On March 20, 2020, the Federal Energy Regulatory Commission (FERC) issued a notice of proposed rulemaking in Docket No. RM20-10-000 to revise its regulations regarding transmission incentives for electric utilities. Commissioner Richard Glick dissented in part. Significantly, the proposed rulemaking would change the availability and amount of return on equity incentive adders, including adders for transmission projects that meet certain economic and reliability benefits thresholds return on equity (ROE) incentives of up to 250 basis points, and would allow these incentives to exceed the zone of reasonableness when added to the base ROE.
Read on for analysis and details of the proposed rulemaking. Comments will be due 90 days after the proposal’s publication in the Federal Register, which has not yet occurred.
FERC proposes to revise its existing transmission incentives policy and corresponding regulations in light of changes in transmission development and planning in the last few years. Briefly, the proposed policy revisions are as follows:
- Focus on granting incentives based on the benefits to consumers of transmission infrastructure investment, specifically ensuring reliability and reducing the cost of delivered power by reducing transmission congestion, and depart from the risks and challenges adopted in Order No. 679.
- Offer public utilities ROE incentives of up to 100 basis points for transmission projects that provide sufficient economic benefits, as measured by the degree to which such benefits exceed related transmission project costs.
- Offer public utilities an ROE incentive of up to 50 basis points for transmission projects that provide significant and demonstrable reliability benefits.
- Modify the incentive allowing public utilities to recover 100 percent of prudently incurred costs of transmission facilities that are canceled or abandoned due to factors beyond the applicant’s control.
- Eliminate the ROE incentive and related acquisition adjustment incentive available to stand-alone transmission companies.
- Increase from 50 to 100 basis points the ROE incentive available to each utility that joins and/or continues to be a member of a transmission organization (i.e., independent system operator/ISO or regional transmission organization/RTO), and ensure it is available regardless of whether the utility’s participation is voluntary.
- Offer public utilities incentives of up to 100 basis points for transmission technologies that enhance reliability, efficiency and capacity, and improve the operation of new or existing transmission facilities.
- Establish a 250-basis-point cap on total ROE incentives granted to a public utility in place of the current policy of limiting ROE incentives to the public utility’s zone of reasonableness.
- Reform the information collected from transmission incentive applicants in FERC-730, Report of Transmission Investment Activity (Form 730), by obtaining this information on a project-by-project basis, and expand some of the information collected.
The most consequential of these proposals are the revisions to FERC’s incentive ROE policy. These are examined in more detail below.
Up to 100-basis-point ROE incentive for projects with a high benefit-to-cost ratio
FERC proposes to grant up to 100 basis points of ROE incentives to transmission projects based on an economic benefit-to-cost test. The incentives include a 50-basis-point incentive for transmission projects that meet an ex-ante benefit-to-cost threshold, and 50 additional basis points for transmission projects that demonstrate on an ex-post basis that they will be able to satisfy a higher benefit-to-cost threshold when constructed. To be eligible for the ex-post incentive, a transmission project must exhibit a benefit-to-cost ratio in the top 10 percent of transmission projects at the time of transmission project completion based on applying its actual costs to the projected benefits.
FERC’s rationale behind adopting a benefit-to-cost ratio for awarding ROE incentives is that this will allow it to set a clear expectation as to the level of benefits relative to costs required to receive an ROE incentive. To calculate the economic benefits of a transmission project, FERC proposes to limit measurement of economic benefits to adjusted production costs or similar measures of congestion reduction or certain other quantifiable benefits that are verifiable and not duplicative. FERC reasons that, while this will reduce the comprehensiveness of the measurement of economic benefits, it is a reasonable trade-off in the interest of making the economic benefits test transparent and straightforward.
FERC requests comment on a number of issues, including the merits of the use of benefit-to-cost ratios to determine the eligibility of transmission projects for ROE incentives based on their economic benefits, whether additional types of economic benefit measures should be considered, and whether other, existing methods could be used that are equivalent (or comparable) to adjusted production cost that might inform the range of benefit measures.
Up to 50-basis-point ROE incentive for projects that provide reliability benefits
FERC proposes to revise its transmission incentive regulations to provide a 50-basis-point ROE incentive for transmission projects that produce significant and demonstrable reliability benefits above and beyond the requirements of the NERC reliability standards. Examples of such benefits include but are not limited to the following:
- Significantly increasing import or export capability between balancing authorities
- Resulting in an Interconnection Reliability Operating Limit being downgraded to a routine System Operating Limit
- Improving the bulk power system’s ability to operate reliably during foreseen and unforeseen contingencies beyond the NERC transmission planning requirements or other local planning criteria
- Reducing the complexity of the transmission system by eliminating the need for one or more remedial action schemes on the system
- Using network management technologies — such as dynamic line ratings, power-flow controls or transmission topology optimization — which can provide significant and demonstrable reliability benefits by giving operators better tools to address unforeseen system conditions
ROE incentives may exceed zone of reasonableness, subject to 250-basis-point cap
Due to changing investment conditions, FERC proposes to revise its current policy of interpreting FPA section 219(d) to require that the ROE, inclusive of any incentives, remain within the zone of reasonableness. This proposal recognizes that the returns provided by base ROE serve a different purpose than the separate grant of authority in FPA section 219(b)(2) to provide a return on equity that attracts new investment in transmission facilities (including related transmission technologies). In place of limiting ROE incentives to the zone of reasonableness, FERC proposes to establish a cap of 250 basis points on total ROE incentives applicable to all public utilities regardless of their risk profile.
FERC seeks comment on this proposal, including on the level of the cap on the ROE incentives requested by applicants, and on whether FERC should allow applicants, on a case-by-case basis, to seek removal of the zone-of-reasonableness conditions placed on previously granted incentives and to replace those restrictions with a hard cap on the incentives they have been granted.
Up to 100-basis-point ROE incentive for transmission technologies
FERC proposes to allow developers to apply for a 100-basis-point ROE incentive for transmission technologies that enhance reliability, efficiency and capacity, and improve the operation of new or existing transmission facilities. Examples of such technologies include advanced line rating management, transmission topology optimization and power flow control. FERC will make a case-by-case determination of eligibility based on the characteristics of the technology and the benefits the technology offers. Each public utility seeking this incentive must demonstrate that the technology, as applied in a particular transmission project or stand-alone transmission technology project, meets the criteria for eligible transmission technologies and that the transmission technology project meets the economic benefits ROE incentive benefit-to-cost threshold described above.
100-basis-point incentive for RTO participation
FERC proposes to provide each transmitting utility that turns over its wholesale transmission facility to the RTO/ISO a fixed 100-basis-point RTO-participation incentive, and modify its implementation. It reasons that standardizing and increasing the level at which this incentive is awarded reasonably recognizes the increased customer value resulting from transmitting utilities joining and continuing to participate in RTOs/ISOs since the issuance of Order No. 679. The proposal is that transmitting utilities newly joining RTOs/ISOs and those that already receive the current RTO-participation incentive would be eligible to seek the new 100-basis-point adder. FERC invites comment on this proposal, including on what process FERC should adopt to implement a 100-basis-point RTO-participation incentive for existing transmitting utility rates.
For further details, see the full text of FERC’s notice of proposed rulemaking.