FERC Order 679 responsible for $23bn of transmission infrastructure investment in 2012-2016 period

Note: The dollar amounts quoted in this article reflect investment in projects that have received incentive rate treatment, and do not necessarily reflect a company’s or the industry’s total transmission investment. For total industry investment in transmission, see Nearly $170bn of North American transmission to come online by 2020.

Nearly $23bn of electric transmission investment that has applied for FERC incentive rate treatment under Order 679 is expected to be made between 2012 and 2016, according to TransmissionHub data.

For the 2008-2016 period, the total comes to $36.2bn.

Incentive rate treatment is applied to projects that demonstrate either reliability or congestion benefits. Under FERC Order 679, “Promoting Transmission Investment through Pricing Reform,” those incentives can take the form of an incentive-based return on equity (ROE), construction work in progress (CWIP), a hypothetical capital structure, accelerated depreciation, recovery of prudently incurred costs, deferred cost recovery or single-issue ratemaking (Docket No. RM06-4-000).

Public utilities that have been granted transmission incentive rate treatment for specific transmission projects are required to report their investments to FERC on an annual basis, including their actual and projected investments for the current year in which they are filing and the following five calendar years.

In 2012 alone, such investment is estimated to total $4.2bn. For the 2012-2016 period, investment will peak at $5.4bn in 2013, and gradually decrease over the following years – to $5.2bn in 2014, $4.5bn in 2015 and $3.6bn in 2016.

In the nine-year period between 2008 and 2016, investment was at its highest in 2011, with actual investment totaling $6bn. PacifiCorp.’s Energy Gateway project and Allegheny Energy‘s Trans-Allegheny Interstate Line (TrAIL) comprised just over $2bn of that total. Southern California Edison (SCE) reported investments of $824m and Dominion Resources (NYSE:D) reported $751m of investment in 2011.

 

Over the five years between 2012 and 2016, SCE has the highest projected amount of investment, or $4.9bn. The Edison International (NYSE:EIX) subsidiary has planned to bring online 25 projects, 13 of which are scheduled to enter service during the five-year period, including the $2.2bn Tehachapi Renewable Transmission project, which comprises 250 miles of combination 500-kV and 220-kV lines, and the $700m, 500-kV Devers to Colorado River line.

Dominion subsidiary Virginia Electric Power comes in second, with 36 projects totaling $2.9bn of transmission investment, including 19 new build projects, such as the Chikahominy to Skiffes Creek project, which is estimated to cost between $150m and $250m. Of the 36 projects the Virginia-based company has planned, 30 are scheduled to come online between 2012 and 2016. The company’s biggest project in terms of dollars, however, is its Mt. Storm to Doubs rebuild, a 99-mile, 500-kV line estimated to cost $370m and enter service in 2015.

In third place is PacifiCorp., which estimates it will spend $2bn on its Energy Gateway transmission expansion project over the five-year period. In 2016 alone, the company will spend $600m of that total. Energy Gateway is a 2,000-mile, 500-kV transmission line that the company is building jointly with Idaho Power.

For the 2008-2016 period, SCE, Dominion and PacifiCorp. again take the top three spots, with $7.2bn, $5bn and $4.9bn of investments, respectively.

Exelon (NYSE:EXC) takes fourth place for the nine-year period, with $2.1bn of investment. The company and its partners are building the Reliability Interregional Transmission Extension line (RITELine) project for an estimated $1.6bn. The project has an in-service date of 2018. Exelon expects to make investments in 2014, 2015 and 2016 for $390m, $530m and $405m, respectively. 

Responses to Order 679 divide along industry, consumer lines

At Congress’s direction, FERC in July 2006 issued Order 679 to establish incentive-based rate treatments (FERC granted rehearing on the order in December 2006). Congress had instructed FERC to issue such a rule within one year of enactment of the Energy Policy Act of 2005. In FERC’s notice of proposed rule-making in November 2005, the commission noted that investment in transmission between 1975 and 1998 had declined significantly, while load had more than doubled. By 2003, though investment had begun to pick up, it remained below 1975 levels, FERC said at the time.

State regulatory commissioners as well as state attorneys general, among others, have argued that FERC’s incentives have resulted in excessive subsidization for transmission facilities by consumers, and that companies investing in transmission are being overcompensated for making investments they already should be making.

Massachusetts Attorney General Martha Coakley in September 2011 filed a complaint with FERC arguing that the base ROE for New England transmission facilities should be lowered from 11.14% to 9.2%, a position that Rep. Edward Markey (D-Mass.), after FERC in May granted a hearing for the complaint, said he supported.

Transmission companies, including Northeast Utilities (NYSE:NU), National Grid, and United Illuminating, however, have countered that the base ROE in New England falls into FERC’s “just and reasonable” zone. The base ROE is used to calculate formula rates for transmission service under ISO-New England’s open access transmission tariff (OATT).

Other responses have been varied. In March, a group of 37 utilities, governmental and non-governmental organizations sent a letter to FERC listing points the commission should reevaluate.

In September 2011, ATC asked that FERC draw a distinction between CWIP as an incentive and a rate treatment, arguing that the company’s ability to use CWIP as a rate treatment has resulted in enhanced cash flow, more favorable debt ratings and a lower cost of capital – all of which produce lower costs to consumers.

FERC in May 2011 issued a notice of inquiry (NOI) (Docket No. RM11-26-000) on Order 679, seeking comment on the scope and implementation of the rule. In the NOI, FERC noted that it had received 75 applications for incentive rate treatment, amounting to more than $50bn in proposed investments. FERC in June 2012 said it was reviewing the extensive comments submitted in the NOI to determine how to proceed.

About Rosy Lum 525 Articles
Rosy Lum, Analyst for TransmissionHub, has been covering the U.S. energy industry since 2007. She began her career in energy journalism at SNL Financial, for which she established a New York news desk. She covered topics ranging from energy finance and renewable policies and incentives, to master limited partnerships and ETFs. Thereafter, she honed her energy and utility focus at the Financial Times' dealReporter, where she covered and broke oil and gas and utility mergers and acquisitions.