In a move to encourage investment in transmission infrastructure, FERC amended its previously-issued final rule on promoting transmission investment through pricing reform, as mandated by the Energy Policy Act of 2005 (EPAct 2005). In the order on rehearing, FERC granted the requests for rehearing of several industry groups and established a rigorous nexus test for incentives and clarified that Return On Equity (ROE) incentives will not be handed out lightly.

Pursuant to the nexus test, applicants must show a "meaningful causal connection" between the requested incentive and the demonstrated risks and challenges faced by the applicant in building transmission. FERC clarified that it will not hand out incentives merely for building transmission or based on the applicant's statements that incentives are needed. Rather, the applicant must demonstrate that the incentives are "tailored to address the demonstrable risks and challenges faced by the applicant," according to a statement made by Chairman Kelliher.

FERC also clarified the process to obtain an incentive ROE. Where an applicant seeks multiple incentives, FERC will look at the total package of what has been requested to determine its effect on risk factors, and whether a lower incentive ROE is merited in light of the effects of the total package of incentives on risk. Applicants will need to justify the need for an incentive ROE, and then will need to further justify the specific level of ROE. A ROE determination may be requested up-front, prior to making an investment, through a request for declaratory order and applicants will not need to present a cost-benefit analysis for incentive-based rate treatment. Additionally, the previously-established rebuttable presumption, which holds that state and federal approvals for transmission siting would satisfy the requirement that a project reduce congestion or maintain reliability, was amended such that to the extent these state and federal approvals do not address the congestion or reliability requirements, the applicant must explain how the project will satisfy them.
(Docket No. RM06-4)