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Transmission Incentive Overhaul

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

Fortnightly Magazine - February 2009

reasonable rate. 8

FERC has awarded substantial ROE adders notwithstanding the concurrent approval of CWIP and abandoned plant incentives or the presence of other risk-mitigating factors. 9 While it has sometimes reduced the ROE adder to reflect approval of the other incentive rate treatments, generally by 25 basis points (from 150 to 125 basis points), 10 it has not adequately explained why any adder, let alone 125 basis points, is appropriate. 11 The presence of a formula rate, which Order No. 679 acknowledged as reducing transmission owner risk, has since been deemed irrelevant. 12

Likewise, while Order No. 679-A (P 122) stated that a “prior contractual commitment or statute may have a bearing on our nexus evaluation of individual applications[,]” FERC has awarded ROE adders in spite of them. 13 FERC also has awarded ROE adders for projects that, while substantial, address basic system-reliability concerns. As an example of both phenomena, National Grid and Northeast Utilities sought a battery of incentives for their “New England East-West Solution” (NEEWS) Project, which involves additions to the 345-kV system in three states to address identified transmission reliability issues. FERC granted the requested CWIP and abandoned plant protections and, on that basis, a reduced ROE adder of 125 basis points (down 25 points from the requested 150). 14 In NEEWS, Order P 69, FERC justified these incentives based on financial, regulatory, and environmental risks, and internal competition for project financing. However, FERC explained neither how approval of the ROE adder would address those concerns nor why such an enormous adder was justified in the face of the other approved incentives. 15

Nor did FERC explain why an incentive ROE is justified when the applicants already were obliged to construct the project, both through contractual arrangements associated with the formation of RTO New England and because the project addresses system-reliability issues. While FERC dismissed the latter concern on the ground that Section 219 “specifically authorizes incentives for transmission projects that ensure reliability,” 16 the statute doesn’t specify the particular incentives to be made available for such projects, which may be more effectively and appropriately encouraged through advanced technology adders, CWIP recovery, or abandoned-plant protections. Section 219 likewise doesn’t direct FERC to authorize enhanced ROEs for projects that applicants must build under existing RTO agreements and planning procedures.

Moreover, while enhanced ROEs are awarded in part to address perceived siting difficulties, it’s not obvious increased ROEs will eliminate or even mitigate such challenges. Raising a project’s price tag doesn’t make it easier to gain siting approval. If FERC’s theory is that a higher ROE encourages recipients to resolve environmental concerns or to overcome other siting barriers, then FERC should require applicants to identify specific barriers to be overcome and explain how an enhanced ROE will aid the company in overcoming them. If FERC is to follow through on its assurance that it would allow only “real incentives to construct new transmission infrastructure” and not “incentives that only serve to increase rates without” materially enhancing the probability of construction, as Order 679 specifies, then ROE-incentive applicants should be required