FERC said recently that it is seeking comments on possible improvements to its electric transmission incentives policy to ensure that it appropriately encourages the development of the infrastructure needed to ensure grid reliability and reduce congestion to reduce the cost of power for consumers.
The Energy Policy Act of 2005 amended the Federal Power Act (FPA) to add Section 219, which directs FERC to use transmission incentives to help ensure reliability and reduce the cost of delivered power by reducing transmission congestion, FERC said.
The commission noted that in July 2006, it implemented FPA Section 219 by issuing Order No. 679, which established such incentive rate treatments as return on equity (ROE) adders to compensate for the risks and challenges faced by a specific project, for forming a transmission-only company, or for joining an RTO or ISO.
Order No. 679 also established such risk-reducing incentives as allowing the use of hypothetical capital structures and inclusion of 100% of prudently incurred costs of abandoned plant in rate base, FERC said, adding that since issuing the order, it has acted on 109 incentive applications for more than $80bn in anticipated construction costs.
FERC noted that in 2012, it issued a policy statement that provided additional guidance on how it would interpret certain aspects of the regulations adopted in Order No. 679.
Of the 2012 policy statement, FERC noted in the notice of inquiry (NOI) that it reframed the nexus test for applicants seeking the ROE adder for risks and challenges and eliminated the technology ROE adder. The commission said in that policy statement that it would expect an applicant seeking an ROE adder for risks and challenges to demonstrate that:
- The proposed transmission project faces risks and challenges that were not either already accounted for in the applicant’s base ROE or addressed through risk-reducing incentives
- It is taking appropriate steps and using appropriate mechanisms to minimize its risk during transmission project development
- Alternatives to the transmission project had been, or would be, considered in either a relevant transmission planning process or another appropriate forum
- It commits to limiting the application of the ROE incentive to a cost estimate
FERC said in its statement that since Order No. 679 was issued 13 years ago, there have been numerous significant developments in how transmission is planned, developed, operated, and maintained.
As noted in the NOI, those developments include FERC’s issuance of Order No. 1000; an evolution in the generation mix and the number of new resources seeking transmission service; shifts in load patterns; and an increased emphasis on the reliability of transmission infrastructure.
The commission said in its statement that in light of developments in the transmission sector and the experience gained over that time, it believes that it is prudent to seek comment on whether and how to improve FERC’s current transmission incentives policy.
The March 21 NOI examines whether incentives should continue to be granted based on a project’s risks and challenges or should be based on the benefits that a project provide, FERC said, adding that examples of other topics addressed in the NOI include consideration of incentives based upon measurable criteria for economic efficiency and reliability benefits, providing incentives for improvements to existing transmission facilities, considering the costs and benefits of projects in awarding incentives, and determining whether to review incentive applications on a case-specific or standardized basis.
The NOI also seeks comment on various ROE incentives, including how they interact with the base ROE and other transmission incentives, FERC said, noting that the NOI further seeks input about possible metrics for evaluating the effectiveness of incentives.
Among other things, the NOI noted that FERC could evaluate incentive requests based on the transmission project’s potential to achieve benefits related to reliability and reductions in the cost of delivered power by reducing transmission congestion. Questions in the NOI included: “If the commission adopts a benefits approach, should it lay out general principles and/or bright line criteria for evaluating the potential benefits of a proposed transmission project? If so, how should the commission establish the principles or criteria?”
FERC said in its statement that initial comments on the NOI are due 90 days after publication in the Federal Register, with reply comments due 30 days after that.