While the transmission industry in the United States faces such challenges as rate certainty questions, there is still ample opportunity for project development, according to panelists at TransForum East, which was held in Washington, D.C., and presented by PennWell’s TransmissionHub.
Speaking on the Dec. 1 panel on rate recovery, David DesLauriers, director – Management Consulting Division, with Black & Veatch Corporation, said that 2015 was a remarkable year “in the sense that we saw, really, a confluence of the emerging pressures emerging for transmission developers. Those pressures were arising from challenges to base returns on equity, evolving incentive policy … as well as new rate certainty questions that are arising out of [FERC] Order 1000.”
He also noted that all projections of transmission investment going forward from 2015 and beyond indicate that there is a leveling out of transmission build. He said that the drivers for transmission investment are still present, such as congestion matters, renewable integration, the changing grid, the need to improve reliability, aging infrastructure issues, and the need to introduce new technologies into the grid.
“[Y]et, as we step back and acknowledge that those drivers are still very real and very present, we have to begin to ask ourselves the question as [to], are there other factors and other drivers affecting build going forward,” he said.
As noted in his presentation, according to the Edison Electric Institute, projected transmission investment is slated as $19.2bn in 2015, $19bn in 2016, and $19.8bn in 2017.
Discussing challenges to returns on equity (ROEs) that are outstanding in ISO New England and in the Midcontinent ISO (MISO), DesLauriers said: “[We] have to stand back and ask ourselves … is this now really the time to be challenging ROEs? What kind of impact will that have on transmission investment going forward, and the whole question of establishing longer-term ROEs – is that a valid policy approach when we know that federal monetary policy could be changing very soon?”
DesLauriers also discussed Order 1000, noting that “we are beyond the regional and interregional filings and, really, we’re beginning to consider some new questions that hadn’t been raised before because of where we were in the process.”
On where Order 1000 stands today, his presentation noted that competitive solicitation processes are open in several ISO/RTO regions, including MISO and the Southwest Power Pool (SPP), and that the initial project solicitation and bid review processes are now proceeding.
DesLauriers also referenced a filing made at FERC by ITC Holdings’ (NYSE:ITC) ITC Grid Development.
As TransmissionHub reported, ITC Grid Development in September requested that FERC provide the guidance that the company requested as to how winning bids will be treated for ratemaking purposes in time to facilitate the company’s participation in the ongoing SPP competitive solicitation process.
As TransmissionHub reported in September, various entities across the United States filed comments with FERC on ITC Grid Development’s petition involving FERC Order 1000, in which the company sought guidance. ITC Holdings said in July that its petition comes at a time when RTOs are initiating their recently approved competitive solicitation processes. SPP has an open bidding window for its first competitive project, while MISO is expected to launch its competitive process before the end of the year.
In its Sept. 25 answer to comments and protests, ITC Grid Development noted that it asked FERC to provide guidance with respect to an approach devised by the company – a binding bid with exemptions (BBE) – to comply with the long-term revenue requirement bids prescribed by MISO and SPP in their FERC-approved Order 1000 transmission solicitation processes. Many of the protests and comments made in the proceeding are aimed at other targets, including the role of cost-based rates in the transmission project solicitations demanded by Order 1000, ITC Grid Development said.
As noted in DesLauriers presentation, implications for 2016 and beyond in relation to the ITC filing include that the outcome could provide some precedent for rate treatment of future competitive projects (Order 1000) across the country. According to his presentation, related questions include:
- How will an extended decision timeline on this question affect competitive bids in the short term?
- Can this decision affect future ROE and incentive levels? Investment levels?
- What steps should developers consider today in light of this open question?
Discussing the outlook for 2016, his presentation noted that evolving conditions continue present some headwinds for transmission developers but Black and Veatch suggests that they are manageable. Suggested better practices include: deciding which markets and projects make the most sense for one’s enterprise; monitoring competitive solicitation roll-outs closely (new regions-new solicitations); monitoring key regulatory filings that will shape and clarify rate trends; and expecting and managing a certain level of uncertainty commensurate with one’s enterprise’s risk-reward comfort, as not all questions will be answerable at the project’s start.
‘Incredibly difficult to develop transmission projects’
Paul Kraske, partner – Energy & Infrastructure Projects, at Skadden, Arps, Slate, Meagher & Flom LLP, during his presentation on the panel, noted that it is still taking an “incredible amount of time” to develop transmission projects in the United States.
He listed some examples of projects in development, including Eversource Energy’s (NYSE:ES) Northern Pass project, Clean Line Energy Partners’ Plains & Eastern Clean Line project, and TransWest Express LLC’s TransWest Express Transmission Project.
“[I]t is still incredibly difficult to develop transmission projects in the United States, and it is incredibly risky to develop those projects because you could spend a great deal of time and a bucket of money developing the project, and not get to the finish line,” Kraske said.
On whether the market is mature to the point where the industry does not need help to get transmission projects done, or can live without government support, Kraske said, “I would say emphatically no.”
He added, “[I]f the question is, is the only way to provide that support through additional incentives in … rates, I suppose I would say, I don’t necessarily think it is.”
Transmission development is a long, arduous and risky proposition and seemingly, there are two ways to apply government support to mitigate that situation, he said.
“One is you can hold a pot of money … at the end of the process and say, ‘If you make it, we will reward you … with this financial incentive,’” he said.
The other entails, instead of holding a large amount of money to incent people to take risks, “you could apply your support in such a way as to make the path less arduous and the mission less risky,” he said.
What makes transmission development arduous and risky is not lack of opportunity or lack of capital or financing for different transmission projects, but rather, it is siting and permitting, Kraske said.
He noted that there is still opportunity for transmission infrastructure in the United States that is outpacing the development of transmission projects.
“[W]e are still not getting the job done in putting up the transmission projects as … fast as they’re required and to the extent that it’s … contemplated by folks who are really looking for a robust grid,” he said.
Noting that the government has tried to facilitate siting and permitting in the past, without too much success, he said that the answer involves “some sort of federal government backstop siting authority, equivalent to Natural Gas Act authority for the development of gas pipelines – give FERC the ability to … site transmission lines. I realize that it is kind of a big ask, … but I’m not sure this is a bad time to have this discussion; 2016 is an election year [and] there’s going to be a lot that’s on the table.”
The answer also involves “some kind of statutory time limit on NEPA reviews,” he said, adding, “[L]et’s give folks that are developing transmission some sense of how long their NEPA process is actually going to take.”
Also speaking on the panel was Macdara Nash, vice president – Business Development, with National Grid, who noted that the transmission market continues to evolve.
As stated in his presentation, that evolution involves:
- FERC methodology and RTO and independence adders initially enabled more open and transparent transmission systems
- Non-ROE incentives evolved to target specific risks, such as abandonment
- Competition was introduced
- Increased stakeholder involvement questioning the need and risk/reward balance of historical allowed ROEs
Transmission is risky business, his presentation added, highlighting such matters as:
- Long and contentious siting and permitting
- Changing route/unknown subsurface conditions
- Big capital outlays and long-lived projects
- Shifting demand/changing needs
- Changing technologies
- Competitive proceedings with Order 1000
Nash highlighted efforts occurring in New York, including the state’s look at alternating current transmission upgrade alternatives. He noted that for those types of projects that are competitive, questions to address include do the incentives compensate for the long and costly development cycle, particularly where there are multiple developers involved.
As noted in Nash’s presentation, the New York State Public Service Commission (PSC) in November 2012 initiated a proceeding to examine alternating current transmission upgrades. In November 2013, the PSC initiated the comparative proceeding phase of the case, and in December 2014, the PSC requested additional information and encouraged redesign within the right of way.
As TransmissionHub reported in late September, noting that it has completed a comparative evaluation of 22 transmission proposals and several non-transmission alternatives, New York State Department of Public Service (DPS) trial staff said that the infrastructure investments it has proposed will increase the bulk power transfer capability between Upstate and Downstate New York by about 1,000 MW.
The PSC initiated the AC Transmission proceedings to consider whether to address the persistent transmission congestion that exists at the Central East and Upstate New York/Southeast New York (UPNY/SENY) electrical interfaces. Trial staff added that the PSC sought proposals from transmission owners and other developers proposing projects to increase the UPNY/SENY transfer capacity by about 1,000 MW. Trial staff said it issued an interim report dated July 6, addressing primarily the issues of environmental compatibility and beneficial electric system impacts on the Central East and UPNY/SENY electrical interfaces.
According to Nash’s presentation, a PSC order is expected this month.
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