Promoting Transmission Investment Through Pricing Reform Docket No. RM11-26-000

In a Policy Statement issued November 15, 2012, the Federal Energy Regulatory Commission (“FERC”) made several significant changes that will be applied prospectively in determining the need for incentive-based rate treatments for investments in new electric transmission infrastructure for the purposes of benefiting consumers by ensuring reliability and reducing the cost of delivered power by reducing transmission congestion. The Policy Statement clarifies FERC’s regulations under section 219 of the Federal Power Act and FERC’s Order No. 679, issued in 2006 to implement the FPA section 219 incentive policies.

In the Policy Statement, FERC provides guidance with respect to certain aspects of its incentives policies. First, FERC will no longer look to whether a project is “routine” or “non-routine” in determining whether a proposed transmission project meets the nexus test, which requires applicants to demonstrate a connection between the incentives requested and the proposed transmission investment. Instead, FERC has reframed the nexus test to analyze the need for each individual incentive, and the total package of incentives, instead of relying on the routine/non-routine proxy. Applicants for incentives will need to demonstrate how the total package of incentives requested is tailored to address demonstrable risks and challenges.

Second, applicants must demonstrate that they have reduced their risk through requesting other incentives (e.g., construction-work-in-progress (“CWIP”) recovery; project cost abandonment protection) before seeking an incentive return on equity (“ROE”). FERC stated that projects receiving such risk-reducing incentives may not warrant an incentive ROE, or may warrant a lower incentive ROE, based on the project’s risks and challenges. Applicants must then make four showings as part of their application for incentives:

  1. Identify the risks and challenges the proposed project faces that are not either already accounted for in the applicant’s base ROE or mitigated through risk-reducing incentives. FERC specifically noted that, while projects applying new technologies to facilitate more efficient and reliable usage and operation of existing or new facilities are likely to face the type of risks and challenges that warrant an overall incentive ROE, FERC will no longer grant a separate incentive adder for new technology.
  2. Demonstrate that applicant is taking steps to minimize risks and challenges, such as through risk-reducing incentives or through mitigating costs by implementing best practices in their project management and procurement procedures.
  3. Demonstrate that alternatives to the project are considered in either a relevant transmission planning process or another appropriate forum, such as a state regulatory commission, including identification of demonstrable consumer benefits of the proposed project and its role in promoting a more efficient, reliable and cost-effective transmission system.
  4. Commit to a cost estimate for the project to which the incentive ROE will apply (possibly with a dead-band above or below the definitive cost estimate) in granting an ROE incentive. Costs above the cost estimate will be recoverable, but will not be subject to the incentive ROE.

FERC gave three examples of types of projects that may still need an enhanced ROE despite other incentives, noting that its examples are not an exhaustive list:

  1. Projects to relieve chronic or severe grid congestion that has had demonstrated cost impacts to consumers;
  2. Projects that unlock location constrained generation resources that previously had limited or no access to the wholesale electricity markets;
  3. Projects that apply new technologies to facilitate more efficient and reliable usage and operation of existing or new facilities.