APPA Warns of Spike In Transmission Costs If FERC Incentive Proposals Are Adopted

by Paul Ciampoli
APPA News Director
Posted July 1, 2020

If adopted, transmission incentive changes proposed by the Federal Energy Regulatory Commission in a Notice of Proposed Rulemaking (NOPR) are likely to hike transmission costs without any assurance of commensurate benefits for consumers, the American Public Power Association said on July 1.

Moreover, given that transmission development in the U.S. has been strong in recent years, FERC has fallen short in justifying the need for significant reforms to its transmission incentive policies, APPA said in response to the NOPR (Docket No. RM20-10).

In the NOPR, which was issued in March, FERC proposed substantial changes to its regulations and policies governing the award of transmission incentives under section 219 of the Federal Power Act (FPA).

As a threshold matter, APPA noted that it supports prudent investment in the country’s transmission infrastructure for the benefit of consumers. “Prudently planned and constructed transmission facilities can increase supply options, reduce congestion-related costs, integrate renewable resources, and promote grid reliability. APPA supports reasonable Commission policies that promote such beneficial transmission investment.”

No compelling reason to change existing approach

APPA said that FERC’s existing approach to evaluating project-specific incentive applications is generally sound and argued that the NOPR identifies no compelling reason to change. The current incentive framework was established in Order No. 679 and subsequent orders.

In the years since the Commission issued Order 679, and particularly since a 2012 Policy Statement was released, transmission investment has grown significantly, “and the NOPR provides no evidence that investment is being withheld for lack of incentives under FERC’s current policies,” APPA said.

“It is important to note, moreover, that the increase in transmission investment in recent years has resulted in substantial increases in transmission rates in some regions, and this trend is expected to continue.”

APPA pointed out that the Energy Information Administration’s 2020 Annual Energy Outlook projects that rising transmission and distribution costs will offset much of the projected decrease in generation costs through 2050.

“These transmission cost increases impose a significant burden on public power utilities and the customers they serve. In considering proposed changes to its transmission incentives, the likelihood of increased cost burden on transmission customers should be a principal consideration, consistent with FPA section 219,” APPA told FERC. “Unfortunately, most, if not all, of the new incentives proposed in the NOPR fail to adequately ensure that the additional costs that would be imposed on consumers would be justified by commensurate consumer benefits.”

NOPR has a number of significant flaws

APPA said that the NOPR suffers from a number of significant flaws that should prompt the Commission to reconsider most of the proposed policy changes.

As a threshold matter, the NOPR does not justify the need for significant reforms to its incentive policies, APPA argued.

“The Commission specifically acknowledges that transmission development has been ‘robust’ in recent years. There is no empirical evidence cited in the NOPR demonstrating that the current incentive framework is ineffective in promoting transmission investment in accordance with the dictates of FPA section 219, and, in fact, the Commission acknowledges that it is has insufficient information to gauge the effectiveness of its current policies.”

While FERC asserts that the types of transmission projects and the incentives needed to promote them must evolve in response to industry changes, “the NOPR never draws a rational connection between the proposed incentives and the new types of projects the Commission claims are needed.”

Even if the Commission is correct that new “types” of transmission are needed, the proposed incentives are largely aimed at “low-hanging fruit” projects that are – or should be – identified in the regional planning processes already, APPA went on to say.

APPA questions proposal to shift to a “benefits-based” system

APPA also took issue with the Commission’s proposal to eliminate the nexus requirement and shift to a “benefits-based” system.

Such a move “runs afoul of the requirements of FPA section 219,” APPA said. It pointed out that Section 219 of the FPA requires FERC to adopt certain transmission incentives for the purpose of benefitting consumers by ensuring reliability and reducing the cost of delivered power by reducing transmission congestion.

But this obligation is coupled with the overarching requirement that incentive rates under FPA section 219 must be just and reasonable and not unduly discriminatory or preferential.

Project benefits are necessary, but not sufficient, to satisfy the requirements of FPA section 219 for granting transmission investment incentives, the public power group said.

The current “risks and challenges” framework for project-specific incentives was designed to ensure that there is a nexus between the total package of incentives sought and the demonstrable risks or challenges faced by the applicant in undertaking the project, APPA pointed out.

Joint ownership of transmission facilities

Of particular concern to APPA and its public power utility members, the NOPR makes no reference to promoting joint ownership of transmission facilities by non-public utilities, even though the issue was squarely raised in a prior notice of inquiry and addressed by APPA and other parties.

The Commission has consistently recognized the benefits of joint ownership of transmission facilities, and, in particular, has encouraged the participation of non-public utilities in jointly owned projects, including through the 2012 Policy Statement.

“If the Commission proceeds with a final rule based on the NOPR, it should continue to promote joint ownership of transmission facilities by, at a minimum, applying heightened scrutiny to incentive requests for any project for which joint ownership arrangements may have been feasible but were not pursued,” APPA argued.

FERC should not double the RTO Adder

APPA was harshly critical of FERC’s proposal to “double down” on the current equity return bonus that transmission owners get for participating in regional transmission organizations and independent system operators. The proposed rule would double the return on equity adder from 50 to 100 basis points, and would award the adder even if a utility is required to participate in an RTO/ISO by state authorities or other legal requirement.

The “NOPR offers no reasonable basis for simply doubling the current standard RTO participation adder,” APPA said, arguing that the proposed rule failed to establish that the substantial increase in costs that doubling the RTO/ISO participation bonus would be justified by any increased customer benefits. “The NOPR cites no evidence that an increase to the adder is necessary to encourage new, let alone continued, RTO/ISO participation,” APPA added.

APPA also contended that awarding the adder for non-voluntary participation in RTOs/ISOs would be “a departure from the bedrock principle for granting incentives (i.e., of inducing action that is not otherwise required).”

APPA outlines recommendations to FERC if it proceeds with NOPR incentive proposals

If the Commission chooses to proceed with the incentive proposals in the NOPR, APPA offered a number of recommendations including, among other things:

* Transmission incentives should be restricted to projects evaluated and approved in a full Commission-approved regional transmission planning process under Order No. 1000;
* An entity seeking a project-specific transmission incentive should be required to demonstrate that there is at least a rational relationship between each incentive sought and the decision to invest in the transmission project;
* The Commission should require a clear demonstration through a cost-benefit analysis that the quantifiable benefits to consumers from a project materially exceed the incremental costs of the requested incentives; and
* Parties to proceedings in which project-specific incentives are proposed must have full access to all information and analysis on which the claims of benefit are based, including analyses conducted by RTOs and ISOs, and an opportunity to evaluate and challenge benefit claims. The risk of being unable to substantiate a claimed benefit-cost outcome must be on the applicant.

APPA also makes several recommendations related to return on equity (ROE) adders.

It said that project-specific ROE adders should sunset after no more than 15 years. A shorter time frame could be applied in particular circumstances if, prior to the sunset date, the Commission makes a determination that the adder is no longer needed or effective.

APPA also argued that project-specific ROE adders should be limited to the cost of the project used in the application to demonstrate project benefits.

Also, any basis point cap on ROE adders should be set at 150 basis points, and total ROE adders should be limited to the lower of this basis point cap or the top end of the zone of reasonableness, it said.