Panelists: Industry hindered by ROE matters, helped by investor interest and federal programs

Despite the benefits that electric transmission provides, such as enabling a cleaner resource mix, the industry continues to run into regulatory challenges, including return on equity matters, Karen Onaran, manager, federal regulatory affairs, Edison Electric Institute (EEI), said during a Nov. 15 financing panel at Transforum East, held in Washington D.C., and presented by PennWell’s TransmissionHub.

As noted in Onaran’s presentation, transmission provides flexibility to meet customer demands; provides access to diverse resources; and provides insurance and optionality for the future.

According to EEI data on transmission investment of investor-owned utilities, she said: “[T]he actual investment in 2015 was $20.1bn, which is a very healthy number. Again, we see in 2017, a topping out at around $22bn.”

EEI’s member companies, she said, are constantly investing in the grid to address aging infrastructure matters; build reliability and resiliency into the grid in light of such weather events as Superstorm Sandy in 2012; and make sure “that there’s affordable and reliable energy.”

While “FERC is very supportive of transmission,” the commission tends “to send the wrong message to the industry and to investors at times through some of their regulatory policies,” she said.

For instance, Onaran noted the “pancaking” in return on equity (ROE) matters, which refers to the “consecutive, serial, multiple complaints,” that are filed at the commission.

As TransmissionHub reported, there have been four successive ROE complaints filed since fall 2011, and the New England Transmission Owners (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.

The issue is not necessarily with complainants filing complaints, which is their right to do that, Onaran said.

“The issue is that, how does FERC treat that, and what FERC does is it automatically sends every single one of these complaints to settlement proceedings,” she said.

Earlier at TransForum East, Bob McKee, director – Regulatory Relations & Policy, American Transmission Company, also discussed “stacked” complaints, noting 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 [Midcontinent ISO, or] 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.”

Of the “pancaking,” Onaran said, “[T]hat’s just complete uncertainty for the utility industry and also investors, who are looking for consistent solid returns.”

She continued, “[W]e need to figure out how best to allow people to come in and yes, file complaints when they find that the rate may be unjust and unreasonable, but we need some sort of threshold because it’s getting to the point where there’s just too much uncertainty, and it’s going to look less and less attractive to investors.”

As noted in her presentation, according to EEI, FERC has made two legal errors:

  • Assertion of only one just and reasonable ROE is inconsistent with the law and not sound policy
  • Treatment of successive complaints unlawfully extends the refund period past the 15-month statutory limit

Onaran said, “Complainants need to meet at least some threshold, some basis of reasonable burden of proof that their calculations are showing that the current [two-step discounted cash flow, or] DCF methodology is showing that the current rate is absolutely unjust and unreasonable.”

She noted that EEI filed an intervention with FERC regarding the “pancaking” issue and the commission sent the matter to settlement. FERC said that it has “always allowed successive complaints, that’s not unfair, and then sent it to settlement.”

EEI has filed for rehearing, she said.

Further discussing the DCF methodology, as noted in her presentation, EEI is calling for FERC to broaden the proxy group to reflect investor choice – for instance, a national proxy group; reevaluate capping incentives at the top of the zone of reasonableness; and develop a floor based on average state-approved ROEs.

Of the floor, for instance, she said that EEI recommends that FERC come “up with a certain floor, and that the ROE must at least be 50 basis points above that floor.”

Fellow panelist, Boyd Nelson, Co-Head, U.S. Power & Utilities Investment Banking, Scotiabank, said, “I think the bigger issue for reduced ROEs for investors is the volatility – it’s the uncertainty.”

He said that other risks that the transmission industry is facing include political risks – such as policy changes and FERC decisions on ROE matters; technology risks; and construction risks, which, for instance, are manageable under the right circumstances, such as having a good EPC agreement in place.

Government programs in place

Fellow panelist, Paul Kraske, partner – Energy & Infrastructure Projects, Skadden, Arps, Slate, Meagher & Flom LLP, said during the panel: “[W]e’re not yet at the point where transmission development is going to take off without some assistance from the federal government. But at the same time, that assistance does not necessarily have to come in the form of higher ROEs. In other words, it’s not solely that sponsors and developers have to be incentivized by making more money to get into transmission development.”

As noted in his presentation, FERC in September issued an order that will reduce the ROE in MISO for transmission owners by more than 200 basis points – from 12.38% to 10.32%.

Kraske said that the question is what then, in the absence of making this more lucrative, would be effective to incent developers and sponsors to get into the transmission space or pursue these projects. Also, the question is, can the federal government be used to – instead of rewarding people more – address the other side of the equation, by removing some of the obstacles that are making it difficult to get transmission projects done, he said.

Kraske said that there is some reason for optimism, noting: “We see these statistics about the need for trillions of dollars in investment in transmission and the development of transmission is still motivated by these macro considerations, including aging infrastructure, the need to integrate renewables, the retirement of coal projects, interconnection improvements, and so on.”

Referencing the recent presidential election, Kraske said that as far as what the new administration will do on such matters as energy policy, “nobody knows,” so “there is at least some reason for concern, given the general disfavor for renewable energy.”

He added that if renewable energy development slows down and the U.S. Environmental Protection Agency’s Clean Power Plan is gone, “the question is, what happens to transmission? Like, if you’re not developing renewable energy in the middle of the country, or in places that are farther away from load, some of the compelling reasons for developing transmission go away.”

The current vacancies at FERC and at the U.S. Supreme Court also add to uncertainty in the industry, he said.

Discussing challenges in the transmission space, Kraske noted that “if you said, what are the top 10 obstacles to transmission development, one through nine would be siting and rights of way [ROWs].”

There is a demand for projects, and there is plenty of capital available to get transmission projects built, he said.

Indeed, Nelson said that “low-cost capital abounds wherever you go” with investors out there, all looking where to deploy that capital.

Nelson noted that energy transformation is “clearly another path to growth,” adding that coal-to-gas conversions will continue, which will create more growth opportunities, as “the fate of coal has been decided more on economic terms than on policy terms.”

He also said that wind and solar power development will continue to happen “as long as it creates jobs.”

Kraske said that two government programs that aim to help transmission development in light of siting and ROW challenges, as well as ROE challenges, are the Western Area Power Administration’s (WAPA) Transmission Infrastructure Program (TIP), and the U.S. Department of Energy’s (DOE) 1222(b) program.

According to WAPA’s website, Section 402 of the American Recovery and Reinvestment Act of 2009, which amends Section 301 of the Hoover Power Plant Act of 1984, authorizes Western to borrow up to $3.25bn from the U.S. Department of the Treasury to develop new or upgraded electric power transmission lines and related facilities, with at least one terminus within WAPA’s service territory, that facilitate the delivery to market of power generated by renewable energy resources. The TIP is seeking new applications from project developers, according to the site, which also noted that applicants with a proposal to build new or upgraded transmission lines and related facilities that promote the delivery of clean, renewable power should consider applying.

Kraske said that the TIP “is more of a financing program where money is made available by WAPA for the development of transmission projects in the United States.”

The 1222(b) program, which contemplates the “public/private partnership to get transmission projects done in the United States,” he said, “is not actually a financing opportunity in the first instance – it’s not going to make federal government money available to transmission projects. What both programs are actually helping with is the condemnation of rights of way, and essentially, what you’re able to do by developing your project through one of these programs is to access federal government eminent domain authority and condemnation rights.”

That “gives some certainty to developers that there is backstop authority to condemn those rights of way and get a route at the end of the day,” he said.

A big development involving the 1222(b) program, for instance, he said, is that DOE in March announced that it was partnering with Clean Line Energy Partners on the Plains & Eastern Clean Line project.

As TransmissionHub reported, with a significant number of conditions, DOE on March 25 agreed to participate in the high-voltage, direct-current, 720-mile project designed to move wind power from Texas and Oklahoma into Tennessee.

About Corina Rivera-Linares 3235 Articles
Corina Rivera-Linares, chief editor for TransmissionHub, has covered the U.S. power industry for the past 15 years. Before joining TransmissionHub, Corina covered renewable energy and environmental issues, as well as transmission, generation, regulation, legislation and ISO/RTO matters at SNL Financial. She has also covered such topics as health, politics, and education for weekly newspapers and national magazines. She can be reached at clinares@endeavorb2b.com.