FERC approves most Order 679 incentives for Transource Missouri projects

FERC on Oct. 31 granted most of Transource Missouri‘s requested Order 679 incentives for the $65m Iatan to Nashua and the $380m Sibley to Nebraska City projects.

“We find that Transource Missouri has sufficiently demonstrated a nexus between the considerable risks and challenges it is undertaking to develop and construct the projects and the incentives it has requested,” FERC said in the order. 

On Aug. 31, the company, a subsidiary of Transource Energy, a joint venture between American Electric Power (NYSE:AEP) and Great Plains Energy (NYSE:GXP), requested 100% recovery of construction work in progress (CWIP); recovery of all prudently incurred costs and authorization to establish regulatory assets; use of a hypothetical capital structure; abandonment recovery costs; ROE adders; and authorization to change the base return on equity (ROE) in the formula rate pursuant to Section 205 of the Federal Power Act (FPA).

With the exception of Transource Missouri’s request to make future single-issue FPA Section 205 filings to adjust the base ROE in the formula rate, FERC conditionally granted each of these incentives.

The commission ordered a hearing on Transource Missouri’s requested formula rate, which it said has not been shown to be just and reasonable and may be unjust and unreasonable.

Transource Missouri requested to include a base ROE of 10.6%, which would yield an overall base ROE plus adder of 11.1% for Iatan to Nashua and 12.1% for Sibley-Nebraska City.

Incentive rejected

In rejecting Transource Missouri’s single-issue incentive, FERC said that single-issue ratemaking is predicated on a transmission utility receiving cost recovery through existing rates and proposing such ratemaking to address all rate issues for a project without opening existing rates, rather than to address a specific rate component like the ROE.

“Here, Transource Missouri has no existing assets or rates, and therefore, the single-issue ratemaking contemplated by Order No. 679 does not apply,” FERC said.

Rejecting the single-issue incentive does not preclude the company from making a Section 205 filing to change its formula rate inputs, including base ROE, FERC noted.

Incentives granted

ROE adders

Transource requested a 50-basis point ROE adder for RTO participation for the Iatan to Nashua project and a 100-basis point ROE adder for RTO participation for the Sibley to Nebraska City project. FERC granted the 50-basis point adder on the condition that the company take all necessary steps to turn over operational control of the project to the Southwest Power Pool (SPP) and that it become a transmission-owning member of SPP.

FERC granted the 100-point adder for Sibley to Nebraska City.

“The Sibley-Nebraska City project faces numerous risks and challenges, including the construction challenges associated with two crossings of the Missouri River and obtaining rights-of-way in two states without the benefits of state siting processes,” FERC said. “In addition, the project is planned to extend 170 miles, cost $380m, facilitate the integration of approximately 3,000-5,000 MW of wind energy and non-renewable generation, alleviate congestion at two of the most congested flowgates on the SPP system, and increase power transfer capability between Kansas and Nebraska, as well as between the SPP and MISO regions. Moreover, … the project has a long lead time and its final route is still uncertain, which increases the associated risks. … In light of the specific risk and challenges associated with this project, we find that the requested ROE adder is just and reasonable.”

CWIP & regulatory asset

FERC granted the company’s request for 100% CWIP but has required Transource Missouri to submit annual FERC-730 reports.

The commission also granted the company’s request to establish a regulatory asset to record pre-construction costs not included in CWIP, as well as its request to accrue a carrying charge from the effective date of the regulatory assets until they are included in rate base.

However, to avoid monthly compounding interest, FERC directed Transource Missouri to restrict the compounding of carrying charges to no more frequently than semi-annually. The company also has to make a Section 205 filing to demonstrate that pre-construction costs are just and reasonable.

“Transource Missouri will have to establish that the costs included in the regulatory asset are costs that would otherwise have been chargeable to expense in the period incurred. These costs will be subject to challenge at that time,” FERC said.

Abandonment costs 

FERC also granted the ability to recover 100% of prudently incurred costs in the event that the projects must be abandoned. The abandonment, however, must result from factors beyond Transource Missouri’s control and be demonstrated in a Section 205 filing. 

“We will not determine the justness and reasonableness of Transource Missouri’s recovery of costs for abandoned electric transmission facilities, if any, until Transource Missouri seeks such recovery in a future FPA section 205 filing,” FERC said. “Order No. 679 specifically reserves the prudence determination for the later FPA section 205 filing that every utility is required to make if it seeks abandoned plant recovery.”

Hypothetical capital structure

Transource Missouri will be allowed to use a hypothetical capital structure comprising 40% debt and 60% equity for the projects. However, the company may only use such a structure until the projects enter commercial operation, rather than until it secures permanent financing, as Transource originally requested, FERC said.

“We find that the use of a hypothetical capital structure until each project achieves commercial operation more appropriately addresses Transource Missouri’s business risk and is sufficient to permit incremental financing,” FERC said. 

Further, FERC will not require a mechanism to track capital infusions from Transource’s parent companies, which the Missouri Public Service Commission (PSC) had requested on concerns that parent level debt would be treated as subsidiary level equity for the purposes of rate recovery.

“The Missouri commission essentially requests that Transource Missouri’s hypothetical capital structure be based on the capital structure of Transource Missouri’s corporate parents,” FERC said. “However, we have previously found that requiring an applicant to adopt its corporate parent’s capital structure until such a time that it has its own capital structure would be inappropriate and would be inconsistent with the intent of the hypothetical capital structure incentive discussed in Order No. 679.”

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.