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Killing the Goose

Second thoughts on transmission’s golden egg.

Fortnightly Magazine - March 2012

blow over, those hopes were dashed last October, when the commission jumped the gun on its Order 679 reform efforts and trimmed down a set of rate incentives for the proposed $1.6 billion RITELine project (Reliability Interregional Transmission Extension), involving AEP, ComEd, and MidAmerican in a complicated joint venture structure. The order cut a requested 150 basis-point incentive “adder” to RITELine’s return on equity down to 100 points to recognize that other financial incentives granted for the project at the same time would reduce risk, offsetting need for a much higher ROE—the same fix that Norris had suggested the year before in his PATH dissent. (RITELine Illinois LLC, Dkts. ER11-4069, ER11-4070, Oct. 14, 2011, 137 FERC ¶61,039.)

Indeed, in posing a long list of 74 policy questions for industry comment, FERC’s inquiry had anticipated the RITELine ruling by asking for industry comment on that very issue. Question 27 of the inquiry asked, “Are there specific criteria the Commission should use in evaluating whether and how to adjust certain incentives to account for the impacts of other incentives?”

This rush to judgment in a single case, without waiting to distill industry comments in the inquiry and formulate a more cohesive policy, proved too much for Commissioner Philip Moeller, an Order 679 booster, who dissented in RITELine: “Now is not the time,” he wrote, “for this Commission to begin retreating from its incentive policy on needed transmission lines.

“Yet I question whether we are sending that message.”

Nine Cents a Month

Overall, the May 19 inquiry has drawn heavy criticism. Some utilities, transcos, and financial firms praise the status quo. But the many consumer advocates, trade groups, state utility commissions, attorneys general, environmental groups, and industry coalitions that have responded find fault in how the commission has interpreted its policy. FERC pays little attention to consumers, they say. That’s because the policy’s twin pillars—the rebuttable presumption and nexus tests—don’t measure whether consumers enjoy any trickle down from the billions in extra revenue paid out to transmission developers.

Instead, FERC simply presumes consumer benefits if the project wins approval in regional planning or state siting and permitting, and then grants incentives if it finds some sort of metaphysical connection—a nexus—between the money and the project’s characteristics.

Under this model, incentive awards hinge on a singularly vague question: is the project “routine”? That leads many commenters to say that the rebuttable presumption and nexus tests are broken beyond repair. FERC should adopt express definitions of what projects qualify for incentives, they say. Others, perhaps leery of any easy blueprint, want FERC to define the opposite—what projects it will disqualify.

To FERC’s credit, the industry appears overwhelmingly to favor at least two of 679’s risk-reducing incentives: a) the 100-percent rate base allowance for construction work in progress (CWIP), and b) the guarantee of cost recovery for costs incurred for projects ultimately abandoned for reasons outside the developer’s control. In fact, many say the commission should simply adopt those two awards as part of its general rate-making policy, independent from its incentives policy. Commenters generally see these