02 April 2019

FERC Opens Inquiry on Improvements to Electric Transmission Incentives Policy

On March 21, 2019, the Federal Energy Regulatory Commission (“FERC” or “Commission”) issued a notice of inquiry (“NOI”) in which the Commission addresses possible improvements to its electric transmission incentives policy.  The NOI requests stakeholder comment on a wide range of issues related to the Commission’s current transmission incentives policies. FERC Chairman Neil Chatterjee said, “as I announced in November, I believe these policies are overdue for a fresh look with input from all stakeholders, not just those that happen to be parties to a pending complaint proceeding.”  The NOI was published in the Federal Register on March 28, 2019.  Comments on the NOI are due on June 25, 2019 and Reply Comments are due on July 25, 2019.

The Energy Policy Act of 2005 amended the Federal Power Act (“FPA”) to add Section 219, which directs FERC to use transmission incentives to help ensure reliability and reduce the cost of delivered power by reducing transmission congestion.  In July 2006, FERC implemented FPA Section 219 by issuing Order No. 679, which established a number of incentive rate treatments, including return on equity (“ROE”) adders to compensate for the risks and challenges faced for a specific project, for forming a transmission-only company, and for joining a regional transmission organization or independent system operator.  The Order also established several risk-reducing incentives, such as allowing the use of hypothetical capital structures and inclusion of 100 percent of prudently incurred costs of abandoned plants in a rate base.  To date, the Commission has acted on 109 incentive applications for more than $80 billion since the Commission issued the Order.

In the news release associated with the NOI, FERC specifically recognized that nearly 13 years have passed since the issuance of Order No. 679, and that since then, there have been a number of significant developments in how transmission is planned, developed, operated, and maintained.  The release reiterates the need for comment on whether and how to improve FERC’s transmission incentives policy in light of recent developments.

Specifically, the NOI examines whether incentives should continue to be granted based on a project’s risks and challenges, or based on the benefits that a project provides.  Additionally, it examines whether transmission incentives could better encourage enhancements to existing facilities and asks how evolving transmission technologies could be more thoughtfully considered in the context of the Commission’s transmission incentives policy.  With respect to transmission incentives that are adders to ROE, the NOI looks at the requirements, level, and design of these incentives, as well as their relationship to the calculation of base ROEs.  With respect to the non-ROE adder, risk-reducing transmission incentives, the NOI examines the design and value of some of these incentives, and whether there may be other potential risk-reducing transmission incentives.

Broadly, the NOI also looks at how FERC should approach granting incentives.  This examination includes whether some incentives should be granted on a generic basis rather than the current case-by-case approach.  FERC also considers whether there should be more analysis of the combinations of incentives and levels of any ROE adders.  Finally, the NOI discusses whether additional structure and guidance regarding the Commission’s approach to the incentive structure should be added to the evaluation process.  A parallel NOI also initiated by FERC on March 21 will examine base ROE.

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