By Rich Bonnifield, Jessica Friedman, and Chris Zentz

On May 19, 2011, the Federal Energy Regulatory Commission (FERC) issued a Notice of Inquiry (NOI) seeking input on FERC’s transmission rate incentives policy adopted under Order No. 679.  FERC’s review is designed to ensure that current regulations and policies on transmission incentives appropriately encourage development of transmission infrastructure. 

Comments are due 60 days after the NOI is published in the Federal Register.

BACKGROUND

Order No. 679 adopted a policy for transmission rate incentives in response to Congress’ enactment of Section 1241 of the Energy Policy Act of 2005 (EPAct).  Section 1241 added Section 219 to the Federal Power Act (FPA), directing FERC to establish by rule incentive-based (including performance-based) rate treatments to promote transmission infrastructure investment. 

In Order No. 679, FERC established several broad categories for incentive rate treatments.  To be eligible for incentive rate treatment, an applicant must satisfy the threshold criteria in Section 219 with a showing that the facilities for which incentive rate treatment is sought ensure reliability or reduce the cost of delivered power through reduced transmission congestion.  FERC established a set of rebuttable presumptions to assist in determining whether proposed facilities meet the statutory threshold, including transmission projects that (1) result from a fair and open regional planning process that considers and evaluates projects for reliability and/or congestion and is found to be acceptable to FERC or (2) have received construction approval from an appropriate state commission or state siting authority.  In addition to meeting the statutory threshold, an applicant for incentive rate treatment must demonstrate that there is a nexus between the incentives sought and the investment being made.  To satisfy this “nexus test”, FERC will examine the total package of incentives being sought, the interrelationship between any incentives, and how the requested incentives address the risks and challenges faced by a project.  FERC’s orders have clarified that this standard is implemented on a project-by-project basis and an applicant is not allowed to bundle together multiple projects for the purpose of meeting the nexus test unless they are part of a larger single project (seeVNF Alert dated January 10, 2011).

FERC’s orders on incentive rates issued to date have been as varied as the requested incentives and applications.  Many of the orders have included dissenting and/or concurring opinions of one or more Commissioners concerned that the incentives were too generous to transmission investors and that the criteria were insufficiently rigorous.  The NOI addresses the fundamental question of whether FERC’s decisions have appropriately balanced consumer and investor interests.

NOTICE OF INQUIRY

The NOI will assist FERC’s determination of whether existing rate incentive policies are working as Congress intended when it enacted Section 219 of the FPA.  Through the NOI, FERC is seeking input from stakeholders on the scope and implementation of its transmission rate incentives policies.

The NOI includes 74 specific questions related to FERC’s incentive policies under Order No. 679.  Some questions are broad in scope, while others are more focused on possible “tweaks” to FERC’s current requirements and policies.  The NOI’s “overarching questions” include:

• Are FERC’s incentives policies appropriately promoting investment in transmission infrastructure in accordance with Section 219?
• Some barriers to construction of new transmission facilities fall outside FERC’s jurisdiction.  How do FERC’s incentives policies affect such barriers?
• Are there other factors or considerations which FERC should consider as part of its transmission incentives policies, in order to be consistent with the goals of Section 219?
• Have the incentives granted to transmission projects had an impact on consumer rates and service, including impacts related to reliability and the reduction of congestion?
• Have the incentives granted to transmission projects had an impact on investment patterns in the electric industry?  Do the incentives impact the allocation of investment capital among transmission, generation, and distribution facilities?
• Examples of more specific questions that FERC posed in the NOI include:
• Do the rebuttable presumptions established in Order No. 679 serve as appropriate bases for satisfying the statutory threshold for section 219(a)?
• Is the distinction between a routine and non-routine project in analyzing “risks and challenges” useful in providing guidance to the industry on how to apply the nexus test?  Does this distinction appropriately differentiate between the level of difficulty in constructing various transmission projects?
• Do certain incentives sufficiently mitigate the risks and challenges of a transmission project so as to obviate the need for granting other incentives, or warrant adjustment in level of those incentives?  For example, should granting 100 percent Construction Work in Progress (CWIP) and recovery of the costs of abandoned plant affect the evaluation of a request for an incentive Return on Equity (ROE) adder based on a project’s risks and challenges?
• Should FERC limit the application of incentives to the cost estimate utilized for including or retaining the project in the plan submitted through the regional planning process?  If so, which incentives should be applied to the cost estimate, and which should be applied to all prudently incurred costs?
• How could such an approach be implemented?  Would this approach work in all regions of the country?  What processes for developing, evaluating, and updating cost estimates must be in place within regional transmission planning processes to facilitate such an approach?
• FERC has general ratemaking policies with respect to CWIP and recovery of abandoned plant costs, as discussed below.  Pursuant to Order No. 679, incentives above and beyond those general ratemaking policies may be requested on a case-by-case basis.  Would it be appropriate to remove these issues from the case-by-case analysis of incentive requests, in favor of exploring changes to FERC’s general ratemaking policies?  What would be the impact on ratepayers of revising these ratemaking policies, rather than authorizing higher levels of CWIP or recovery of costs of abandoned plant on a case-by-case basis?

IMPLICATIONS

Some industry observers believe FERC issued the NOI as a result of complaints from state utility commissioners claiming that FERC was giving favorable rate treatment to grid projects that should not qualify for such treatment under Section 219 of the FPA.  Commissioner Norris issued a lengthy press release on the NOI that suggests he may be open to revising current incentive rates policies.  In contrast, statements from both Commissioners Moeller and Spitzer emphasized the ongoing need to invest in transmission upgrades.  While FERC has not committed to change its incentive rates policies, the NOI presents a significant opportunity for stakeholders to shape FERC’s transmission rate incentive policies.

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