FERC issues new guidance on transmission rate incentives

In a policy statement issued Nov. 16, FERC said it will refine the way it evaluates applications for transmission incentive rates required by the Energy Policy Act of 2005 (EPAct05) and established in FERC Order 679.

Incentive rates were intended to encourage infrastructure investment while maintaining just and reasonable rates for customers. Since the establishment of incentive rates, the commission has evaluated more than 85 incentive applications, FERC said. The revisions the policy statement contains are based on FERC’s experience and on 1,500 pages of public comments received in response to a May 2011 notice of inquiry (NOI) on the scope and implementation of those policies.

“There are a number of strong and diverse opinions on our transmission incentives policies, and we’ve heard them all and tried to take them into account in crafting this policy statement,” FERC Commissioner John Norris said in a separate statement supporting the commission’s position.

The factors that motivated Congress to direct FERC to offer incentives is “as clear today as it was in 2005,” Norris said, noting that the method for doing that goes to the heart of the commission’s responsibility.

“Sure, we can get more infrastructure built if we just throw a lot of money at it,” Norris added, “[b]ut our broader responsibility starts with ensuring fairness, or as our statutory directive tasks us, ensuring just and reasonable rates.”

The policy statement highlights three categories of projects that FERC believes are likely to face risks and challenges that may justify an incentive ROE. Those include projects that relieve chronic grid congestion, projects that provide access to location-constrained resources including renewable resources, and projects that build the grid of the future rather than replicating the grid of the past.

The policy statement includes refinements in three specific areas employed when considering ROE adders: the so-called “nexus test,” risk-reducing returns on equity (ROE), and incentive ROEs.

“The policy statement makes clear that we will continue to apply the nexus test (requiring a nexus between incentives sought and the risks and challenges of the project), but will do so with greater rigor,” FERC Commissioner Cheryl LeFleur said in a separate statement supporting the policy statement.

Specifically, LeFleur said the commission will no longer simply consider whether a project is routine or non-routine, “but will consider carefully the specific risks and challenges of each application that requests incentive treatment.”

In its policy statement, FERC said it “will rely more directly on Order No. 679’s requirement that applicants demonstrate how the total package of incentives requested is tailored to address the risks and challenges of a project.”

FERC will also require that project developers pursue other risk-reducing returns before seeking incentive rate treatment. Examples of incentives designed to reduce those risks include construction work in progress, pre-commercial cost recovery and abandoned plant cost recovery, the commission said.

“We will raise the bar for applicants to demonstrate why incentive return on equity (ROE) adders are necessary on top of the base ROE (which already accounts for risk) and the risk-reducing incentives,” Norris said.

In addition, the policy statement said FERC no longer will consider a separate ROE adder for an advanced technology, though projects employing advanced technology may still merit an incentive ROE.

FERC will also expect additional showings from an applicant seeking an incentive ROE based on a project’s risks and challenges. Those will include a commitment to cost containment in the application of that incentive, though the commission said it is open to how an applicant structures that commitment.

FERC said it will continue to monitor and evaluate its incentives policies to identify issues, trends and developments that may warrant modification.

“It is clear to me that we continue to need significant transmission infrastructure in this country,” Norris said. “Not only must we replace aging transmission infrastructure, but we also need new transmission infrastructure to reduce costly congestion, support competitive markets, and tap into our nation’s very rich renewable resource areas.”

Norris continued: “Even with these exciting developments, however, transmission remains the core infrastructure needed to support a reliable, efficient electricity system, and to unlock the renewable resources that will provide fuel diversity and clean energy at the most efficient price for consumers.”