by Paul Ciampoli
APPA News Director
Posted March 23, 2020

The Federal Energy Regulatory Commission on March 19 issued a notice of proposed rulemaking (NOPR) that the Commission said would shift the focus in granting transmission incentives from an approach based on the risks and challenges faced by a project to one based on the benefits to consumers.

Section 219 of the Federal Power Act, added by the Energy Policy Act of 2005, directs FERC to develop incentive-based rates for electric transmission.

FERC implemented incentives in Order No. 679, issued in July 2006, and provided additional guidance in a November 2012 policy statement. However, according to the Commission, the ways in which transmission is planned, developed, operated and maintained has change considerably since then, and the current policy may not fully accomplish the intent of FPA section 219.

FERC in March 2019 issued two notices of inquiry (NOI). In the first NOI, the Commission sought comments on possible changes to its electric transmission incentives policy, while in the second NOI, FERC said it was examining 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 (Docket Nos. PL19-3, PL19-4).

The March 19 NOPR addresses many of the issues raised in FERC’s notice of inquiry on transmission incentives.

NOPR would eliminate nexus test

FERC said the NOPR would eliminate Order No. 679’s “nexus test,” which requires applicants to show a connection between the requested incentives and the risks and challenges associated with the project, and instead provide a series of incentives based on economic and reliability benefits (Docket No. RM20-10).

Among the proposed reforms, the NOPR would:

* Increase the ROE adder incentive for joining and remaining a member of a Regional Transmission Organization, an Independent System Operator or other Commission-approved transmission organization from 50 basis points to 100 basis points and make the incentive available regardless of whether that participation is voluntary;
* Provide a 50 basis points ROE adder for transmission projects that meet a pre-construction benefit-to-cost ratio in the top 25 percent of projects examined over a sample period, and an additional 50 basis points for projects that meet a post-construction benefit-to-cost ratio in the top 10 percent of projects studied over the same sample period;
* Afford an ROE adder of up to 50 basis points for projects that demonstrate reliability benefits by providing quantitative analysis, where possible, as well as qualitative analysis; and
* Offer a 100-basis-point ROE incentive for transmission technologies that enhance reliability, efficiency and capacity as well as improve the operation of new or existing transmission facilities.

The NOPR proposes to replace the current policy of limiting incentives to the top of the base ROE zone of reasonableness with a 250-basis-point cap on total ROE incentives.

FERC said this change recognizes that base ROE and transmission ROE incentives serve different functions. In addition to seeking comment on the level of a cap, the NOPR asks whether transmission providers should be allowed, on a case-by-case basis, to seek removal of the zone-of-reasonableness restrictions placed on previously granted incentives and replace them with the hard cap.

The NOPR also proposes to offer utilities incentives for transmission technologies that, as deployed in certain circumstances, enhance reliability, efficiency, and capacity, and improve the operation of new or existing transmission facilities.

“We propose that these technologies will be eligible for both: (1) a stand-alone, 100-basis point ROE incentive on the costs of the specified transmission technology project; and (2) specialized regulatory asset treatment. Further, we propose to give pilot programs a rebuttable presumption of eligibility for these incentives,” FERC said.

The NOPR retains several existing incentives, including those related to construction work in progress and hypothetical capital structures, that FERC said remain vital in removing regulatory barriers and other impediments to transmission investment.

FERC acknowledges transmission infrastructure development has remained generally robust

FERC said that while transmission infrastructure development has remained generally robust at an aggregate level, “the types of transmission projects that are needed, and the use of rate treatments to incent them, must evolve to reflect the changes in market fundamentals.”

Along with the changing mix of resources used to generate electricity, more types of resources are now participating in Commission-jurisdictional markets, FERC said in the NOPR. “Industry innovation and market reforms, demand-side resources, electric storage, distributed energy resources, and new technological innovations provide transmission operators with new opportunities as well as new challenges. There is a need for existing and new transmission facilities to help facilitate integration of these resources and a need to incent development and enhancement of transmission facilities so that they are effective in doing so.”

Additionally, transmission planning has evolved significantly, FERC said. A 2012 Policy Statement to provide additional guidance regarding its evaluation of applications for transmission incentives under FPA section 219 and Order No. 679 was issued less than one month after transmission planning regions submitted their first round of Order No. 1000 regional compliance filings.

All transmission planning regions have now conducted at least two iterations of their regional transmission planning process, with some having conducted as many as seven. FERC noted.

As part of such processes, the six RTOs/ISOs use sophisticated software modeling to identify the relative benefits and costs of proposed new transmission projects premised upon transmission projects’ economic benefits.

“There is now an opportunity for the Commission to leverage the RTOs/ISOs’ efforts to better target incentives at transmission projects that demonstrate sufficient economic benefits, as measured by the degree to which such benefits exceed related transmission project costs,” the NOPR said.

APPA Urges FERC to Consider Transmission Costs

APPA has questioned the need for significant changes to the Commission’s policy for awarding project-specific incentives, arguing that the current framework is generally sound. In comments on the transmission incentive NOI, however, APPA and other commenters urged FERC to revisit a number of “generic” incentives, including the ROE adder awarded to stand-alone transmission companies, or “transcos.” The recent NOPR proposes to eliminate the incentive ROE adder for transcos.

APPA has also asked FERC to ensure that transmission incentive policy changes do not unreasonably increase transmission costs. In August, more than 40 entities including public power utilities, state public utility commissions, state attorneys general, consumer advocates, electric cooperatives, groups representing industrial energy consumers, and other associations 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.

In a letter sent to FERC Commissioners, the entities said that as FERC considers comments filed in response to the NOIs, the Commission should “bear in mind the substantial transmission cost increases borne by customers in many regions of the country in recent years.” The comments on the NOIs “described and documented this sharp escalation in wholesale transmission rates and the concerns it has generated.”

APPA, California Municipal Utilities Association, National Rural Electric Cooperative Association, and Transmission Access Policy Study Group were among the associations that signed on to the letter.

Comments on the NOPR are due 90 days after publication in the Federal Register.