FERC, in an order issued Oct. 14, granted a lower-than-requested base return on equity (ROE) of 9.93% for the proposed approximately 420-mile, 765-kV Reliability Interregional Transmission Extension Project.
American Electric Power (NYSE:AEP), Commonwealth Edison, Electric Transmission America and RITELine Transmission Development, which involves ETA and Exelon (NYSE:EXC) subsidiary Exelon Transmission Company, are developing the approximately $1.6bn project, which will strengthen the transmission system in Illinois, Indiana and Ohio.
The project will include five 765-kV substations and other transmission facilities and is expected to allow the integration of about 5,000 MW of additional renewable generation. The project is expected to be in service about five to six years after obtaining regional transmission expansion plan (RTEP) approval by PJM Interconnection, FERC added.
In July, RITELine Illinois and RITELine Indiana filed an application seeking acceptance of a formula rate and approval of rate incentives for the project.
The RITELine Companies requested several transmission rate incentives, including an overall ROE of 12.7%, but noted that they could support an incentive ROE of 13.2%, which includes a base ROE of 10.7% plus ROE adders of 50 basis points for regional transmission organization participation; 50 basis points for using advanced transmission technology; and 150 basis points to compensate for the risks and challenges associated with investing in new transmission.
FERC said it will grant the requested 50-basis-point RTO adder provided that the project is included in the PJM RTEP, the RITELine Companies take all necessary steps to turn over operational control of the project to PJM, and the companies become participating transmission owners.
FERC also said it denies the request for a separate advanced technology incentive adder of 50 basis points for using a six-conductor bundle along with trapezoidal stranded conductors in the project, noting that both of the technologies for which the companies seek a stand-alone advanced technology incentive adder are in use and have been for some time.
Furthermore, FERC said it will grant a 100-basis-point adder for the risks and challenges of the project, conditioned upon the project being included in the PJM RTEP, noting that the project faces numerous risks and challenges, including obtaining rights-of-way through several counties without the benefits of a state siting process.
However, FERC said it is reducing the companies’ requested 150-basis-point adder to 100 basis points in light of the total package of incentives conditionally granted.
With regards to ROE, FERC said that while the 25 companies identified by the RITELine Companies are an appropriate starting point for developing a proxy group that reflects comparable risks, the RITELine Companies improperly left in the high-end cost of equity for PPL (NYSE:PPL) when setting the appropriate reasonableness zone.
“[W]hen we eliminate the high-end ROE for PPL Corporation, we determine that the appropriate zone of reasonableness for the RITELine Companies is 7.15% to 13.65%,” FERC said. “The resulting midpoint and median are 10.40% and 9.93%, respectively.”
FERC said it grants a base ROE of 9.93%, noting that this base ROE, combined with the incentive ROE adders that are conditionally granted, produces an overall ROE of 11.43%. The commission directed the companies to make a compliance filing within 30 days of the order’s date that revises their formula rate.
FERC also said it will grant the companies’ request to include 100% of construction work in progress (CWIP) in rate base, as well as their request for recovery of 100% of prudently incurred costs associated with abandonment of the project if such abandonment results from factors beyond the companies’ control, conditioned that the project be approved in the PJM RTEP.
With regard to formula rate, FERC said the RITELine Companies cannot assess charges to customers until the project is included in the PJM RTEP and PJM includes the formula rate and protocols in its tariff. “We will accept the RITELine Companies’ proposal to implement a formula rate with modifications to the protocols, to become effective October 17,” FERC said.
The companies also proposed to reflect in the formula rate a hypothetical capital structure of 45% debt and 55% equity until long-term financing is obtained and the project begins commercial operation, saying that this capital structure will result in a more predictable and steady cash flow stream from formula rate revenues and support the companies’ efforts to obtain at least BBB investment grade quality.
FERC said it grants that request until any part of the project achieves commercial operation, conditioned upon the project being included in the PJM RTEP. Once any part of the project reaches commercial operation, the companies will use their actual capital structure, FERC added.
Commissioner Philip Moeller dissented in part, saying: “Now is not the time for this commission to begin retreating from its incentive policy on needed transmission lines. Yet I question whether we are sending that message with a 50 basis-point reduction in the 150 basis-point incentive for risks and challenges.”
Among other things, he said the order conditions all of its incentives on approval by the planning process established in PJM, and thus the project will not be built unless it is needed.