FERC granted incentive rate treatment to NextEra Energy Transmission West LLC (NEET West) for its development of two projects through the California ISO’s (Cal-ISO) competitive transmission development process and set for hearing and settlement proceedings NEET West’s proposed return on equity (ROE) of 10%.
FERC’s Jan. 8 order also said that NEET West’s proposed ROE associated with the cost cap NEET West agreed to in the Cal-ISO process “highlights broader policy considerations related to the potential benefits of cost containment proposals in the context of competitive transmission development,” and that FERC will hold a technical conference to explore such issues.
NEET West in its incentive rate proposal sought a 10% base ROE for two separate projects in the Cal-ISO footprint, with a 50 basis point adder for participation in a regional transmission organization, along with other incentives. The order approved an abandoned plant incentive – allowing recovery of prudently incurred costs if the projects must be abandoned for reasons outside NEET West’s control – along with a regulatory asset incentive, a hypothetical capital structure of 50% debt and 50% equity and the 50 basis point ROE adder for Cal-ISO participation.
NEET West told FERC that the proposed base ROE is conservative in light of the cost containment risks it will face as a competitive developer of the projects, and it asserted that FERC should not hold a hearing on the ROE issue due to the cost cap commitment. It claimed that a hearing and settlement process will add delay and uncertainty around the projects, which it hoped to avoid due to the aggressive schedule for the Suncrest project, FERC said.
The Suncrest project involves a Static VAR Compensator (SVC) at San Diego Gas & Electric’s existing Suncrest substation, along with a short 230-kV tie-line connecting the SVC to the substation, the order pointed out. NEET West committed to a construction cost cap of $42.8m and a binding operating and maintenance (O&M) cost cap for the first five years following the start of commercial operations, FERC said.
NEET West expects to place the Suncrest project in service in 2Q17, and as TransmissionHub reported in January 2015 when Cal-ISO awarded NEET West to be the project developer, the cost containment language in the NEET West proposal was cited by the Cal-ISO as one of the key reasons the NEET West bid was chosen.
NEET West also committed to a construction cost cap of $24.5m, and a similar five-year O&M cost cap for the Estrella Substation Project, which includes a new substation, new 230/70 kV transformers, as well as reconductoring and looping of existing transmission lines owned by Pacific Gas & Electric.
NEET West sought the 10% base ROE, along with an adder that would be applied only if the base ROE is determined to be below 10%, such that the adder would bring the ROE to 10%, but in no case exceed 150 basis points, FERC explained. NEET West said that the ROE is conservative and that the adder and incentives were needed given the considerable risks it faces compared with traditional cost-of-service projects because of the possibility that cost overruns in development of the projects will be unrecoverable, the order related.
“We find that NEET West has not provided adequate support for its requested conditional ROE incentive and, therefore, deny it,” FERC said, noting that protestors challenged the proposal because it did not strike an appropriate balance between risk to NEET West and risk to ratepayers.
Although NEET West’s cost containment commitments protect ratepayers from certain construction cost and O&M costs for a specific term, there is no commitment by NEET West to cap its base ROE over time, thus potentially changing the bargain of its commitment, FERC said.
“We note that our rejection of NEET West’s requested conditional ROE incentive is based on the specific facts and circumstances of this case,” and that the case “highlights broader policy considerations related to the potential benefits of cost containment proposals in the context of competitive transmission development,” FERC said.
The commission said it intends to convene a technical conference in the future to explore such issues, including how they relate to FERC’s policy statement on incentive transmission rates.