Transmission Cost Recovery Revisited
John Wolfram is the founder of Catalyst Consulting LLC, a utility rate and regulatory consulting firm. He has thirty years of broad experience in the power industry and assists utility clients with FERC formula rates, cost of service studies, and retail rate cases.
FERC transmission formula rates are experiencing a revival. For many years, transmission formula rates or TFRs worked behind the scenes, quietly providing a return of and on wholesale transmission investments. A confluence of market conditions, new laws, and FERC orders has changed that.
As transmission investment increases and as more transmission owners use TFRs for cost recovery, the importance of these rates to regulators, vertically integrated utilities, transmission developers, and customers is skyrocketing.
Now the FERC formula rate stands at center stage, squarely in the spotlight. This resurgence matters because the emerging TFRs function as the revenue engine at the critical intersection of utility financials, the competitive transmission process promoted in FERC Order No. 1000, retail and wholesale rate jurisdiction, and national energy policy goals for enhancing the transmission grid. In short, utility leaders, federal and state regulators, Transcos, investors, and policymakers are all watching - or should be watching - to see how the renewal of FERC formula rates turns out.
FERC permits utilities to set rates through formulas as opposed to stated rates that are numerically fixed. In a formula rate, the formula itself is the rate. As costs vary from year to year, the costs are simply plugged into the formula to determine the resultant charges.