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Killing the Goose

Second thoughts on transmission’s golden egg.

Fortnightly Magazine - March 2012

two incentives as particularly well-suited to address the financing risk involved in transmission development. CWIP, for example, helps lower the financing rate by covering shortfalls when cash flow from early operations can’t cover interest costs.

Other incentives, however, draw markedly less support. Examples are accelerated depreciation, hypothetical capital structures, and ROE adders for both RTO membership and formation of transcos.

ELCON, for example, sees accelerated depreciation as neither useful nor beneficial: “It does not target pre-commercial cash flow because it can be claimed in rates only after a facility has been constructed and placed into service.” (Comments, p.13, filed Sept. 12, 2011.)

The Maryland Public Service Commission, which has practically declared war against PJM (see “Race to the Bottom,” p.8) , takes aim at FERC’s common 50-point ROE adder for RTO membership:

“This adder has become nothing more than a discriminatory tax on ratepayers who happen to reside within RTOs. It is unclear if the incentive encouraged any utilities to join RTOs that would not have otherwise done so.” (Comments, p.14, filed Sept. 12, 2011.)

More helpful, perhaps, is a different idea from the National Rural Electric Cooperative Association (NRECA), and also from the American Public Power Association, which has aligned itself with a large group of consumer-focused entities, including state PUCs, attorneys general, and consumer advocates, known as the “joint commenters.” NRECA and the joint commenters ask FERC to consider leaving its 50-point ROE adder in place only for three years or so, and then to phase down the award to 25 points in years four through six, and only 10 points thereafter—noting that as the years go by, it becomes less likely that the incentive is actually influencing a longstanding member to remain within the RTO.

Yet the question might be trivial in the end. National Grid, for example, cites estimates by its subsidiary, Massachusetts Electric, that FERC’s 50-point RTO adder costs retail ratepayers about 9 cents on a typical monthly bill.

Alarming Escalation

The more serious problem concerns FERC’s ROE adders: the bonus incentives added to return on equity under Order 679 that can run anywhere between 50 and 200 or more basis points, and that might eventually help drive the transmission component of the retail electric bill to unacceptable levels—perhaps far beyond the 8.9-percent share of the average nationwide electricity price that the U.S. EIA reported in its Annual Energy Outlook 2011 .

ELCON puts it this way: “The routine approval of large transmission incentives has contributed substantially to the alarming escalation in the costs of transmission service that members located in every region of the country have experienced.”

Of course, the 2005 EPAct law directs FERC to adopt an incentives policy to reward grid construction, and appears to mandate incentives for RTO membership and for using new or advanced technology. At some level those points would appear nonnegotiable.

But delving deeper, the comments to the May 19 FERC inquiry reveal two basic industry complaints about ROE adders. First, the incentive adders apply only when a project is placed in service and begins earning its revenue requirement; they