APPA Responds to FERC Proposals on Cybersecurity Rate Incentives

by Paul Ciampoli
APPA News Director
November 17, 2022

The Federal Energy Regulatory Commission (FERC) should reconsider several aspects of a Notice of Proposed Rulemaking (NOPR) on cybersecurity rate incentives including a proposal that would allow a 200-basis point return on equity (ROE) adder on eligible investments, the American Public Power Association (APPA) said in recent comments filed at FERC.

If the Commission allows an enhanced ROE on eligible investments, it should limit the incentive to 50 basis points, as the proposed 200-basis point adder is more than necessary to promote cybersecurity investment and could impose excessive costs on consumers, APPA said in its comments filed this month.

The comments responded to the FERC NOPR issued in September.

At the outset of its comments, APPA noted that it supports prudent utility investment to address the growing cybersecurity threats faced by the nation’s electric grid.  APPA also recognizes that, in adding section 219A to the Federal Power Act (FPA) Congress has directed the Commission to adopt incentive rate treatments (or performance-based rates) to promote certain cybersecurity-related investments. 

“While many features of the NOPR strike an appropriate balance between encouraging cybersecurity investment and protecting customers from unreasonable costs, APPA respectfully submits that certain aspects of the NOPR do not fully comply with the FPA’s requirements for incentive rate mechanisms, which remain fully applicable to any rule promulgated under section 219A.”

APPA urged the Commission to modify certain of the NOPR’s proposals while preserving the features of the NOPR designed to protect customers and ensure transparency.

NOPR Details

Under the NOPR, cybersecurity expenditures would be eligible for an incentive including both expenses and capital investments associated with advanced cybersecurity technology and participation in a cybersecurity threat information sharing program. 

Also, eligible cybersecurity expenditures would be voluntary and have to materially improve the utility’s cybersecurity posture. FERC proposes to establish a pre-qualified list of cybersecurity expenditures that are eligible for incentives that would be publicly maintained on FERC’s website.

The proposed incentives would take two forms: a return on equity adder of 200 basis points, or deferred cost recovery that would enable the utility to defer expenses and include the unamortized portion in its rate base, on which the utility could earn a return (the Regulatory Asset Incentive).

Approved incentives, with certain exceptions, would remain in effect for up to five years from the date on which the investments enter service or expenses are incurred.

Incentives Should Be Narrowly Tailored to Satisfy the Requirements of FPA Section 219A

Along with its concerns about the ROE adder proposal, APPA also said that FERC must ensure that there is a nexus between the incentives and project investment decision.

Such a requirement conforms the Commission’s regulations to precedent requiring the Commission, in awarding rate incentives under the just and reasonable standard, to see to it that the increase is in fact needed, and is no more than is needed, for the purpose, it said.

“Evaluating applications for incentives to ensure that there is a nexus between the incentive and the applicant’s investment decision is also necessary to verify that incentives are not awarded for actions that a utility has already taken or is already required to take,” APPA said.

While Congress has required FERC to adopt a rule providing incentives, the Commission, in designing such incentives, must conform to longstanding requirements for just and reasonable rate incentives, it said.

In considering the design of incentives under FPA section 219A, the Commission should also take into account evidence that lucrative incentives are generally unnecessary to promote cybersecurity investment, APPA argued.

The Commission Should Limit the Regulatory Asset Incentive to 50 Percent of Project Investment

APPA noted that in connection with the Regulatory Asset Incentive, the NOPR asks whether it would be preferable to permit only 50% of incentive-eligible expenses to be treated as regulatory assets.

“APPA encourages the Commission to adopt this change from the NOPR’s proposal to allow the entire qualifying expenditure to be accorded regulatory asset treatment.”

APPA also said that incentives should not be available for investments that utilities are required to make or that have already been made.