Some thoughts on who should take the lead and how to set up financial incentives.
One of the most interesting questions that arises from federal...
Grid Investment & Restructuring: Two Challenges, One Solution
FERC must align the immediate self-interest of profit-maximizing entities with its own view of what is in the public interest.
to strict showings.) It is noteworthy that there appear to have been no successful applicants to satisfy the requirements of this regulation. We therefore propose that CWIP be pre-authorized for independent transmission companies without a special showing of need, at least for an interim period. The need for additional capital investment at a level far exceeding recent levels is sufficiently established, such that the commission has a rational basis for such a rule. For example, ATC successfully included 100 percent of CWIP in rate base, pursuant to a company-specific modification of the Attachment O formula rate authorized for MISO transmission owners. FERC's approval was predicated on ATC reducing its ROE below the generically approved Midwest ISO ROE, limiting the CWIP treatment to construction that commenced after the filing of the rate proposal that was modified in the settlement, and forgoing the ability to file for rate incentives for new construction. While ATC bargained away an otherwise available premium to equity for new infrastructure development, the availability of enhanced returns for new investment remains a valuable inducement to the creation of ITCs. The 50 basis-point adder for new infrastructure is consistent with, and in fact less generous, than what FERC specifically has approved for Midwest ISO transmission owners.
In proposing CWIP for new infrastructure investment, we recognize that FERC will want assurance that the new facilities will be in the public interest. FERC therefore could make incentive 3 (CWIP in rate base) available under two alternative justifications. CWIP would be authorized if the planned transmission addition is proposed by an RTO, ISO, or regionally established transmission authority that reviews transmission additions as necessary for reliable service or to relieve congestion found to be uneconomic. 22 It also would be authorized where the independent transmission owner identifies a level of congestion that it proposes to relieve, and seeks authority from the FERC to construct new infrastructure to relieve the congestion. In this situation, the ability to retain the incentive return and to retain the benefit of CWIP in rate base would be dependent on producing the projected level of savings. This approach is akin to performance-based ratemaking, which we discuss below.
Eligibility for incentive 4 (asset depreciation) would require a showing that new infrastructure is likely to have a shorter economic life than the observed historical service life of the infrastructure element. In Order No. 2000 FERC suggested that accelerated depreciation could be justified for new transmission infrastructure investment. We believe that this incentive is particularly important given that much new investment is warranted by the need to reduce congestion costs. As other measures may lessen the need for transmission investment for this purpose, such as demand-side bidding, distributed generation, and new power plant construction within congested areas, it is reasonable to conclude that economic life for such investment may be shorter than its historical life. We urge FERC to reject arguments that that prospect negates the need for accelerated depreciation. While these alternative measures cannot be implemented speedily, transmission infrastructure promises demonstrable benefits based on established technology. In such instances, FERC should not