FERC on Oct. 18 granted in part a complaint against three ITC Holdings Corporation subsidiaries and set at 25 basis points – effective April 20, 2018 – their return on equity (ROE) adders for being independent stand-alone transmission companies (Transo Adders).
As noted in the order, Consumers Energy, Interstate Power and Light, Midwest Municipal Transmission Group, Missouri River Energy Services, Southern Minnesota Municipal Power Agency (SMMPA), and WPPI Energy – collectively referred to as the complainants – on April 20 filed a complaint against the three subsidiaries – International Transmission Company (ITCTransmission), ITC Midwest, and Michigan Electric Transmission Company (METC) – collectively referred to as the ITC Companies.
All three operating companies are transmission-owning members of the Midcontinent ISO (MISO) that recover incentive ROE adders under Attachment O of MISO’s Open Access Transmission, Energy and Operating Reserve Markets (Tariff).
FERC added that the complainants assert that ROE adders previously granted to the ITC Companies for being independent stand-alone transmission companies – the Transco Adders – have been rendered unjust and unreasonable by the merger transaction that FERC authorized in 2016 among Fortis, ITC Holdings, GIC (Ventures) Pte. Ltd (GIC), and their subsidiaries. As a result of that merger transaction, FERC said, the ITC Companies are now indirectly owned by two entities – 80.1% by Fortis and 19.9% by GIC – with affiliates that participate in Eastern Interconnection energy and capacity markets.
Noting that numerous parties to that proceeding questioned whether the Transco Adder would remain valid following the merger transaction, FERC said that it determined that the issue of the Transco Adder was outside the scope of the FPA section 203 proceeding and that parties seeking to pursue that issue should instead raise it through a complaint under FPA section 206.
The complaint and answer
The complainants argue that the ITC Companies are no longer entitled to collect the approximately $24m annual reserves associated with their Transco Adders, FERC said, adding that the complainants also argue that, because of the change in the ITC Companies’ ownership, the ITC Companies no longer possess the full independence that was the basis for the Transco Adders. Specifically, the complainants argue that the Transco Adders were conditioned on the companies’ remaining independent of Eastern Interconnection market participants, and Fortis and GIC participate in Eastern Interconnection markets.
FERC added that the complainants allege that the current ownership situation of the ITC Companies compromises their independence. The complainants state that Fortis subsidiary FortisOntario generates, purchases, and sells electricity over the Eastern Interconnection grid, in portions of Canada located just outside MISO, FERC said. The complainants also assert, for instance, that FortisOntario’s areas of grid use include areas affected by the “Lake Erie Loop Flow” that is regulated by phase-angle regulators (PARs) owned and operated by the ITC Companies.
FERC added that the ITC Companies, in their May 10 answer, assert that the complainants have failed to meet their burden of proof, and contend that the fundamental challenge raised by the complaint is that the ITC Companies are not independent because they “are now owned by entities whose affiliates participate in electricity markets in the Eastern Interconnection.”
However, the ITC Companies assert that the complainants fail to acknowledge the significance of the regulatory definition of market participant, which means, for instance, any entity that, either directly or through an affiliate, sells or brokers electric energy, or provides ancillary services to the RTO, unless the commission finds that the entity does not have economic or commercial interests that would be significantly affected by the RTO’s actions or decisions.
FERC also said that the ITC Companies further state, for instance, that ITC Holdings’ governance is independent from market participant influence, as ITC Holdings continues to be governed by its own board of directors, the majority of whom are independent.
In discussing substantive matters, FERC noted that in Order No. 679, it established criteria for use in determining whether an entity with active ownership by a market participant is sufficiently independent to qualify for a Transco Adder to its ROE. Those criteria include the entity’s “integrity of investment planning, capital formation, and investment processes, as well as how its business structure provides support for transmission investments,” FERC said.
FERC said that based on the record in this proceeding, it finds that the merger transaction has reduced, but not eliminated, the ITC Companies’ independence from market participants.
With respect to business structure, for instance, FERC said that it finds that the ITC Companies demonstrate some level of independence in that the majority of ITC Holdings’ board is unaffiliated with Fortis and GIC. However, Fortis and GIC have representatives on ITC Holdings’ board and thus provide some oversight to ITC Holdings’ executives, FERC said.
Given the ITC Companies’ reduced level of independence, FERC said that it finds that it is appropriate to revisit the appropriate level of the Transco Adder for the ITC Companies. FERC noted, for instance, that in 2015, prior to the merger transaction, it found that ITC Midwest was a fully independent Transco and determined that a 50 basis points was an appropriate size for ITC Midwest’s Transco Adder.
Because the merger transaction has reduced, but not eliminated, the ITC Companies’ level of independence, FERC said, the commission finds that a 25 basis point Transco Adder appropriately encourages the Transco business model in these circumstances and promotes corresponding consumer benefits.
“Accordingly, we direct the ITC Companies to revise their formula rates in Attachment O of the MISO Tariff to reflect a 25 basis point Transco Adder, effective April 20, 2018, the date of the complaint, and to make associated refunds for the period from April 20, 2018 through the date of this order,” FERC said. “We also direct ITC Companies to submit their revised MISO Tariff Attachment O formula rates in a compliance filing due within 30 days of the date of this order. In addition, we direct ITC Companies to submit a refund report within 45 days of the date of this order.”
As noted in the order, FERC Chairman Kevin McIntyre was not present at the Oct. 18 FERC meeting and did not vote on the item; Commissioner Cheryl LaFleur is concurring with a separate statement; and Commissioner Richard Glick is dissenting with a separate statement.
In her statement, LaFleur said, in part, “While I have concerns regarding the level of independence demonstrated by the ITC entities, I believe that commission precedent adequately justifies today’s determination that reduced Transco Adders for the three ITC Holdings Corporation subsidiaries are just and reasonable. Most importantly, I believe that today’s order reflects a reasonable compromise that provides immediate rate relief to customers.”
In his statement, Glick said, in part, “I dissent from today’s order because I do not believe that the ITC Companies are sufficiently independent to justify an ROE adder. … [T]he ITC Companies’ acquisition by Fortis and GIC eliminated the principal justifications for awarding the ITC Companies an additional return on their investment. I would grant the complaint in its entirety and eliminate the ITC Companies’ independence adder.”
Parties’ responses following order
An ITC spokesperson, in a statement provided to TransmissionHub, said that the company is disappointed in FERC’s “failure to fully recognize our independence. We are reviewing our options including rehearing and appeal. While the order acknowledges value in our business model, the commission found ITC to be less independent post Fortis ownership.”
Noting that the Oct. 18 order was characterized as a compromise solution and that some commissioners spoke to the need for a broad review of all transmission incentives, the spokesperson said: “Such a review will provide an opportunity for a more expansive review of this and other transmission incentives offered under FERC’s policy statement. ITC will advocate that any change to current policy should take into consideration previously approved incentives, which were relied upon by developers to construct facilities that provide ongoing benefits to customers.”
TransmissionHub reached out to the complainants for response. An SMMPA spokesperson, for instance, told TransmissionHub that the SMMPA is still reviewing the order.
David Pomper, partner at Spiegel & McDiarmid and counsel for Missouri River Energy Services and other municipal complainants, told TransmissionHub, “We are studying next steps and are appreciative that the commission took a step to protect consumers, while disappointed they didn’t go all the way.”
Katelyn Carey, Consumers Energy director of media relations, told TransmissionHub that the company is pleased with FERC’s decision “as it will likely lead to lower costs for our customers.”