FERC should clarify methodology used in setting transmission rates – WIRES

Arguing that uncertainty around rates of return for transmission projects could discourage investment in transmission, the industry trade group WIRES is calling on FERC to re-examine and clarify its use of the discounted cash flow (DCF) methodology to provide greater stability and predictability regarding regulated rates of return on equity (ROE). 

In its “petition for statement of policy” filed with FERC June 26, the group requested that FERC establish an expedited proceeding to consider how to minimize the subjectivity and variability in DCF outcomes “to ensure that pending litigation, federal monetary policy, and a failure to take proper account of transmission benefits do not discourage investment in the grid.”

The statement comes in the midst of a complaint initiated in the New England ISO over the fairness of transmission rates of return in that region.

Group leaders say investment in transmission is more vital today than ever before, especially considering the current structure of the industry.

“Today’s more market-oriented bulk power system needs a steady diet of transmission investment as a platform,” Jim Hoecker, WIRES’ counsel and former FERC chairman, told TransmissionHub June 26. “We’re in a substantially different environment where the transmission system is concerned than we were in the 20th century when the industry was essentially serving native load.”

In addition to setting clear guidelines for the use of DCF, WIRES also said the commission should give more weight to the ongoing benefits of transmission when setting rates of return on new and existing transmission projects.

Investment certainty the goal

In light of fluctuations in transmission investment in past decades and obstacles to timely transmission development, FERC should avoid creating yet another barrier to “these long-lived, intergenerational investments” by allowing the potential for abrupt changes in allowed returns to create a perception of risk, WIRES said in its petition.

“We think the commission can do some things to reassure the capital markets,” Hoecker said. “The capital markets hate uncertainty.”

Hoecker also said using a DCF methodology without clearer guidelines for its application could result in an over-reliance on current federal monetary policy, which would amount to applying short-term trends to long-term projects.

“If you set rates of return based on short-term trends, you may end up chasing all that capital away from the transmission sector,” he said.

In its petition, WIRES said, “it is time to move past ‘zero-sum’ transmission ratemaking disputes to more stable rates of return on equity and a more stable pattern of infrastructure investment that will sustain transmission’s diverse benefits as well as the commission’s initiatives.”

Petition does not dictate specifics

While calling for a reexamination and refining of “the old, formulaic ways of setting just and reasonable rates,” the WIRES petition stops short of being overly prescriptive, Hoecker said.

The group’s petition calls for the adoption of several policy measures that would foster more consistency in DCF outcomes, including a standardized selection of proxy groups and denying complainants a hearing on rates of return for existing facilities unless it is shown that existing returns are at the extremes of the zone of reasonableness.

FERC has in the past allowed national proxy groups to determine a single utility’s base ROE, and regional proxy groups to determine the base ROE for that region. However, in the FERC complaint underway in the New England ISO (FERC Docket No. EL11-66), complainant, respondent and FERC staff arguments have employed both national and regional proxy groups to determine the region’s base ROE.

WIRES recommended other measures, including allowing consideration of competing infrastructure investments of other industries, and permitting the use of rate of return methodologies other than DCF. Finally, WIRES’ petition supports the use of more forward-looking data and modeling.

“The easiest way for the commission to begin to move on this issue is generically,” Hoecker said, referring to the need to develop overarching guidelines that are applied consistently. “Otherwise, it will just be litigating cases for the indefinite future and creating even more uncertainty.”

WIRES’ petition argues that changes to the industry over the last two decades present the commission with an opportunity to seek ways to ensure “consistent and well-planned transmission investment year-in and year-out,” consistent with the FERC’s duty to protect customers and create positive incentives for transmission investment.

WIRES is not the first organization to call for greater definition about how FERC determines rates of return for transmission projects. A white paper issued June 6 by the Edison Electric Institute (EEI) warned against FERC relying on a “single, mechanical” approach to determine base ROEs and considering evidence that does not reflect capital market realities. That document included a number of specific reform proposals.

The WIRES petition recommends that the FERC open a 30-day comment period on the policy proposals, then issue a statement of policy detailing how it will administer rate of return proceedings for electric transmission.