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Transmission Asset Sales: Running the Regulatory Gauntlet
the sale of transmission assets; this gives those commissions "a meaningful seat at the table." In the end, the favorable state regulatory climate needed for transmission asset sales can most reliably be expected in those jurisdictions that support ongoing efforts by the Federal Energy Regulatory Commission (FERC) to restructure the industry.
Regulatory Issues: Buyer Beware
The analogous regulatory issue for the buyer is whether it will be permitted to earn a return on that portion of its investment that exceeds the selling utility's book value. FERC generally has required use of depreciated original cost, both for measuring the rate base and for calculating future depreciation costs. Under this approach, a buyer typically inherits the rate base of a prior owner even if the buyer has purchased assets (or an entire firm) for a price higher than depreciated original cost or book value. 6
In the merger context, usually at the state level, the regulatory treatment of consideration in excess of book (the acquisition premium) often has taken the form of amortization funded by synergy savings achieved or projected by the merger sponsors. At FERC, the issue has been raised in requests for an incentive return on equity and recognition of accumulated deferred taxes 7 reimbursed to the seller as an element of the rate base. 8
FERC's provides for either a 200 basis point return on equity adder or inclusion in rate base of accumulated deferred taxes paid to the seller. The adder is payable to any independent transmission company that transfers control of its facilities to a regional transmission organization (RTO). It earns 50 percent for the transfer of control to an RTO and an additional 150 basis point if none of its passive or active owners are market participants in the RTO. The return on equity is calculated on a net present value basis for the period, beginning with the transfer of control and ending Dec. 31, 2012. 9
Two recent cases sketch out the parameters of the commission's incentive policy. In , FERC accepted rates that reflected both a 100 basis point return on equity incentive and inclusion of accumulated provision for depreciation in the rate base, as well as a capital structure with a 60 percent common equity ratio . By contrast, in Illinois Power Company , the commission set for hearing rates based on a 50-50 capital structure, a 13 percent return on equity, and the levelized gross plant original cost method for determining the capital cost to be included in rates. This method has the effect of including both accumulated depreciation and accumulated deferred taxes in the rate base . The most likely result of the Illinois Power order establishing hearing procedures is a restructured arrangement that will give the commission a further opportunity to refine its incentive policy.
The Impact of PUHCA
Any private firm owning transmission assets is a FERC-regulated public utility. More important, any entity owning a significant equity interest in that public utility is subject to the Public Utility Holding Company Act of 1935 (PUHCA). Investors funding the acquisitions of transmission assets