Though Virginia State Corporation Commission (SCC) staff supports approval of a certificate of public convenience and necessity (CPCN) for the Cloverdale Extra High Voltage Transmission Improvements Project in Botetourt County, Va., it has concerns over who should build, own and operate it, favoring Appalachian Power Company (APCo) over AEP Appalachian Transmission (Virginia Transco).
In its Dec. 3 post-hearing brief, SCC staff said that while APCo built, owns and operates the Cloverdale substation, the companies’ May 2 application proposes to divide responsibility for the project between APCo and its affiliate, Virginia Transco so that Virginia Transco would build, own and operate most of the Cloverdale project. More specifically, Virginia Transco would undertake about 94% of the project with the remaining 6% left for APCo.
Virginia Transco is a wholly owned subsidiary of AEP Transmission Holding Company, which is in turn a wholly owned subsidiary of American Electric Power (NYSE:AEP), and APCo is a wholly owned direct subsidiary of AEP.
According to their Dec. 3 brief, Virginia Transco and APCo are seeking a CPCN for the project, which will require approximately $237m of investment and three years to complete and place in service.
The companies said they want to build the project together, with most of the project to be financed by Virginia Transco, resulting in lower costs for customers and improved cash flow credit metrics for APCo, leading to additional benefits to customers in the long run.
The project, which consists of installing a new 765/500-kV transformer bank and two new 500/345-kV transformer banks; constructing a new 500-kV yard; constructing four short new extra high voltage transmission lines between the several yards of the Cloverdale substation; partially relocating four existing transmission lines; and associated new substation improvements, including buswork, switches and related equipment.
As reported in September, staff has concluded that the proposed project will significantly reinforce the reliability of the transmission system in the Roanoke, Va., area and surrounding region.
The SCC convened on Oct. 22 an evidentiary hearing on the matter, staff said in its filing.
Based on staff’s evaluation of the technical aspects of the project, staff added that it supports approval of the certificate, but recommends that the SCC authorize APCo to build, own and operate the entire project.
“Staff continues to oppose the application’s proposal for Virginia Transco to supplant APCo in the construction, ownership, and operation of transmission facilities at APCo’s existing Cloverdale substation,” staff said.
The plain language of the state Utility Facilities Act supports construction, ownership and operation of the project by APCo, staff said, noting that “an entity that seeks to ‘begin to furnish public utility service within the commonwealth’ and further seeks to begin such operations ‘in the territory of any holder of a certificate’ must first ‘prove … to the satisfaction of the commission that the service currently rendered by such certificate holder in such territory is inadequate to the requirements of the public necessity and convenience.’”
No such evidence was proffered by the companies and therefore it is required that any CPCN for the project be issued to APCo, not Virginia Transco.
The financial benefits from investing in the project also support staff’s recommendation for the SCC to authorize APCo to build, own and operate the entire project, staff said.
While the companies assert that APCo’s current financial condition can be maintained by handing investment in the project to Virginia Transco, the companies’ position is based on, for instance, an understatement of the value of transmission investment, and the support for such investment provided by federal regulation and Virginia law.
“The Cloverdale Project represents an opportunity for APCo not just to maintain its current financial condition; rather, the project allows APCo to improve its financial condition,” staff added. “It is not in the public interest for APCo to [forgo] such an opportunity, especially given the ratepayer and jurisdictional concerns discussed in … this brief.”
Investment in the project, which will occur over several years, allows APCo to help balance significant generation and distribution investments with transmission investment that offers APCo more predictable and stable cash flows over time.
Staff also noted that if Virginia Transco were to build and own portions of the project, APCo – and ultimately its retail customers – would still pay for portions of the project not undertaken by APCo. Rather than APCo investing capital upfront and recovering its costs and a profit through stable and predictable cash flows over time, Virginia Transco ownership would require APCo to pay an allocated share of the forgone investment and profit, staff said.
Also, the project’s regional nature means that APCo can recover the vast majority of the project’s costs through FERC wholesale rates. Staff further noted that of the small portion of the project’s costs that would not be recovered by APCo through FERC wholesale rates, Virginia law passes through the Virginia-jurisdictional portion of all such FERC-approved transmission costs, including a FERC-approved ROE.
The companies cite the fact that APCo does not currently have ratemaking authority from FERC to earn a return on construction work in progress (CWIP) for transmission projects, as it does under state regulation for generation and distribution.
However, staff added, the distinction between a return on CWIP and accumulated funds used during construction is a cash flow issue limited only to the construction period. Once a transmission project is placed in service, cost recovery begins with a larger rate base than would exist were a return on CWIP allowed during the construction period. Furthermore, federal law does not prohibit APCo from seeking a return on CWIP for the project or other transmission investment.
Staff also said that APCo’s ownership, construction and operation of the project does not put the company at risk of a credit downgrade, and the company can afford to make the entire $237m investment needed for the project.
The record also shows that the level of cumulative future investment cited by the application is overstated as even though the companies identified $1.1bn in potential transmission projects with projected in-service dates between 2014 and 2017 in APCo’s service territory, many of the projects used to calculate that figure have been proposed for construction in West Virginia by AEP West Virginia Transmission Co. About $600m of that $1.1bn amount is for projects planned for construction in West Virginia.
Among other things, staff said that even if Virginia Transco is able to realize a cost of debt lower than APCo, other cost of capital components such as return on common equity and capital structure may still result in ratepayers paying more with Virginia Transco ownership.
In their brief, the companies said, “There is no dispute about the need for the project and the fitness of the proposed engineering solutions to address this need,” adding that SCC staff wholly supports the issuance of a certificate authorizing project construction.
The only point of contention between the companies and staff is whether the certificate should be issued to APCo alone, as opposed to both companies as requested in the application.
The evidence of record shows that customers will benefit if APCo and Virginia Transco are permitted to build, own and operate different components of the project, and that staff’s concerns are misplaced and not well taken, the companies added.
“Based upon current relative financing costs, it is clear that customers will experience a greater rate increase if staff’s recommendation is adopted,” the companies said. “It is also clear that undertaking the project alone will weaken APCo’s cash flow credit metrics for the next three years, the result of making the significant investment required to build the project, with no concurrent recovery of cash revenues which is delayed until the facilities are placed in service.”
Thus, the companies added, staff’s opposition boils down to a single argument: that APCo’s credit ratings may suffer over the long term if the SCC allows $222m of the investment to be made by Virginia Transco.
That argument is not supported by the evidence on the record, which shows substantial contemporaneous transmission investment by APCo and shows that APCo’s credit rating is not at risk of deterioration as a result of jointly developing the project with Virginia Transco, as proposed by the applicants.
Staff also expresses concern that the SCC’s regulatory oversight of the facilities and operations of Virginia Transco will be diminished in several areas if the SCC approved the companies’ joint application for the project.
To address that concern, the companies added, Virginia Transco will agree to certain conditions that will allow the project to proceed to the benefit of APCo’s customers and without the alleged loss of oversight identified by staff, including:
- Virginia Transco will agree that its capital structure will match that of APCo. In addition, Virginia Transco will agree not to begin a proceeding before FERC to modify or remove the current 50% cap on Virginia Transco’s equity capitalization.
- Virginia Transco will not pursue the option for local county or municipal review and approval of 138-kV transmission lines for any 138-kV transmission line, but will instead seek the SCC’s approval for such projects.
- Virginia Transco will not undertake any transmission projects below 138-kV without first bringing any such project to staff for discussion and evaluation. If staff recommends it for specific projects, Virginia Transco will apply to the SCC for a certificate of public convenience and necessity.
The companies also said that staff takes the position that state law prohibits Virginia Transco from undertaking any portion of the project, arguing that Virginia Transco is required to prove the inadequacy of the current electric service of APCo, the incumbent retail supplier, before it can provide transmission services in Virginia.
Given that Virginia Transco does not seek to serve customers at retail in APCo’s certificated territory and that its participation in the project is limited to its role as a wholesale provider of transmission services, staff’s position is plainly without merit, the companies said.
The companies noted in their filing that the project is necessary to ensure that the transmission system serving the Roanoke, Salem, Lynchburg and New River Valley area and adjoining counties continues to meet mandatory reliability standards established by NERC.
Because there is no significant generation capacity located in the project area, customers in Roanoke, Salem, Lynchburg, the New River Valley and adjoining counties must depend upon the transmission system serving the area for continuous and reliable source of electricity.
The companies added that the Cloverdale substation is the principal transmission hub for the extra high voltage transmission lines serving that area, which include the Jacksons Ferry-Cloverdale 765-kV line, the Cloverdale-Joshua Falls 765-kV line, the Matt Funk-Cloverdale 345-kV line and the Cloverdale-Lexington (AEP-Dominion interconnection) 500-kV line.
The project is needed for three main reasons, including that it has been mandated by PJM Interconnection as necessary to address certain NERC reliability criteria violations identified in PJM’s 2011 regional transmission expansion plan (RTEP). Also, PJM conducted a market efficiency study that determined that the project will cost-effectively address the significant economic congestion that exists on the bulk transmission system in the area. Furthermore, two 500/345-kV transformer banks at the Cloverdale substation are approaching the end of their useful life and need to be replaced to maintain reliability.
The companies also noted that a reliable and stable power supply is necessary in order to attract new industries and expansions of existing industries to the area. Additionally, they said that the location for the project will reasonably minimize adverse impact on the scenic assets, historic districts and environment of the area concerned.
The companies further noted that placing all or a portion of the project underground is not a reasonable option and the project will use or parallel existing rights-of-way to the extent feasible.
Among other things, the companies said that while they concur with most of the recommendations presented in the state Department of Environmental Quality (DEQ) report, they oppose some of them as they are “unduly burdensome, impractical and/or unnecessary.”
For instance, they object the recommendations of the state Department of Game and Inland Fisheries as to a time-of-year restriction on in-stream work in Tinker Creek and its tributaries.