Rep. Edward Markey (D-Mass.) told FERC Chairman Jon Wellinghoff May 11 that the quickest step in addressing spiraling transmission costs in New England would be for FERC to reduce the base return on equity (ROE) for the region’s transmission owners from the current 11.1% to 9.2%, as requested by a group of state attorneys general and regulators.
FERC on May 3 established hearing and settlement judge procedures involving a September 2011 complaint filed by the Massachusetts Attorney General and others against the New England transmission owners, contending that the current base ROE recovered through ISO New England’s open access transmission tariff is unjust and unreasonable.
“Reducing the rate could save New England ratepayers between $100m and $200m annually, according to the complainants,” Markey said in his letter to Wellinghoff, adding that FERC’s recent decision to agree to hear the complaint is a positive step.
“The rates under discussion are established by [FERC],” a spokesperson for ISO New England told TransmissionHub May 15. “The ISO doesn’t establish the rates, and the ISO does not own any transmission or generation so it does not receive any of this return on equity. The ISO acts only as the billing agent for the transmission owners and has no position on this return on equity.”
Markey noted that the boom in transmission construction in New England since 2003 has led to a 500% increase in transmission costs for consumers and pushed the region’s transmission rates to some of the highest in the country. ISO New England expects more than $6bn in new transmission investments in the region over the next four years, he said, adding that as a percentage of total power costs, transmission costs will increase from less than 6% in 2008 to about 21% in 2014.
Transmission expenditures in New England come from a highly concentrated, well-capitalized group of companies, Markey said, noting that six companies made 99% of the region’s transmission investments between 2000 and 2010. Two of those companies, National Grid plc subsidiary National Grid USA and Northeast Utilities (NYSE:NU), accounted for almost three-quarters of that investment.
Transmission is becoming a greater revenue driver in recent years for these companies, he said, adding that earnings within the transmission segment of Northeast Utilities’ business have grown from $138m in 2008 to $200m in 2011.
“I am concerned that with large, well-capitalized companies with strong credit ratings increasingly dominating the regional market for new transmission, excessive and unwarranted incentive transmission rates are disproportionately benefiting the bottom lines of transmission builders at the expense of electricity consumers,” he said.
There are other methods for relieving congestion, increasing reliability and achieving clean energy targets that are not eligible for incentive adders, Markey said. Using ROE adders for transmission may reduce the relative attractiveness of other important and cheaper non-transmission alternatives like demand response, energy efficiency, distributed generation and smart grid systems and infrastructure.
Markey also said that while investments in new transmission facilities can be a part of modernizing the electricity grid, he is concerned that FERC’s policies on transmission investment – particularly those developed in response to Section 1241 of the Energy Policy Act of 2005 (EPAct 2005) – have resulted in consumers paying excessive charges.
Transmission investments may be necessary to relieve congestion, bring renewable energy to market and enhance reliability, but it is not clear that all new transmission investments for which incentives have been authorized in fact required special rate treatments. Nonetheless, Markey added, the last several years have seen a prolific use of ROE “adders” for new transmission that, in some cases, have given transmission owners risk-free, formula-based returns of up to 13.5% on new projects. Such returns on equity for predictable infrastructure investments seem even more inflated given the current state of economic growth and interest rates, he said.
Complaint could have chilling effect on investment
Former FERC Chairman Jim Hoecker, who is also senior counsel and energy strategist at Husch Blackwell, principal of Hoecker Energy Law & Policy and adviser to the WIRES group, told TransmissionHub May 15 that if the country is to achieve a strengthening of the grid for the benefit of electricity consumers, “we need to be sensitive to what those risks are and what the benefits to consumers are over time.”
He added: “I haven’t heard any, and I haven’t seen any rates of return that have been so substantially out of the norm with regard to financing infrastructure projects as to impose an unreasonable burden on consumers, but that’s why we have FERC to take a look at consumer interests and balance them against the need to invest. That can sometimes be a very complicated question.”
FERC’s administration of the provisions of EPAct 2005 has been relatively conservative and responsible, he said. “The commission always asks itself whether a particular facility or proposal actually needs the additional rates of return before they grant it and not all facilities that apply for returns, or even those that are granted these risk-based rates of return, are actually built,” he said. “The question is why is building new transmission so risky and part of the answer is that there’s a lot of regulatory risk and delay in the system.”
Among other things, Hoecker said he does not view the complaint as a big attack on transmission providers or developers. “But I do think that this kind of complaint could have a chilling effect on investment and we need to be careful with that because not just in New England, but around the country, people are going to be looking at this case to see if the commission is backing away from its commitment to make it financially practicable for people to invest in transmission,” he said.