Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Transmission Incentive Overhaul

FERC’s ROE incentive adder policy sends the wrong signals.

Fortnightly Magazine - February 2009

achieve those ends cost-effectively. Indeed, in FERC’s view, such cost-benefit inquiries are themselves disincentives to transmission investment. 23 This is bad policy, and its impacts will get worse over time. Transmission investment reduces congestion but will not eliminate it, because resolving one bottleneck generally unmasks another latent one elsewhere on the grid. Attempting to eliminate every bottleneck (and paying incentives for efforts to do so) would be tantamount to undertaking an impossibly expensive game of “Whac-A-Mole.” Likewise, transmission systems built to withstand N-3 contingencies would be more reliable than those built to withstand N-1 or N-2 contingencies, but achieving such levels of reliability is generally not cost-effective and has not been attempted. Unfortunately, nothing within the four corners of FERC’s incentive-rate policy precludes granting incentive ROEs for such efforts. FERC’s exclusive focus on whether a transmission project will produce benefits, without considering whether those benefits are worth the cost, leaves the incentive-rate bus without any brakes.

FERC should consider introducing a cost-benefit component into its incentive-rate analyses. Cost-benefit evaluation is necessary to avoid incentivizing over-investment in transmission, and is consistent with Section 219. That section doesn’t require FERC to “promot[e] capital investment” without regard for whether such investment is cost-effective. Rather, it requires the commission to promote “economically efficient transmission” that will “reduce the cost of delivered power” (see FPA §§ 219(a), (b)(1)) . FERC’s unchallenged authority to consider non-cost factors in setting transmission rates should not be confused with a much more extreme proposition: That FERC may ignore cost-benefit considerations while fulfilling its duty to ensure just and reasonable rates under FPA Sections 205 and 206.

While quantifying reliability benefits and conducting cost-benefit analyses may be difficult, the perfect should not be the enemy of the good. FERC should attempt to do so, because the effort would bring much-needed focus to the attempt to reach reasoned decisions on transmission incentive-rate applications. In the meantime, the commission should begin by tying incentive ROE adders to applicants’ meeting of project cost and deadline targets. For example, applying incentive ROE adders to budgeted, rather than actual, expenditures would avoid exacerbating incentives to bring in new transmission projects at the maximum prudent cost that will be allowed in rate base. Significantly, applying enhanced ROEs only to budgeted amounts imposes no risk of loss on the public utility. Above-budget but still prudent amounts would continue to be placed in rate base and earn a normal return. Moreover, if a public utility believed that cost-overruns experienced in a given case were truly outside its control, the public utility could make a later Section 205 filing seeking to earn an enhanced ROE on the full cost of the project. Linking enhanced ROEs to an applicant’s ability to construct new transmission facilities on time and within budget (absent factors outside its control) is nothing more than straightforward compliance with Congress’s command that FERC “shall establish … incentive-based (including performance-based) rate treatments,” [FPA § 219(a)] (emphasis added), a requirement with which the commission has not yet even attempted to comply.

 

Endnotes:

1. See Barack Obama and Joe Biden: