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Transmission Expansion: Risk and Reward in an RTO World

Some thoughts on who should take the lead and how to set up financial incentives.
Fortnightly Magazine - August 2002

FERC had rejected that request without prejudice because the MISO itself had not yet won certification as an RTO. 5

Later, on Dec. 3, 2001, MISO sought to raise ROE to 13 percent for all ISO pricing zones other than American Transmission Co., the ITC formed under Wisconsin law. In addition, MISO sought to add 1 percent (100 basis points) to the proposed 13 percent baseline for RTO construction of new facilities. Finally, it asked for a 15-year depreciation rate for new facilities, plus a special incentive of 200 basis points (on top of the 13 plus 1 percent rate) for new transmission projects determined by MISO to require expediting.

MISO had supported its request with a DCF analysis of gas pipelines and other utilities, as well as independent DCF analysis of utilities' cost of capital by Moody's and Standard and Poor's. MISO had argued that a 13 percent return fell within a range of reasonableness between 9.28 and 15.48, and that an ROE slightly above the median was justified by the risk to owners of relinquishing control. MISO also argued that transmission was risky relative to gas pipelines, and that the higher return was needed to induce transmission owners to join the RTO.

In January, FERC granted authority to MISO to claim a 13 percent return, but suspended the rate and set the matter for hearing. 6 But for our purposes the significance of the order lies with the policy guidance found elsewhere in the opinion.

In particular, FERC emphasized that 13 percent was not a premium ROE for new investment, but simply the higher end of the reasonable range for existing plant. 7 This decision is therefore very important for utilities that are still working towards RTO approval. 8

Were a higher ROE considered a PBR or premium, it may be required to "incent" the behavior of joining the RTO. Cases have found that an incentive may not be established if the conduct is already underway. 9 Additionally, the PBR would have to establish an "additional" benefit, beyond compliance with Order 2000-an order that has not yet involved strictly enforced performance deadlines. Such proof would be fraught with debate over whether refusal to join an RTO was an option, and joining was a material "additional" benefit. The MISO order relieves utilities of any perceived timing conflict between establishing a PBR and joining an RTO. Higher ROEs should be available to a transmission owner without respect to when it joins.

The MISO decision clears up some confusion created by other rejected proposals. For example, in , FERC rejected a PBR mechanism outside the context of an RTO that met independence criteria. 10 In that context, FERC stated "other incentives such as the increased ROE on existing plant … are not designed in a manner consistent with Order 2000 because incentives would flow to transmission owners who, " (emphasis added) The MISO decision makes it clear that increased ROEs are possible even though the non-profit MISO will be flowing those higher returns back to transmission owners who are passive and make no