[BETA] Fortnightly

FERC faces a growing chorus of rebellion on earnings incentives.

"If I may say, today, we the states are the chosen ones." That was Virginia utility commissioner Hullihen ("Hulli") W. Moore, speaking on the phone in January with Federal Energy Regulatory Commission (FERC) Chairman Pat Wood and other federal and state regulators, trying to untangle the business of transmission reform.

Moore's comment proved prophetic. Within two months, the state public utility commissions (PUCs) representing Pennsylvania, Michigan, and Ohio took the extraordinary step of asking FERC to overrule any state that would block FERC's plan, in a motion filed in March.

The problem was none other than Hulli Moore's Virginia. In February, the Virginia General Assembly had enacted House Bill 2453, a law prohibiting any Virginia utility from transferring ownership of its transmission system, and the state's governor had shown no inclination to cast a veto. American Electric Power, with a subsidiary operating in Virginia, had cited the new law as reason to go slow on joining PJM-or any regional transmission organization (RTO), as it had promised as a condition of its merger with Central & South West.

The three PUCs were aghast. They saw Virginia as hijacking FERC's agenda:

"Since AEP indicates that it cannot operate its Virginia-based transmission facilities separately from the rest of the system, Virginia and the Virginia Commission are exercising de facto jurisdiction over a wholesale electric market region which extends over the SPP [Southwest Power Pool], MISO [Midwest ISO], and PJM [Pennsylvania-New Jersey-Maryland Interconnection] regions covering 27 states and the District of Columbia." .

So regulators now drive the debate. That muscle was seen clearly in comments filed by state PUCs in response to FERC's January plan to offer rate incentives for utilities who (1) form new RTOs, (2) transfer grid assets to independent transmission companies (ITCs) that join with RTOs, or (3) invest in new transmission facilities. FERC's planned incentives would grant increases in authorized return on equity (ROE) ranging from 50 to 150 to 100 basis points.

As might have been expected, the response has ranged from cautious approval to outright objection. State PUCs warn of higher rates. They see FERC's plan as too broad, lacking a cost-benefit analysis. (Indiana and Iowa regulators argue, however, that the ROE incentives are too narrow.)

he criticisms tend to fall under one of 10 categories:

• Unproven. Incentives are tied too closely to RTO and SMD concepts, which themselves are objectionable as too costly.
• Inflationary. Encourages and rewards utilities for divesting grid assets at inflated prices, saddling retail customers with the bill.
• Unjustified. Undercuts requirement in FERC Order 2000 to present positive cost-benefit data to justify innovative pricing schemes.
• Too Expensive. Cost of paying out the incentive outweighs revenue from operational savings.
• Inconsistent. Contrary to FERC's proposal in SMD to adopt participant funding to pay for transmission expansion.
• Overbroad. Should be applied, if at all, only to "economic" transmission enhancements-i.e., those grid projects designed to bring new competitive generation resources to market-but not to "reliability" transmission, meaning those projects needed only to maintain system reliability.
• Overly Generous. Provides retroactive