Transmission incentives are over-used, APPA and others tell FERC

    The Federal Energy Regulatory Commission has been too generous in approving incentives for new transmission, APPA and a broad-based coalition told the Federal Energy Regulatory Commission Sept. 12. The resulting higher rates have led to hundreds of millions of dollars in excessive rates paid by consumers, APPA and the others said.

    The commission has approved rates of return on equity adders and other incentives for transmission projects that should have been constructed without incentives, APPA and the others said. These projects were necessary to maintain reliability and sometimes contractually required to assure that utilities meet their obligation to serve customers, they said.

    The association submitted comments with more than two dozen other organizations in FERC Docket RM 11-26, a notice of inquiry inviting comment on the use of rate incentives to promote construction of new transmission. Joining APPA on the comments (posted on were state regulators, state consumer advocates, industrial customer groups and other public power associations and utilities. Many of the organizations were part of an ad hoc group that filed comments jointly with APPA a year ago to urge FERC to examine its transmission rate incentives policy.

    FERC’s authority to award rate incentives does not supersede its obligation under the Federal Power Act to assure that rates are just and reasonable, the commenters said. They identified eight specific cases in which the approved rates in their view exceeded that statutory threshold.

    The commission has routinely awarded incentive rates to projects contained in regional transmission plans developed by regional transmission organizations. While acceptance in a regional plan should be a necessary condition for incentive rate treatment, many projects in RTO plans are routine and should not automatically qualify for incentive rates, APPA and the others said.

    The commenters also noted that high rates of return on transmission projects might be skewing utilities’ investment decisions away from distribution in favor of transmission as utilities allocate limited dollars for capital investment.

    FERC must pay closer attention to the approved returns on equity in a weakening economy, the commenters said. State regulators have reduced rates of return, while the commission has not. Lower returns for retail services already enhance the attractiveness of transmission investment, the commenters said. Adding incentive rates on top of already-generous wholesale rates unreasonably inflates transmission revenue requirements, they said.

    The commission should not allow the collection of incentives, such as adders to return on equity, on transmission project cost overruns, the commenters said.

    Incentive rates are appropriate when used to reduce the risk surrounding transmission projects that are needed to alleviate congestion in load pockets, the commenters said. Application of incentives should be far more measured than has been the case to date, they said. The simple fact that landowners or state regulators are challenging siting of a transmission line should not immediately qualify a project for rate enhancements, the commenters said. The commission should use other risk-reducing measures (such as construction work in progress, recovery of abandoned plant or recovery of development costs) before turning to incentive rates, APPA and the others said. Rate incentives should be used only after those measures prove insufficient, and should not be coupled with risk-reduction incentives.

    The commenters also urged the commission to do more to encourage joint ownership of new transmission lines, as this would go far to reduce risks of a new project for any single entity. They said the commission should require all applicants for incentive rates to demonstrate that they have considered joint ownership and to explain why joint ownership would be infeasible or inadequate to overcome risks related to building a new transmission line.


From September 19 issues of Public Power Weekly