Group of utility and oversight organizations weigh in on FERC transmission incentives

A diverse group of utilities, governmental, and non-governmental organizations with a focus on energy has weighed in with recommendations on how FERC should modify its policy regarding transmission incentives.

The group was responding to FERC’s notice of inquiry (NOI) in promoting transmission investment through pricing reform, issued in May 2011 (Docket No. RM11-26-000).

“We share a belief in the importance of developing and maintaining a modern, robust electric transmission system,” the group said in a letter hand-delivered to FERC on March 5. “We recognize the benefits of investment in new transmission facilities, and welcome efforts to improve reliability, reduce congestion, and integrate renewable resources,”

However, the letter also expressed reservations about the manner in which the commission has sought to promote new investment. “The current incentive structure places unwarranted burdens on consumers, and diverts ratepayer capital away from other important electric infrastructure investments,” the letter continued.

The NOI sought comment on the scope and implementation of FERC’s transmission incentives regulations and policies under Order No. 679, noting that: “In the past five years, the commission has received over 75 applications for transmission incentives. The requested incentives have been varied, and the demonstrations supporting the incentives applications have likewise been varied.”

The group’s letter listed eight specific points it believes the commission should evaluate in revising its current transmission policies.

The commission should grant risk-reducing incentives first and award above-cost incentives rarely, the group said. “Where unusual risks are shown to be present, the commission should first consider incentives that directly address and reduce such risks,” the letter said. “The commission should not approve return on equity (ROE) incentives as a matter of course, particularly where other factors—such as cost recovery under formula rates—will mitigate the risk associated with a project.”

FERC should not provide incentives to projects that transmission providers are already obligated to build, such as projects mandated by an ISO/RTO or to ensure compliance with mandatory reliability standards.

The letter also said FERC should not incent expensive solutions when lower-cost alternatives are available, including a non-transmission alternative that may prove to be a better option for solving a given concern.

The commission should not base eligibility for above-cost rewards on project scale, the letter continued. “The commission’s existing policy of making unusually large transmission projects preferentially eligible for incentives creates a misdirected reward structure,” favoring wires-based solutions over incremental system upgrades and ongoing management of peak demands, the letter said.

The group members agreed FERC should not apply ROE adders to cost overruns, nor should it apply ROE adders to abandoned plant amounts.

The commission should identify types of projects that are presumptively ineligible for incentives by compiling a list of “baseline” or “low-risk” projects that are generally ineligible for incentives, or which face a high burden to demonstrate incentive-worthy risks, the letter said.

Finally, FERC should make the price of incentives transparent by keeping distinct the cost-based and above-cost incentive components of the rate of return for projects that receive incentives, the letter concluded.

The letter was signed by representatives of state consumer advocates’ offices, the National Association of State Utility Consumer Advocates (NASUCA), environmental and consumer organizations, state utility commissions, offices of state attorneys general, and consumer-owned utilities.

Although the deadline for comments passed on Sept. 12, 2011, because of the nature of the proceeding as information gathering rather than a contested matter, the commissioners are more open to hearing as many points of view as possible, a FERC spokesperson told TransmissionHub on March 5.