Electricity Markets

FERC urged to stick with current transmission incentive approach

A move by the Federal Energy Regulatory Commission to scrap or alter its current approach to transmission project-specific incentives in favor of a framework intended to advance certain categories of benefits would run afoul of legal requirements and likely interfere with the regional transmission planning processes the Commission has sought to promote, a large group of a large group of state utility regulators, industrial power customers, public power utilities, consumer advocates and related associations said.

The Aug. 26 reply comments were submitted to FERC in an electric transmission incentives notice of inquiry proceeding (PL19-3).

FERC in March issued two NOIs, the first in which it sought comments on possible changes to its electric transmission incentives policy, and one in which FERC is examining whether, and if so how, to revise its policies on determining the allowed return on equity (ROE) used in setting rates charged by utilities it regulates (Docket Nos. PL19-3, PL19-4).

The American Public Power Association and other parties submitted initial comments in the transmission incentives proceeding on June 26. In those comments, the Association and the other parties said that as FERC 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.

Now, this same group of entities, with the addition of the Kansas Corporation Commission, has returned to FERC to respond to proposals made by other power industry participants in the NOI proceeding.

FERC’s “risks and challenges” approach should remain in place

One of the key points made by the American Public Power Association and the other entities is that FERC’s existing “risks and challenges” framework remains appropriate for evaluating project-specific incentive requests, which is a point they also emphasized in their initial comments.

By requiring that applicants for project-specific incentives demonstrate that the total package of incentives is tailored to address the demonstrable risks or challenges faced by the applicant, the Commission’s rules help ensure that incentives appropriately target impediments to beneficial transmission investment, the parties said.

They told FERC that eliminating or modifying the current approach in favor of an “expected benefits” or “project characteristics” framework in an effort to promote certain categories of benefits would not only be inconsistent with the Federal Power Act, it would also “likely interfere with the regional transmission planning processes the Commission has sought to promote.”

Rather than modify its policies for awarding project-specific incentives, “the Commission should assess whether, and, if so, why, transmission planning processes may not always produce the most beneficial and cost-effective projects, as the Commission’s rules and policy contemplate.”

In addition, with a 2012 FERC policy statement’s emphasis on risk mitigation, including the expectation that applicants would use risk-reducing incentives prior to seeking an incentive ROE adder, the Commission’s current incentive approach strikes an appropriate balance between consumer and investor interests, the parties said.

 The group also pointed to figures showing that transmission investment has been robust in recent years as evidence that a new incentive approach is not necessary.  “Certainly the evidence cited in the initial comments does not show that transmission owners and developers are withholding investment for want of more lucrative incentives, particularly revenue-enhancing incentives,” the American Public Power Association and the other parties went on to say.

A benefits approach falls short

A number of the comments urging the Commission to move away from the current risks and challenges framework in favor of some form of a “benefits” approach are grounded, to a significant degree, in concerns that the regional and interregional planning processes have been unsuccessful in consistently identifying the most beneficial and cost-effective transmission projects.

“While Joint Commenters are sympathetic to concerns that Commission-approved transmission planning processes may not always result in the identification of the most beneficial transmission projects (or non-transmission alternatives), it would not be appropriate for the Commission to adopt changes to its policies for project-specific incentives in order to address deficiencies in the planning or cost allocation process.”

They noted that the mandatory regional planning processes required by FERC Order No. 1000 are intended to ensure that the more efficient or cost-effective solutions are identified to address regional transmission needs.  Moreover, FERC expressly adopted the transmission planning reforms in Order No. 1000 to help ensure investment in the “right transmission facilities” as the industry evolved.

Therefore, “a properly-functioning regional planning process should already be identifying the more efficient or cost-effective projects to ensure reliability and reduce the cost of delivered power by reducing transmission congestion, as commenters observed.

Joint Commenters continue to oppose RTO/ISO membership incentive adders

The Joint Commenters said that they continue to oppose retention of the ROE incentive adders for independent transmission companies and for membership in a Regional Transmission Organization or Independent System Operator.

In addition, they said that FERC should also reject arguments that 100 percent recovery of construction work in progress and/or abandoned plant costs should be awarded automatically or adopted as a general Commission ratemaking practice. “These incentives should be reserved for projects that face identifiable risks and challenges that the incentives may help address.”

And the Commission should not modify its incentive policies to allow public utilities (non-municipal utilities) to capitalize certain operation and maintenance costs, such as vegetation management costs and communication/cybersecurity expenses. 

“If public utilities incur expenses that they believe are in the nature of capital costs, they may propose such rate treatment for the Commission’s review.”

FERC should also limit the duration of incentives, including limiting project-specific ROE adders to no more than fifteen years, the Joint Commenters said, reiterating a point they made in their initial comments.

“Nothing in FPA section 219 requires incentives to be continued for any particular length of time, and, from the Commission’s initial adoption of incentive rules in Order No. 679, the Commission contemplated that incentives could be of limited duration and subject to meeting identifiable metrics.”

Letter urges FERC to keep transmission costs at a reasonable level

Meanwhile, in recent related news, in an Aug. 23 letter to FERC Commissioners, more than 40 entities – including the American Public Power Association -- said that against the backdrop of increasing transmission costs, FERC should strive to ensure that those costs remain at a reasonable level for consumers as it weighs possible changes to its transmission incentives and ROE policies.

The parties emphasized their collective concern about increasing transmission costs and encouraged the Commission to remain mindful of this concern as it weighs its transmission incentives and ROE policies.