Client Alerts
Comment Deadline Approaches for FERC’s Proposed Transmission Incentives Rule
By William DeGrandis, Jenna McGrath, Nicholas J. Guidi & Carlos Clemente
The Federal Energy Regulatory Commission (“Commission” or “FERC”) recently issued a Notice of Proposed Rulemaking (“NOPR”) proposing to revise its existing transmission incentives policy and corresponding regulations.
Since the release of the NOPR, the positions of various industry participants discussed in comments in energy media outlets have aligned along anticipated sides. Transmission owners and developers in some cases do not believe that the Commission has gone far enough in increasing access to incentives, or has proposed to place new burdens on, or even taken away, incentives they have been counting on. Transmission customers, on the other hand, fear the proposed reforms are too generous to transmission owners, and are concerned by the potential of higher transmission costs. Comments are due to be filed with the Commission by July 1, 2020, and the significant level of informal comments and discussion thus far will help parties focus their comments on the various proposals included in the FERC NOPR.
I. Highlights of the Transmission Incentives NOPR
The NOPR proposes substantial revisions to the Commission’s transmission incentives policies. Specifically, FERC
The Federal Energy Regulatory Commission (“Commission” or “FERC”) recently issued a Notice of Proposed Rulemaking (“NOPR”) proposing to revise its existing transmission incentives policy and corresponding regulations. The Commission’s intent in proposing these revisions is to adapt its transmission incentives policy to the constantly evolving landscape of transmission infrastructure planning, development, operation, and maintenance. FERC asserts that the drivers of the reforms include the diversification of the resource mix, abundance of new resources requiring transmission, shifting load patterns, increased transmission planning spurred by recent Commission rulemakings, and emerging challenges to maintaining structural reliability.
Since the release of the NOPR, the positions of various industry participants discussed in comments in energy media outlets have aligned along anticipated sides. Transmission owners and developers in some cases do not believe that the Commission has gone far enough in increasing access to incentives, or has proposed to place new burdens on, or even taken away, incentives they have been counting on. Transmission customers, on the other hand, fear the proposed reforms are too generous to transmission owners, and are concerned by the potential of higher transmission costs. Comments are due to be filed with the Commission by July 1, 2020, and the significant level of informal comments and discussion thus far will help parties focus their comments on the various proposals included in the FERC NOPR.
I. Highlights of the Transmission Incentives NOPR
The NOPR proposes substantial revisions to the Commission’s transmission incentives policies. Specifically, FERC proposes to:
Discard the “risks and challenges” approach that FERC has utilized based on previous rulemakings, in favor of a benefits assessment for return on equity (“ROE”) incentives, with a particular focus on the benefits of reducing costs and ensuring reliability.
Offer ROE incentives for projects that demonstrate exceptional economic benefits compared to other transmission projects, based on ex ante and ex post benefits-to-costs analyses.
Offer an ROE incentive for projects that demonstrate significant reliability benefits.
Modify the Abandoned Plant Incentive to commence from the date the project is selected in a regional transmission planning process for cost allocation purposes, rather than the date the Commission grants the incentive.
Eliminate the ROE and acquisition adjustment incentives for stand-alone transmission companies (“Transcos”).
Implement a uniform 100 basis-point ROE incentive for utilities that join or remain a member of a Regional Transmission Organization (“RTO”) or Independent System Operator (“ISO”), regardless of whether such membership is voluntary.
Offer a 100 basis-point ROE incentive and regulatory asset incentive for transmission technologies that enhance reliability, efficiency, and capacity, and improve the operation of new or existing transmission facilities.
Establish a uniform 250 basis-point cap on total ROE incentives to replace the current ROE incentive ceiling based on the upper boundary of a utility’s zone of reasonableness.
Reform the FERC Form 730 (Report of Transmission Investment Activity) process to solicit information on a project-by-project basis, instead of the previous practice of collecting this information on an aggregated basis, and require additional information.
[2]
The Commission invited comment from interested parties on these proposals and the details of their implementation. Initial comments are due July 1, 2020 (per the NOPR, this date is 90 days after its publication in the Federal Register).
As discussed more fully below, transmission incentives have significant financial and policy implications for a wide range of industry participants. The sheer scale and number of the proposed reforms ensures that they will garner numerous comments from diverse sectors of the industry. For this reason, it should be noted that the NOPR and the regulations it proposes are merely proposals at this point, and are not final. The Commission has left itself substantial leeway to modify the proposals included in the NOPR, and will consider comments from interested participants before announcing a final rule. In some cases, the NOPR’s proposals embody concerns or statements made by the Commission in individual transmission incentive cases in recent years.
II. Major Reforms and Implications
FERC has proposed considerable revisions to its policy of granting project-specific ROE incentives. First, the Commission has proposed to discard its current risks and challenges inquiry in favor of an approach that assesses a transmission project’s benefits.
Regarding the first benefit, the Commission proposes to offer an ROE incentive for a project’s economic benefits measured by the degree to which they exceed the costs of related transmission projects.
Together, these economic ROE incentives have the potential to substantially increase the amount of additional revenue available to developers through transmission ROE incentives, as well as increase costs to transmission customers, compared to the current approach. Under the risks and challenges nexus test, the Commission rarely awards ROE incentives and typically caps the select few awarded at 50 basis points. While the comparability analysis referencing peer projects will serve to limit incentives, the potential pay-offs are much larger given the opportunity to receive a 100 basis-point total incentive. Further, the benefits-to-costs assessment will introduce a more quantitative analysis than the largely qualitative nexus test. This could translate to greater certainty as to which projects would merit an economic incentive. However, the Commission’s development of the percentile thresholds and the appropriate study parameters are not plainly defined in the NOPR, and this area will likely draw significant comments as to the details of their implementation.
Regarding the second listed benefit, reliability, the Commission proposes to offer a separate ROE incentive of up to 50 basis points for projects that produce significant and demonstrable reliability benefits above and beyond the requirements of NERC standards.
The Commission invited comment on other types of projects that could demonstrate reliability benefits, and noted that it would also consider the degree to which a project increases resiliency. This broad reliability standard could either signify a holistic assessment by FERC or indicate that the criteria will narrow considerably in a final rule.
In addition to these benefits-based incentives, the Commission proposes to offer incentives for technologies that, as deployed in certain circumstances, enhance reliability, efficiency, capacity, and improve the operation of new or existing transmission facilities.
In addition to these project-specific incentives, the Commission has proposed to modify its ROE incentive for participation in an RTO or ISO.
This expanded incentive has already garnered significant controversy. Commissioner Glick dissented from the NOPR, partially based on this addition. He noted that “[t]here is nothing in the record to suggest that any transmission owner would leave an RTO if not for that handout,” and added that, “[s]imply put, the Commission wants to double the cost to consumers of an ‘incentive’ that does not incentivize anything.”
In light of these substantial changes to its ROE incentive policy, the Commission has proposed to revise the ceiling for ROE incentives.
This proposed revision to the Commission’s incentives policy is sure to draw significant scrutiny. Some will likely argue that it substitutes a one-size-fits-all standard that fails to account for utilities’ individual attributes. Others may contend that the uniform cap levels the playing field and will no longer penalize utilities based on their unique risk profiles. In either case, the new ROE ceiling has the potential to significantly increase the amount to gain from transmission incentives. This will likely draw the ire of consumer advocates, but should satisfy transmission owners that stand to benefit from these incentives. Additionally, like the RTO/ISO incentive, the Commission seeks comment as to whether it should allow applicants previously subject to the zone of reasonableness ceiling to utilize the newly proposed cap.
Lastly, the Commission has proposed to eliminate the ROE and acquisition adjustment incentives for Transcos.
The Commission’s proposed elimination of the Transco incentives leaves unanswered questions. Transcos will be eager to determine whether previously rewarded Transco incentives will continue in effect or whether the Commission will take retroactive action consistent with its proposals. The Commission invited comment on this point
Despite the proposed seismic changes to the ROE incentives described above, the Commission notes that it will continue to offer the following non-ROE incentives: Abandoned Plant Incentive, Construction Works In Progress Incentive, hypothetical capital structures, accelerated depreciation for rate recovery, and regulatory asset treatment.
With respect to the Abandoned Plant Incentive, the Commission proposes to modify the eligibility period due to intervening changes in the transmission planning process since Order Nos. 679 and 679-A.
III. Conclusion
As the NOPR’s primary effect is to increase opportunities for larger ROE incentives, while tightening or even eliminating other available incentives, the financial implications for both transmission developers and owners and transmission customers are significant. In some cases, the Commission has provided fairly specific new or revised incentives and the eligibility criteria that must be satisfied. In others, the reform is more conceptual, with an invitation for comments to flesh out how the change in incentive policy should be implemented. In either case, there is plenty for industry participants to focus on and to provide comments to the Commission in those areas. The proposed reforms will impact billions of dollars of investment in a key infrastructure sector of our nation’s economy and will ripple throughout all sectors of the electric power industry. Given the transmission-friendly proposals the NOPR presents, the outcome is likely to encourage additional investment in this sector. With the significant amount of money at stake and the wide-ranging effect, many affected stakeholders will seek to comment on the NOPR’s proposals, either individually or in conjunction with industry groups. The NOPR process is the perfect opportunity for stakeholders to submit comments expressing their positions or at least monitor the filed comments and any Commission pronouncements as the process unfolds. This NOPR is the final procedural step and thus the last opportunity to comment before the Commission determines whether to adopt these proposals in a rule.
proposes to:
For More Information
