While there is a need to develop transmission, substantial barriers exist due to such factors as financial challenges and regulatory uncertainty, according to Bob McKee, director – Regulatory Relations & Policy, American Transmission Company.
Discussing financial challenges at TransForum East, which is being held in Washington, D.C., and presented by PennWell’s TransmissionHub, McKee said on Nov. 15 that following FERC’s two-step discounted cash flow (DCF) methodology for transmission that was established in FERC Opinion No. 531 in 2014, three items have surfaced:
- Volatility in the returns on equity (ROEs) identified through the methodology
- “Stacked” complaints
- Competition with state returns for distribution and generation
As TransmissionHub reported, in Opinion No. 531, FERC changed the DCF methodology to be used in ROE determinations by adopting the two-step DCF methodology used in natural gas pipeline and oil pipeline cases, and, based on the record in a case involving New England transmission owners, set the ROE halfway between the midpoint and the top of the range of reasonableness. Since then, FERC has established hearing and settlement procedures in other cases addressing utility ROE, explaining that those should be guided by the decision in Opinion No. 531.
Discussing volatility in the ROEs identified through the methodology, McKee noted that the Midcontinent ISO (MISO) incumbent transmission owners have been subject to two complaints, with the first one filed in 2013, and the other one that was filed 15 months after the first complaint.
As reported, a Sept. 28 FERC order affirmed an initial decision in December 2015 by the presiding administrative law judge in a complaint filed under section 206 of the Federal Power Act (FPA). The complaint concerns the MISO Transmission Owners’ (TOs) base ROE reflected in MISO’s Open Access Transmission, Energy and Operating Reserve Markets Tariff. That order cuts transmission owners ROE by more than 200 basis points, so ratepayers in the MISO footprint could save an estimated $200m per year, according to an online analysis by two Stoel Rives LLP attorneys. Spurred by industrial customers’ challenge to MISO’s ROE rate in 2013, FERC ultimately found in its Sept. 28, order that MISO’s ROE of 12.38% – which had been in place since 2002 – was unjust and unreasonable, and reset it to a base rate of 10.32%, according to attorneys Richard Bonnifield and Kate D’Ambrosio.
McKee noted that with regards to complaints against the New England TOs, “that ROE is bouncing all over the place.”
As TransmissionHub reported, there have been four successive ROE complaints filed since fall 2011, and the New England TOs have contended that the continuation of repetitive complaints seeking large ROE reductions increases uncertainties and risks borne by investors and contravenes the legislative provisions of section 206 of the FPA.
Discussing “stacked” complaints, McKee noted that there is a statutory 15-month refund period.
“[W]hat has occurred is that the complainants will file a complaint, wait 15 months and, in the case of the MISO Transmission Owners, the very day that the first complaint – the 15-month period is over – they file a second complaint, so what that essentially does is it extends the refund period over a rather long stretch of time,” he said.
He continued, “[Y]ou’re kind of living under uncertainty for that entire period of time – it keeps on getting stacked over time.”
Discussing competition with state returns for distribution and generation, McKee noted that it has been established that transmission has certain risks with it and that those risks are somewhat greater than building generation and distribution. Thus, he said, it has been acceptable that the returns for transmission should be higher.
“However, as we’re in this environment of declining transmission ROEs, what that does is it bumps against the state returns,” he said, adding that “at the end of the day, it’s an access to capital issue.”
On the regulatory front, McKee addressed FERC Order 1000, noting that a key provision of that order was the introduction of competition in transmission, in that, it aimed “to ensure that these projects are built in the most cost-effective and efficient manner.”
From his perspective, he said he thinks there is work to be done on the order “and clearly, FERC does as well.”
As TransmissionHub reported, during FERC’s Competitive Transmission Development Technical Conference held over the summer, officials with PJM Interconnection, the California ISO, and such companies as Transource Energy and Public Service Enterprise Group’s (NYSE:PEG) Public Service Electric and Gas, discussed cost containment provisions in competitive transmission development processes.
Besides the technical conference, for instance, there have been other efforts by FERC to evaluate the effectiveness of Order 1000, and there are audits underway at MISO and in New England to look at those RTOs’ compliance with the order, McKee said.
As noted in his presentation, under Order 1000, competition for transmission has not really taken off, and interregional planning still seems stalled.
McKee also addressed the recent presidential election and the commissioner vacancies at FERC, noting that according to law, there cannot be more than three commissioners of the same party serving at FERC.
“You have three members [currently at FERC] that are Democrats,” he said. “[A] Republican just won, so we’re going to see turnover there just on its face because there are no Republicans on the commission at this point.”
There are two FERC vacancies, he noted, referencing the departures of former Commissioners Philip Moeller and Tony Clark. The Trump administration needs to appoint two commissioners, he said, adding that chairmanship at FERC will likely change after the election.
So, a “question is, who’s going to take that chairmanship” if current Chairman Norman Bay leaves his position, he said.
“Is the administration going to appoint one of the current sitting commissioners? That’s possible,” he said, adding, “Or could [the president-elect] just appoint a Republican and name that individual chair? And that’s possible too, so there’s a lot of movement there.”
The key takeaway, he said, is that “the composition of this body is going to change.”
With that uncertainty and challenges in the background, he said that there is also the need to build transmission. Since the election, there has been a lot of discussion about the U.S. Environmental Protection Agency’s (EPA) Clean Power Plan not going to go forward, but the underlying development is still there, he said.
“There are still coal retirements, there are still nuclear retirements [and] the fleet is still changing,” he said.
The need to build transmission to accommodate that changing fleet is still there, he said.
As noted in his presentation, the majority of the transmission system was built in the 1960s and 1970s, and the generation fleet is changing due to market drivers, technology and public policy.
“I don’t think anyone should walk away from this election thinking, okay, the generation fleet is going to stay the same,” he said. “It’s not.”