March 27, 2019

FERC Seeks Comment on Broad Reforms to Electric Transmission Incentives Policies

Holland & Knight Energy and Natural Resources
Brendan H. Connors

On March 21, 2019, the Federal Energy Regulatory Commission (FERC) issued a Notice of Inquiry (NOI) seeking comment on possibly broad reforms to the scope and implementation of its electric transmission incentives regulations and policy under Section 1241 of the Energy Policy Act of 2005 (EPAct 2005), codified as Section 219 of the Federal Power Act (FPA), 16 U.S.C. § 824s.

Section 219 directed FERC to use transmission incentives to help ensure grid reliability and diminish the cost of delivered electric power by reducing transmission congestion. It also required FERC to use its incentives policy to promote capital investment in transmission facilities, provide a rate of return on equity (ROE) that attracts new investment in such facilities, encourage deployment of improved technologies at the facilities, incentivize utilities to join regional transmission organizations (RTO) and independent system operators (ISO), and allow utilities to recover certain prudently incurred costs associated with transmission projects.

In 2006, FERC implemented this provision by issuing Orders 679 and 697-A, which set the Commission's basic approach to transmission incentives by requiring that applicants establish a "nexus" between the incentive sought and the investment being made by the applicant, on a case-by-case basis. The Commission also identified a series of incentives that would be available, including:

  • adders to a utility's base ROE for adopting certain actions, like joining an RTO or ISO, forming a transmission-only company, or to compensate for the "risks and challenges" of a specific transmission project;
  • an "abandoned plant incentive" to compensate for prudently incurrent costs arising from plant construction projects having been abandoned and/or canceled due to factors outside of a utility's control;
  • inclusion of 100 percent of "construction work in progress" (CWIP)-related costs in a utility's rate base;
  • an incentive for hypothetical capital structures;
  • accelerated depreciation for rate recovery; and
  • a "regulatory asset incentive" allowing for recovery of prudently incurred pre-commercial operations costs as an expense or through a regulatory asset.

FERC later refined this approach in a 2012 policy statement, in which it provided additional guidance regarding Order 679 and its evaluation of transmission incentives applications.

With this most recent NOI, FERC is asking for commentary from stakeholders on required updates to its transmission incentives policy in light of significant developments in the electricity transmission arena and in various incentives proceedings before the Commission since it issued Orders 679/679-A and its 2012 policy statement.

FERC shapes the NOI as a series of questions, grouped into subject matter sections, seeking comment on the following areas:

  • Incentive Policy Approach, including whether FERC should retain the "nexus" and "risks and challenges" framework in evaluating incentive applications, or whether it should do based on expected transmission project benefits or certain project characteristics, like those located in regions with persistent needs, interregional projects, or projects that unlock constrained resources;
  • Incentive Objectives, including whether FERC should favor incentive applications for transmission projects based on their supposed reliability benefits, economic efficiency benefits, persistent geographic needs, flexibility characteristics, physical and/or cyber security advantages, resiliency benefits, and/or employment of advanced technologies;
  • Existing Incentives, including whether incentives concerning transmission-only companies, RTO/ISO participation, hypothetical capital structures, regulatory assets, CWIP, abandoned plants, and accelerated depreciation should be retained;
  • Mechanics and Implementation, including whether the Commission should limit the duration of incentives, whether it should continue to grant incentives on a case-by-case basis, whether it should consider the interrelationship between different requested incentives, and whether it should retain discretion to limit the appropriate level of ROE incentives or whether it should have pre-determined ranges;
  • Metrics, including whether the Commission should require incentive recipients to provide it more data to determine the efficacy of provided incentives;
  • Miscellaneous Matters, including whether it should grant incentives to promote joint ownership of transmission projects between public and non-public utilities and to assist non-incumbent transmission developers compete with existing transmission owners.

FERC is evidently considering material changes to its incentives policies, which could have significant consequences for affected utilities and market participants who are involved in, or are considering involvement, in electric transmission projects. Public comments will be due 90 days after the NOI's publication in the Federal Register, and reply comments 120 days after publication.

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