FERC, in an order issued Dec. 30, granted a 25 basis point incentive return on equity (ROE) adder to Public Service Electric and Gas (PSE&G) for the company’s proposed Northeast Grid Reliability (NGR) project.
The company had asked for a 100 basis point ROE incentive adder.
FERC said it found that the project presents financial and credit risks and challenges that warrant this incentive.
“Importantly, PSE&G will face these risks and challenges concurrent with significant additional transmission and capital investment, much of it likewise directed by the PJM [Interconnection Regional Transmission Expansion Planning (RTEP)],” FERC said. “In addition, given the scope of the NGR project, PSE&G faces permitting and construction challenges, such as the replacement of over 100 towers and underground construction in densely populated areas. As such, we find a nexus between those risks and an enhanced ROE.”
However, FERC added, it is reducing PSE&G’s requested 100 basis point adder to 25 basis points, noting that granting 25 basis points is just and reasonable in light of the other incentives that the commission is granting to PSE&G. Construction work in progress (CWIP) in rate base and abandonment incentives reduce certain financial and regulatory risks that PSE&G cites as support for a 100 basis point incentive ROE adder, FERC said.
“[W]e find that authorizing 100% of CWIP in rate base for the NGR project would help mitigate the negative impact on PSE&G’s credit metrics and ability to attract financing on reasonable terms,” FERC said, adding that the company has shown its capital budget may be strained as it builds the project while conducting needed improvements to its existing transmission infrastructure.
A spokesperson for PSE&G told TransmissionHub Jan. 4 that the ability to recover 100% of CWIP will provide better rate stability for its customers. “These large-scale projects could take years to be put in service and we believe that recovering those costs, as those costs are incurred, protects customers from rate shock,” she said.
FERC also granted PSE&G’s request for recovery of 100% of prudently incurred costs associated with abandonment of the NGR project, provided that the abandonment is a result of factors beyond the company’s control. According to PSE&G, assurance of cost recovery if the NGR project is abandoned will help the project compete for scarce internal funds.
Commissioner Philip Moeller dissented in part, saying that FERC may again be retreating from its incentive policy on needed transmission lines. The NGR project faces numerous risks and challenges to its completion and will provide many customer benefits including resolving reliability violations and providing significant savings on congestion and capacity costs, he said.
“Although this order finds that the NGR Project demonstrated the nexus between the investment made and the incentives sought, it reduces the requested return on equity incentive adder by seventy-five basis points, without sufficient explanation,” Moeller said in a statement. “This decision thus increases regulatory uncertainty, which can reduce investments in the transmission infrastructure that is needed in this nation.”
According to PSE&G, the NGR project will involve building about 25 miles of 230-kV overhead circuits and 15 to 18 miles of 230-kV underground circuits. The project is expected to cost $895m and is scheduled to be fully operational by June 2015.
FERC also said that according to the company, the project traverses highly developed residential and industrial areas, several large water bodies and environmentally sensitive lands, including the New Jersey Meadowlands District.
PSE&G also said the project will reduce transmission congestion costs by about $2.4m annually in the PSE&G zone, as well as potentially reduce capacity payments for customers. The project will enable the Susquehanna-Roseland project to reach the PSE&G North constrained area, increasing the power transfer capability of the Susquehanna-Roseland project.
Among other things, FERC noted that PSE&G asserted that the NGR project faces a heightened risk of cancellation due to regulatory risks, such as regulatory refusal to issue necessary approvals, delay in regulatory processes, or cancellation through the PJM RTEP.
“We still believe that the order recognizes the siting risks that are inherent to building projects of this type,” the PSE&G spokesperson said. “This is a project that’s needed for system reliability.”
PSE&G is a subsidiary of Public Service Enterprise Group (NYSE:PEG).