Two major organizations in the renewable energy industry have weighed in on the issue of how FERC should calculate the return on equity (ROE) for electric transmission projects, saying now is not the time to make significant reductions to ROEs on transmission investment (FERC Docket No. RM13-18-000).
The American Wind Energy Association (AWEA) and the Solar Energy Industry Associations (SEIA) on Aug. 2 submitted joint comments on the petition for statement of policy filed in June by the industry trade group WIRES. In their comments, the groups outlined the reasons they believe FERC should not reduce the ROE for transmission projects.
The groups echoed comments in the WIRES petition, which called on FERC to re-examine and clarify its use of the discounted cash flow (DCF) methodology to provide greater stability and predictability regarding regulated ROE rates for existing and future investments in high voltage electric transmission infrastructure.
In their comments, AWEA and SEIA highlighted the need for constancy and certainty. They asked FERC to “provide such policy and clarifications as necessary to provide transmission owners and operators, transmission customers, electricity consumers, and the investment community with greater stability and predictability” regarding ROE levels.
The groups noted that investment in transmission is particularly important to their segment of the industry.
“The lack of transmission capacity has proven to be a significant barrier to integrating renewable generation into the nation’s electric supply, largely due to the fact that the regions that possess the most renewable energy potential are generally located far from population or load centers,” the groups said. “Additionally, inadequate transmission even prohibits existing renewable projects, already connected to the grid and operating, from transporting their full output to load centers.”
Indeed, ISO New England (ISO-NE) during a heat wave the week of July 15 curtailed the output of Vermont’s Kingdom Community Wind project because, in the words of an ISO-NE spokesperson, “the transmission system is not sufficient to carry out all the power that they produce.”
In their filing, the groups said it is both the level of return and the stability of that return that attract investors.
ROE must be commensurate with the risks involved
Compared to other assets, transmission investments are extremely risky and require long lead times for the planning process and stakeholder involvement, the groups said, noting that transmission projects often face extensive litigation on siting and related issues.
“Investors are only willing to commit capital to utilities if they expect to earn a predictable return that is commensurate not only with the risks and challenges associated with developing transmission but also with the returns available to other investments with comparable risks,” the groups said.
An investment banker speaking to TransmissionHub’s TransForum West in San Diego in July called transmission projects “goldmines” when they are completed, but agreed that the risks are particularly acute during the development phase of transmission projects, making it difficult to attract investors when projects are in development.
AWEA and SEIA emphasized that Congress recognized the importance of transmission investment and the attendant risks of development when it enacted section 219 of the Federal Power Act through the Energy Policy Act of 2005 (EPAct05). They also noted that Congress has taken no action to diminish the importance of transmission investment since EPAct05, nor have project risks and challenges fundamentally changed.
“Given these risks [and] due to the long-term nature of transmission projects, regulatory certainty is needed to obtain and maintain financing,” the groups said. “For these reasons, regulators should look for opportunities to provide certainty by maintaining and authorizing stable, long-term returns for transmission developers and owners to support timely development of beneficial and necessary transmission investments, while ensuring rates remain ‘just and reasonable’ and fair to customers.”
ROE must remain stable
To the extent that FERC decisions result in a significant reduction of base ROEs after transmission facilities have been placed into service, investors and financing entities will view future investment in the sector as less desirable, given the potential for unpredictable results as well as diminished returns, the groups said.
“The result is that actions to reduce base ROEs, if unwarranted, have the magnifying effect of increasing investors’ required cost of capital, further shrinking the available pool of funds for transmission investment,” they said in their filing, in which they also noted that capital markets are highly sophisticated and will move to risk-comparable investment opportunities with higher returns where such opportunity exists.
“If returns on electric transmission infrastructure are not sufficient and stable enough, investors may avoid such investments and instead seek better and more stable returns elsewhere,” the groups said.
In determining a just and reasonable ROE, the groups said FERC should consider ROEs “in relation to the result produced by the DCF methodology and whether it establishes a ROE that can achieve FERC’s policy goals related to transmission development, while balancing the need of ensuring reasonable rates for customers.”
Such an approach would help to avoid undermining the progress that has been made in developing transmission by allowing FERC to consider broader policy needs, such as the development of renewable energy resources, and the supporting actions necessary to achieve those results.
The groups expressed support for a generic reexamination of the commission’s approach to setting allowed base ROEs. They also asked that FERC “explore methodological options that will reduce or eliminate the uncertainties and risks to investors, as well as customers, and avoid potential reductions in investment in needed transmission facilities, higher costs, project delays, and disruption to infrastructure planning and growth.”