would not comply with FPA section 219;
  • The Commission should consider requiring approval of a project in a Commission-approved regional transmission planning process as a prerequisite for receiving incentive rate treatment under FPA section 219;
  • FERC should reconsider its policy of pre-authorizing incentives for yet-to-be-formed affiliates;
  • The Commission’s suggestion that it might grant incentives based solely on the “expected benefit” of a project or a project’s “characteristics” would not comply with FPA section 219 and would conflict with the Commission’s regional planning rules and policies; and
  • Regardless of any changes to the Commission’s general framework for evaluating applications for project-specific benefits, the Commission should continue to evaluate incentives on a case-by-case basis; there should be no “automatic” awarding of incentives, even for projects approved in a regional transmission planning process.

Joint Commenters also call for elimination of 50-basis point ROE adder for RTO/ISO Membership

In calling on FERC to eliminate the 50-basis point ROE adder granted for joining an RTO/ISO or remaining a member of an RTO/ISO, Joint Commenters argued that transmission owners in RTO/ISO regions derive benefits from their RTO/ISO participation, making it unnecessary to give them an ROE adder to encourage participation.  If the Commission does not eliminate the adder altogether, Joint Commenters said, the adder should phase down over time to reflect the distinction between an incentive to encourage joining an RTO/ISO and one for voluntarily remaining an RTO/ISO member.

Also, project-specific ROE adders should sunset after 15 years, unless, prior to the sunset date, the Commission makes a determination that the adder is no longer needed or effective, the Joint Commenters said.

Base ROE NOI

The Association also joined with other parties in submitting comments on June 26 to FERC in response to a separate NOI that was issued the same day as the transmission incentives NOI.

The Association was joined in these comments by the National Rural Electric Cooperative Association, the Electricity Consumers Resource Council, the Transmission Access Policy Study Group, the Aluminum Association, the American Chemistry Council, the American Forest & Paper Association, and the Industrial Energy Consumers of America.

The second NOI sought 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.

FERC sought 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, in a number of areas.

For example, it sought comments on the role of the Commission’s base ROE in investment decision-making and what objectives should guide the Commission’s approach and whether uniform application of FERC’s base ROE policy across the electric, interstate natural gas pipeline and oil pipeline industries is appropriate. 

Base ROE objectives

In their comments, the Association and the other parties said that “it is worth taking a step back to identify the objectives that should frame review and adjustment of base ROEs. These objectives should not be controversial.”

The groups said that base ROEs should be set at, and adjusted to stay attuned to, the cost of equity, as that cost rises or falls over the years and that the approach used to estimate the cost of equity should achieve reasonably consistent and predictable results across cases and over time.

The parties also said that the approach used to identify the cost of equity should be designed to do that specific job well; FERC should not modify its base ROE policy with an eye toward increasing returns for policy purposes.

“Base ROEs (which apply to utilities’ entire rate bases, including facilities built long ago) should not be distorted in pursuit of policy goals related to providing incentives for new construction or other initiatives,” the groups said.

“Rather, those policy goals should be addressed through explicit, tailored, and explicitly justified incentives. And the approach used to determine base ROEs should not be distorted in an effort to produce ranges that have a desired effect in allowing or cabining incentive ROE adders.”

Reliance on the DCF Method

FERC has historically established base ROEs using the discounted cash flow (DCF) method.  The groups said that the DCF model performs well across wide variations in interest rates and stock prices and that the Commission’s longstanding composite-growth DCF model remains appropriate for electric utilities. If it were to be reconsidered, the Commission could apply a multi-stage model, the groups said.

Addressing FERC’s proposal in the NOI to calculate base ROEs using other techniques in addition to the DCF model, the associations argued that other methods should be used “if but only if doing so promotes accurate and predictable equity cost estimation. It also means that practices that were adopted to deal with past case-specific situations should be discarded if they are no longer useful.”

The groups said that an approach that meets these objectives will advance the Commission’s primary mission of keeping regulated rates cost-based and produce a host of other benefits.

“If the ROE determination method is sound, it will produce similar results over time, absent a substantial change to financial market conditions or to the riskiness of the subject utility. Consequently, absent such changes, neither regulated entities nor potential complainants would find it worthwhile to seek to change an existing allowed ROE. And if they did, by producing consistent and predictable results, a well-designed approach will promote settlement and otherwise enable more rapid resolution of ROE litigation.”

Also, a well-designed approach would keep the focus of ROE litigation on issues that will be instructive for subsequent cases, rather than on one-off controversies such as whether particular companies belong in the proxy group for a particular case, the commenters told FERC.

The groups also responded to many of the specific technical questions that FERC included in the NOI regarding its base ROE policies.