FERC proposes to modify plan to revise its transmission incentives policy

April 19, 2021

by Paul Ciampoli
APPA News Director
April 19, 2021

The Federal Energy Regulatory Commission (FERC) proposed to modify a March 2020 plan to revise its electric transmission incentives policy meant to stimulate infrastructure development.

The supplemental Notice of Proposed Rulemaking (NOPR) proposes to codify FERC’s current practice of granting a 50-basis-point increase in return on equity (ROE) as an incentive for utilities that join a transmission organization, but also proposes to limit the duration of the adder.  

FERC currently allows a transmission utility in a transmission organization to collect the ROE adder for as long as the utility remains a member of the transmission organization.  Under the supplemental NOPR, a utility only would be eligible for the incentive for the first three years after the utility transfers operational control of its facilities to the transmission organization (Docket No. RM20-10).

The action took place at FERC’s April 15 monthly open meeting.

The Commission’s March 2020 NOPR had also proposed to increase the incentive for membership in a regional transmission organization (RTO), an independent system operator (ISO) or other FERC-approved transmission organization from 50 basis points to 100 basis points, but the supplemental NOPR proposes to hold the line at 50 basis points. 

The supplemental NOPR would also require utilities that have received the incentive for three or more years to submit, within 30 days of the effective date of a final rule, a compliance filing to eliminate the incentive from its tariff.  

Utilities currently receiving the incentive must either revise their tariffs to eliminate the incentive or to terminate the incentive three years from the date that they turned over operational control of their transmission facilities to a transmission organization.

The supplemental NOPR seeks comment on whether the incentive should be available solely to transmitting utilities that join a transmission organization voluntarily.  If so, the Commission wants to know how it should apply that standard and, in particular, how to determine whether the decision to join was voluntary. Some have challenged the incentive adder in cases where a utility’s participation in a transmission organization is not voluntary, such as where state law requires that a utility participate in a transmission organization.

In comments on the March 2020 proposed rule and an early FERC notice of inquiry, the American Public Power Association had urged FERC to scale back the ROE adder incentive awarded to utilities that participate in transmission organizations.

At FERC’s April monthly meeting, FERC staff estimated that the proposed rule changes could save ratepayers $350 million annually.

Comments are due 30 days after publication in the Federal Register. Reply comments are due 15 days after that.

Chatterjee, Danly dissent

FERC Commissioners Neil Chatterjee and James Danly dissented from FERC’s decision.

Section 219 of the Federal Power Act (FPA) requires FERC to offer incentives to a utility “that joins a Transmission Organization.”  Chatterjee said that the supplemental NOPR “mischaracterizes the plain language” of this provision in order to strip utilities of a transmission organization incentive, “even though the utility RTO/ISO membership has led to substantial consumer benefits and is vital to the energy transition and the development of much-needed transmission in the RTO/ISO regions.”

He said that the supplemental NOPR “does not even attempt to grapple with any of the Commission’s well-reasoned prior holdings. Rather, the majority merely offers a conclusory statement that a new interpretation is reasonable.”

Chatterjee said he could understand the majority’s proposal “to eviscerate the transmission organization incentive if doing so accomplished an important or even articulable policy objective. But the proposal is—bafflingly—contrary to the current Administration’s federal clean energy goals.”

To meet such aggressive goals, “we will need both robust organized markets and an enormous amount of investment in transmission, and we will need to put Americans to work building the grid of the future. If this Commission hopes to run fast toward these energy transition goals, it must not shoot itself in the foot by eliminating the transmission organization incentive,” wrote Chatterjee.

For his part, Danly said it is not FERC’s role to second guess Congress. “It is irrelevant whether the majority ‘believes’ the RTO adder is no longer necessary as an incentive for a utility ‘that joins’ an RTO to stay in the RTO. If the majority or anyone else has a problem with the statute, their sole recourse is through Congress.”

He said that “just as the statutory text is not limited to an incentive for a utility ‘to join’ an RTO, it also is not limited to a utility that ‘voluntarily’ joins a transmission organization. That word does not appear in the statute. I oppose inserting this further limitation into the statutory text.”

Danly also argued that the majority “also fails to consider the effects of its proposed change on utilities that have not yet joined an RTO.”

He said that there are large portions of the country that have no RTO. “Recent events suggest that utilities in these regions are contemplating joining an existing RTO or forming a new one. The Commission should be taking actions to encourage such decisions. Instead, we are proposing to reduce the benefits to utilities that join RTOs based on a strained, erroneous interpretation of the statute.”

Utilities considering RTO participation “are sure to take note not only of the reduction in benefits attendant to RTO participation that the Commission proposes today, but also of the Commission’s willingness to take extraordinary steps to reduce those benefits. This is not the signal we should be sending to utilities that, to date, have resisted RTO participation,” wrote Danly.

Christie offers concurrence

In a concurrence, FERC Commissioner Mark Christie said the Commission “has previously enumerated the benefits of RTO/ISO participation to both public utilities and consumers, so the costs and benefits of such membership are not at issue here. At a time, however, when transmission costs are already a significant and rising part of consumers’ retail bills, ROE adders needlessly burden consumers with substantial additional costs without demonstrable evidence that they actually incentivize the particular action they are aimed at incentivizing.”

He said he agrees with certain commenters that the RTO adder provides an unnecessary windfall with no nexus to utilities’ decisions to join or remain in a RTO.

“It may also be the case that such adders are duplicative of other Commission incentives already granted to public utilities by virtue of their participation in an RTO/ISO,” Christie wrote.

While section 219 of the FPA requires the Commission to provide certain incentives—such as an incentive for joining an RTO/ISO—it also requires that resulting rates continue to be just and reasonable, Christie said.

“As noted by the Delaware Division of Public Advocate and the Office of the People’s Counsel for of the District of Columbia, ‘Congress did not intend for [FPA section 219], or the rules promulgated pursuant to it, to unjustly enrich utilities and RTO members at the customers’ expense.’ I agree.”

He also agrees with the supplemental NOPR’s conclusion that section 219 of the FPA does not require an incentive for RTO/ISO participation to take the form of an ROE adder and with its request for commenters to propose alternative, non-ROE incentives that would qualify under section 219.

“Absent a clear declaration from Congress that a FERC-authorized incentive must take the form of an ROE adder — which it did not require for RTO participation incentives — awarding an ROE adder for any length of time as a “reward” for joining an RTO/ISO may be inconsistent with FPA section 219’s concurrent mandate that rates must be just and reasonable and not unduly discriminatory or preferential,” wrote Christie.

“Because this supplemental NOPR proposes to limit the use of ROE adders for RTO/ISO membership to three years after joining — a welcome first move — I respectfully concur. I look forward, however, to commenters’ responses regarding non-ROE incentives.”

In a recent episode of the American Public Power Association’s Public Power Now podcast, Christie discussed transmission issues.

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