With FERC Commissioner Tony Clark dissenting, the commission, in a Jan. 6 order, accepted ITC Midwest’s compliance filing, granted the company’s request for clarification, and denied the requests for rehearing of ITC Midwest and Resale Power Group of Iowa in the matter involving ITC Midwest’s transco adder.
As TransmissionHub reported, FERC, in a March 31, 2015 order, conditionally accepted the ITC Holdings (NYSE:ITC) subsidiary’s request to implement a transco adder of 100-basis points, subject to the adder being reduced by 50-basis points and applied to a base return on equity (ROE) that is shown as just and reasonable.
Clark and then-FERC Commissioner Philip Moeller, in a March 31 statement, dissented.
“We are disappointed by FERC’s decision to depart from its longstanding policy of granting 100-basis points for the benefits associated with the independent model,” ITC said, in part, on April 2, 2015.
In its March 31 order, FERC ordered that the adder be effective April 1, 2015, pending the outcome of a November 2013 complaint that seeks to reduce the base ROE of Midcontinent ISO (MISO) transmission owners to 9.15%. FERC said that the justness and reasonableness of ITC Midwest’s base ROE should be based on an updated discounted cash-flow (DCF) analysis that is subject to the findings of an appropriate zone of reasonableness in those complaint proceedings. Complainants in that case are the Association of Businesses Advocating Tariff Equity, Coalition of MISO Transmission Customers, Illinois Industrial Energy Consumers, Indiana Industrial Energy Consumers, Minnesota Large Industrial Group, and Wisconsin Industrial Energy Group.
In the March 31 order, FERC determined that the 100-basis points incentive is excessive for the transco adder at this time. FERC directed ITC Midwest to revise its proposed tariff provisions to modify the transco adder from 100 to 50 basis points and revise its proposed formula rate in a compliance filing within 30 days of the date of the order.
In response to the Jan. 6 order, ITC spokesperson Bob Doetsch told TransmissionHub on Jan. 7: “Given FERC’s approval, we will proceed in including this incentive in our rates in ITC Midwest. The use of transmission incentive adders [supports] the unique risks and challenges ITC faces in transmission investment. From the perspective of doing what’s best for customers and the grid, a reasonable and stable return on equity is important, particularly as the industry embarks on a new build-out of electric infrastructure to address approaching environmental regulations and other external forces.”
Doetsch also said that ITC is disappointed in the order “because we believe FERC failed to provide an explanation for its departure from its prior practice and precedent of awarding 100 basis points for fully independent transmission companies.”
FERC’s Jan. 6 order
As noted in FERC’s Jan. 6 order, ITC Midwest, on April 29, 2015, submitted revisions to the ITC Midwest formula rate in Attachment O of the MISO tariff to modify the transco adder from 100 to 50 basis points. On April 30, 2015, ITC Midwest submitted a request for clarification and rehearing of the March 31 order, and Resale Power Group of Iowa submitted a request for rehearing of the March 31 order.
FERC noted that ITC Midwest requested that FERC clarify that the complaint proceeding also may establish the base ROE effective as of April 1, 2015, to which the transco adder will be applied. In its initial transco adder request, ITC Midwest sought approval of the transco adder to be made subject to the outcome of the complaint proceeding, FERC said.
FERC also said that ITC Midwest stated that FERC addressed the effect of the complaint proceeding on this proceeding stating that “the commission has not ruled on the complaint. However, [the commission] note[s] that if that proceeding results in an updated zone of reasonableness, ITC Midwest’s ROE will be bound by the zone of reasonableness established in that proceeding.”
ITC Midwest asserted that, while FERC identified the complaint proceeding as the potential source of the zone of reasonableness that will bound ITC Midwest’s transco adder, FERC did not state that the complaint proceeding could establish the base ROE to which the transco adder will be applied. Therefore, FERC added, ITC Midwest sought clarification that the complaint proceeding may also establish the base ROE effective as of April 1, 2015, to which the transco adder will be applied.
ITC Midwest requested rehearing of FERC’s decision to reduce the requested transco adder to 50 basis points without a reasoned explanation for its departure from prior precedent of awarding a 100-basis point transco adder for fully independent transmission companies, FERC said.
ITC Midwest stated that FERC in the March 31 order rejected every argument raised by protestors against granting ITC Midwest the transco adder, FERC said.
Among other things, FERC said that ITC Midwest noted that, in the March 31 order, FERC acknowledged that prior orders granting 100-basis point adders were based on the “specific circumstances of the applicants and market conditions at the time of their applications.” ITC Midwest argued, however, that FERC’s precedents do not support FERC’s review of “market conditions” in determining whether to approve the 100-basis point transco adder, FERC said.
Citing arguments in the dissents issued by Clark and Moeller, ITC Midwest asserted that FERC’s decision is not based on the record, is arbitrary and capricious, and provides no guidance on what showing would justify a 100-basis point transco adder, FERC said.
Of Resale Power Group of Iowa, FERC said, for instance, that the group asserted that the plain meaning of “incentive” under Federal Power Act (FPA) section 219 is a “payment or concession to stimulate greater output or investment,” not a reward or bonus for doing something already accomplished or in progress. According to Resale Power Group of Iowa, FERC precedent recognizes that incentives must be prospective and linked to new customer benefits, FERC said, adding that Resale Power Group of Iowa argued that FERC departed from those precedents by adopting an incentive that accomplishes nothing new for transmission customers because ITC Midwest has already undertaken transmission infrastructure projects without the transco adder. Resale Power Group of Iowa argued that ITC Midwest’s application contained no evidence that ITC Midwest would provide new benefits to customers if granted the transco adder, FERC said.
Furthermore, Resale Power Group of Iowa argued that FERC violated its own regulations by granting the transco adder because the incentive is not required to encourage ITC Midwest’s formation, FERC said. Resale Power Group of Iowa asserted that FERC’s regulations and precedent state that the transco adder be granted only where it both encourages Transco formation and is sufficient to attract investment, FERC said, adding that Resale Power Group of Iowa contended that ITC Midwest, a seven year-old Transco, does not need an incentive to encourage its formation.
Noting that it grants ITC Midwest’s request for clarification, FERC said that while paragraph 41 of the March 31 order was unclear, FERC did state in paragraph 1 and ordering paragraph “(A)” that its acceptance was subject to the proposed transco adder being applied to a base ROE that has been shown to be just and reasonable based on an updated DCF analysis and subject to the resulting ROE being within the zone of reasonableness determined by that updated DCF analysis, as those may be determined in the complaint proceeding, and subject to the outcome of the complaint proceeding.
FERC said it denies the requests for rehearing, adding that it disagrees with ITC Midwest’s contention that FERC’s grant of a 50 basis point transco adder instead of the requested 100-basis point adder is not based on the record, is arbitrary and capricious, and provides no guidance on what showing would justify a 100 basis point transco adder beyond unsupported references to “specific circumstances” and “market conditions.”
FERC said that it has conducted independent analysis for each requested ROE incentive, and has not based or justified its granting of such incentives solely on the prior approval of ROE incentives.
FERC also said that it found, as a preliminary matter, that ITC Midwest is a fully independent, stand-alone transmission company member of MISO under Appendix I of MISO’s tariff. However, FERC said, ITC Midwest’s level of independence is just one consideration in FERC’s analysis of an applicant’s request for ROE incentives.
FERC said it disagrees with Resale Power Group of Iowa’s assertion that FERC’s grant of a transco adder violated FPA section 219 and FERC’s regulations because the 50-basis point transco adder is not an incentive and because it does not encourage Transco formation and attract investments.
FERC noted that its statement in Order No. 679 that adoption of the final rule would “provide to Transcos a ROE that both encourages Transco formation and is sufficient to attract investment after the Transco is formed,” was not a requirement that a transco adder encourage Transco formation and be sufficient to attract investment, but was instead merely referring to them as two primary potential benefits of the transco adder.
Among other things, FERC noted that Resale Power Group of Iowa argued that Transco investments have not reduced costs or increased competition, but it merely reiterates previously raised arguments that its rates have gone up since 2008. Regardless of whether Resale Power Group of Iowa’s rates have increased, such an increase does not itself demonstrate that costs would be lower or competition higher absent such Transco incentives or why such incentives would no longer confer such benefits, FERC said.
In a separate Jan. 6 statement, Clark said that consistent with his joint dissent with Moeller in the underlying proceeding, he continues to disagree with the decision to reduce the ROE transco adder for ITC Midwest from 100-basis points to 50-basis points.
“It will be unsurprising if stakeholders are left wondering on what basis the commission reversed precedent and reduced the ROE adder,” he said. “On rehearing, the commission fails to offer additional insight, support or an adequate record upon which to justify its decision.”
Given the significant ongoing changes in the delivery of electricity, driven in no small part by a changing resource mix and a slew of environmental regulations, Clark said he believes that ROE stability would better serve consumers.
“The trend in the electricity industry points towards a consumer-driven need for more investment in transmission infrastructure, not less,” he said. “While I do not dispute there may be times in which the commission is justified in lowering ROEs for utilities based on a fully developed record, such is not the case here. Lowering ROEs on the basis of this scant record sends the wrong signal to investors, sowing uncertainty about the direction the commission is heading with regard to infrastructure policy, and creating a chilling effect during a time in which we will likely most need that very investment.”