FERC rejects rehearing on most changes sought by Transource Kansas

In a Jan. 8 order, FERC denied rehearing on most of the changes sought by Transource Kansas LLC and the Kansas Corporation Commission (KCC) from a previous order that provided some incentive rate treatment for Transource Kansas, which is looking to develop projects in the Southwest Power Pool (SPP) region.

That previous order, issued April 3, 2015, granted a hypothetical capital structure of 40% debt and 60% equity and allowed Transource Kansas to establish a regulatory asset to include all prudently incurred pre-construction costs that are not capitalized and including in construction work in progress (CWIP) and amortize the regulatory asset over a five-year period. The order also accepted Transource Kansas’ proposed base return on equity (ROE) for filing, suspended it and set it for hearing and settlement procedures.

The previous order denied Transource Kansas’ request to allow recovery of costs if a project selected by SPP is abandoned for reasons outside Transource Kansas’ control, and it denied inclusion of 100% of CWIP costs in rate base during the development and construction of Highway Projects – those that will be operated at or above 300 kV.

Transource Kansas sought rehearing on those two elements, claiming that FERC’s incentive rate policy outlined in Order 679 should be applied “more flexibly” to allow incentive rate treatment for unspecified projects that emerge from the FERC Order 1000 competitive solicitation process.  

Transource Kansas is a subsidiary of Transource Energy, which is a joint venture between American Electric Power (NYSE:AEP) and Great Plains Energy (NYSE:GXP). Transource Kansas intends to develop transmission facilities that emerge from the FERC Order 1000 regional planning and competitive solicitation process established by SPP, with state-specific Transource Kansas affiliates developing their own projects and replicating the formula rate plan approved by FERC’s April 3, 2015, decision.

The KCC sought rehearing on that element, asserting that any Transource Kansas state affiliate should not be held to the ROE determination in the FERC settlement and hearing procedures since those procedures will relate specifically to Transource Kansas, will not reflect current capital market conditions when a Transource Kansas state affiliate seeks to build a project and that relying on the previous order would absolve any Transource Kansas state affiliate from the requirement that it demonstrate proposed rates are just and reasonable.

FERC denied the KCC request for rehearing, noting that in a 2014 order involving Xcel Energy (NYSE:XEL), FERC ruled that a base ROE under current market conditions is no different that determining an ROE for affiliated entities using the same capital structure and formula rates. Any state affiliates of Transource Kansas will be similarly situated to the parent company with respect to risk and capital requirements, so it is appropriate to apply the ROE being determined in the Transource Kansas hearing and settlement proceedings to any state affiliate, FERC said.

Furthermore, because Transource Kansas will have to demonstrate that its ROE is just and reasonable, “we see no reason at this time to litigate a separate ROE for each Transource SPP entity, but the commission retains jurisdiction to change an ROE” through Federal Power Act Section 206 procedures if circumstances warrant, FERC said.

The Jan. 8 decision related that in the previous ruling, FERC said granting incentive rate treatment should be tailored to address demonstrated risks and challenges faced by applicants, and that incentives sought by applicants for unspecified projects are more of a challenge.

Transource Kansas argued on rehearing that SPP’s regional transmission plan for competitive bidding provides more specifics than FERC acknowledged in the April 3, 2015, order, and that granting the CWIP costs and abandoned plant incentives would create a more level playing field between incumbent transmission owners and non-incumbents.

But FERC said that both incumbent transmission owners and non-incumbents are similarly situated with respect to the abandoned plant and CWIP costs incentives since both types of companies face the same uncertainty regarding those incentives when putting bids together under the SPP competitive solicitation process.

FERC declined to apply its incentive rate treatment more flexibly for unspecified projects that might emerge from the Order 1000 competitive solicitation process. “Transource Kansas has not identified a specific need for the commission to expand its public policy goals beyond that which it has already enunciated in order to align the commission’s incentive rate practices with a regional transmission organization’s competitive solicitation process,” FERC said.

The order did grant Transource Kansas’ requested clarification that the initial filing of a pro forma formula rate can be made by whichever Transource SPP entity is first awarded a competitive upgrade project by SPP. The formula rate will not be restricted to Transource Kansas and may be used by any Transource SPP entity seeking to use it, FERC said.