Promoting Transmission Investment Through Pricing Reform

141 FERC ¶ 61,129

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

18 CFR Parts 2 and 35

[Docket No. RM11-26-000]

Promoting Transmission Investment Through Pricing Reform

(Issued November 15, 2012)

AGENCY: Federal Energy Regulatory Commission.

ACTION: Policy Statement.

SUMMARY: The Commission issues this policy statement to provide guidance

regarding its evaluation of applications for electric transmission incentives under section

219 of the Federal Power Act. In the six years since the Commission implemented

section 219 by issuing Order No. 679, the Commission has acted on numerous

applications for transmission incentives. The Commission has now determined it would

be beneficial to provide additional guidance and clarity with respect to certain aspects of

its transmission incentives policies under section 219 of the Federal Power Act and Order

No. 679. In particular, the Commission: reframes its nexus test to focus more directly on

the requirements of Order No. 679; expects applicants to take all reasonable steps to

mitigate the risks of a project, including requesting those incentives designed to reduce

the risk of a project, before seeking an incentive return on equity (ROE) based on a

project’s risks and challenges; provides general guidance that may inform applications

for an incentive ROE based on a project’s risks and challenges; and promotes additional

transparency with respect to the impacts of the Commission’s incentives policies. The

g requesting those incentives designed to reduce

the risk of a project, before seeking an incentive return on equity (ROE) based on a

project’s risks and challenges; provides general guidance that may inform applications

for an incentive ROE based on a project’s risks and challenges; and promotes additional

transparency with respect to the impacts of the Commission’s incentives policies. The

- 2 -

Commission finds that the additional guidance provided through this policy statement is

necessary to encourage transmission infrastructure investment while maintaining just and

reasonable rates, consistent with section 219 of the Federal Power Act. The Commission

will apply this policy statement on a prospective basis to incentive applications received

after the date of its issuance.

FOR FURTHER INFORMATION CONTACT:

David Borden

Office of Energy Policy and Innovation

888 First Street, NE

Washington, DC 20426

(202) 502-8734

david.borden@ferc.gov

Andrew Weinstein

Office of General Counsel

888 First Street, NE

Washington, DC 20426

(202) 502-6230

andrew.weinstein@ferc.gov

141 FERC ¶ 61,129

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

Before Commissioners: Jon Wellinghoff, Chairman;

Philip D. Moeller, John R. Norris,

and Cheryl A. LaFleur.

Promoting Transmission Investment

Through Pricing Reform

Docket No. RM11-26-000

POLICY STATEMENT

(Issued November 15, 2012)

1.

The Commission issues this policy statement to provide guidance regarding its

evaluation of applications for electric transmission incentives under section 219 of the

Federal Power Act (FPA).1 In the six years since the Commission implemented section

219 by issuing Order No. 679,2 the Commission has acted on numerous applications for

transmission incentives

(Issued November 15, 2012)

1.

The Commission issues this policy statement to provide guidance regarding its

evaluation of applications for electric transmission incentives under section 219 of the

Federal Power Act (FPA).1 In the six years since the Commission implemented section

219 by issuing Order No. 679,2 the Commission has acted on numerous applications for

transmission incentives. The Commission has now determined it would be beneficial to

provide additional guidance and clarity with respect to certain aspects of its transmission

incentives policies under section 219 of the Federal Power Act and Order No. 679. In

particular, the Commission: reframes the nexus test to focus more directly on the

requirements of Order No. 679; expects applicants to take all reasonable steps to mitigate

1 16 U.S.C. § 824s (2006).

2 Promoting Transmission Investment through Pricing Reform, Order No. 679, 71

FR 43294 (Jul. 31, 2006), FERC Stats. & Regs. ¶ 31,222 (2006), order on reh’g, Order

No. 679-A, 72 FR 1152 (Jan. 10, 2007), FERC Stats. & Regs. ¶ 31,236, order on reh’g,

119 FERC ¶ 61,062 (2007).

- 2 -

the risks of a project, including requesting those incentives designed to reduce the risk of

a project, before seeking an incentive return on equity (ROE) based on a project’s risks

and challenges; provides general guidance that may inform applications for an incentive

ROE based on a project’s risks and challenges; and promotes additional transparency

with respect to the impacts of the Commission’s incentives policies. The Commission

finds that the additional guidance provided through this policy statement is necessary to

encourage transmission infrastructure investment while maintaining just and reasonable

rates, consistent with section 219 of the FPA. The Commission will apply this policy

statement on a prospective basis to incentive applications received after the date of its

issuance.

I.

Background

2

e Commission

finds that the additional guidance provided through this policy statement is necessary to

encourage transmission infrastructure investment while maintaining just and reasonable

rates, consistent with section 219 of the FPA. The Commission will apply this policy

statement on a prospective basis to incentive applications received after the date of its

issuance.

I.

Background

2.

Section 1241 of the Energy Policy Act of 2005 added a new section 219 to the

FPA. The Commission implemented section 219 by issuing Order No. 679, which

established by rule incentive-based rate treatments for investment in electric transmission

infrastructure for the purpose of benefiting consumers by ensuring reliability and

reducing the cost of delivered power by reducing transmission congestion. Since the

issuance of Order No. 679, the Commission has evaluated more than 85 applications

representing over $60 billion in potential transmission investment.

3.

On May 19, 2011, the Commission issued a notice of inquiry (NOI) seeking

public comment regarding the scope and implementation of the Commission’s incentives

policies. The Commission received over 1,500 pages of comments reflecting a wide

range of perspectives on the Commission’s incentives policies. The Commission

- 3 -

appreciates the robust participation by the diverse group of commenters, and has

carefully considered the comments received in formulating this policy statement. The

Commission’s issuance of this policy statement is driven by its experience applying its

incentives policies to individual incentive applications and comments received in

response to the NOI.

II.

Policy Statement

4.

As noted above, the Commission through this policy statement provides

additional guidance with respect to certain aspects of its incentives policies. Specifically,

the Commission: reframes the nexus test to focus more directly on the requirements of

Order No

incentives policies to individual incentive applications and comments received in

response to the NOI.

II.

Policy Statement

4.

As noted above, the Commission through this policy statement provides

additional guidance with respect to certain aspects of its incentives policies. Specifically,

the Commission: reframes the nexus test to focus more directly on the requirements of

Order No. 679; expects applicants to take all reasonable steps to mitigate the risks of a

project, including requesting those incentives designed to reduce the risk of a project,

before seeking an incentive ROE based on a project’s risks and challenges; provides

general guidance that may inform applications for an incentive ROE based on a project’s

risks and challenges; and promotes additional transparency with respect to the impacts of

the Commission’s incentives policies. Each of these issues and the Commission’s

corresponding clarifications are discussed further below.

5.

We note that many aspects of the Commission’s incentives policies are not

addressed in this policy statement. For example, in Order No. 679, the Commission

stated that applicants could seek incentives thereunder regardless of their ownership

- 4 -

structure,3 and that the Commission would evaluate incentive applications on a case-by-

case basis.4 The Commission also established rebuttable presumptions to assist in

determining whether proposed facilities satisfy the statutory threshold of section 219.5 In

Order No. 679 and subsequent cases applying incentives policies, the Commission has

addressed the granting of incentive ROEs that are not based on the risks and challenges

of a project, such as incentive ROEs for RTO membership or Transco formation. With

respect to aspects of the Commission’s incentives policies not addressed in this policy

statement, we decline to provide additional guidance at this time.

A.

Application of the Nexus Test

6.

Order No

the Commission has

addressed the granting of incentive ROEs that are not based on the risks and challenges

of a project, such as incentive ROEs for RTO membership or Transco formation. With

respect to aspects of the Commission’s incentives policies not addressed in this policy

statement, we decline to provide additional guidance at this time.

A.

Application of the Nexus Test

6.

Order No. 679 established the “nexus test,” which requires applicants to

demonstrate a connection between the incentive(s) requested under Order No. 679 and

the proposed investment, and that the incentive(s) requested address the risks and

challenges that a project faces. In Order No. 679, the Commission stated that each

incentive:

“…will be rationally tailored to the risks and challenges faced in constructing new

transmission. Not every incentive will be available for every new investment.

Rather, each applicant must demonstrate that there is a nexus between the

incentive sought and the investment being made. Our reforms therefore continue

3 Order No. 679, FERC Stats. & Regs. ¶ 31,222 at P 4. Section 219(b)(1) requires

that the Commission establish rules for incentives, “…regardless of the ownership of the

facilities.” 16 U.S.C. § 824s(b)(1).

4 Order No. 679, FERC Stats. & Regs. ¶ 31,222 at P 43.

5 Id. P 58.

- 5 -

to meet the just and reasonable standard by achieving the proper balance between

consumer and investor interests on the facts of a particular case and considering

the fact that our traditional policies have not adequately encouraged the

construction of new transmission.”6

7.

The Commission refined the nexus test in Order No

679, FERC Stats. & Regs. ¶ 31,222 at P 43.

5 Id. P 58.

- 5 -

to meet the just and reasonable standard by achieving the proper balance between

consumer and investor interests on the facts of a particular case and considering

the fact that our traditional policies have not adequately encouraged the

construction of new transmission.”6

7.

The Commission refined the nexus test in Order No. 679-A, finding that, in

applying the nexus test, the Commission should look at whether the total package of

incentives is rationally tailored to the risks and challenges of constructing new

transmission.7 The Commission stated that this approach would protect consumers by

recognizing that requested incentives that reduce risk might obviate the need for an

incentive ROE based on a project’s risks and challenges, or otherwise justify a lower

incentive ROE based on a project’s risks and challenges.

8.

Subsequent to Order No. 679 and Order No. 679-A, the Commission further

refined its application of the nexus test by clarifying that the determination of whether a

project is “routine” or “non-routine” is particularly probative in evaluating whether the

nexus test was satisfied. In Baltimore Gas and Electric Company, the Commission

6 Id. P 26.

7 Order No. 679-A, FERC Stats. & Regs. ¶ 31,236 at P 27. See also 18 C.F.R.

§ 35.35(d) (2006) (“Incentive-based rate treatments for transmission infrastructure

investment. … The applicant must demonstrate that the facilities for which it seeks

incentives either ensure reliability or reduce the cost of delivered power by reducing

transmission congestion consistent with the requirements of section 219, that the total

package of incentives is tailored to address the demonstrable risks or challenges faced by

the applicant in undertaking the project, and that resulting rates are just and

reasonable.…”)

acilities for which it seeks

incentives either ensure reliability or reduce the cost of delivered power by reducing

transmission congestion consistent with the requirements of section 219, that the total

package of incentives is tailored to address the demonstrable risks or challenges faced by

the applicant in undertaking the project, and that resulting rates are just and

reasonable.…”)

- 6 -

concluded that, once an applicant demonstrates that a project is not routine, the nexus test

is satisfied and the project is deemed to face risks and challenges that merit incentive(s).8

9.

The Commission recognizes that there are a wide range of views on its

application of the nexus test and, in particular, the Commission’s use of the routine/non-

routine analysis as a proxy for the nexus test. Most commenters in the NOI are

supportive of the nexus test’s focus on evaluating risks and challenges to determine

whether a project merits incentives. Some commenters offer additional criteria for

assessing risks and challenges, while others are more critical of the nexus test and assert

that it is insufficient and requires change. With respect to the Commission’s use of the

routine/non-routine analysis in reviewing incentive applications since BG&E, some

commenters support the continued use of the routine/non-routine analysis, while others

seek more clarity from the Commission.

10.

Based on experience to date with the application of Order No. 679, the

Commission now believes it is essential to re-frame its application of the nexus test to

focus more directly on the requirements adopted in Order Nos. 679 and 679-A.9 The

Commission will no longer rely on the routine/non-routine analysis adopted in BG&E as

a proxy for the nexus test. While prior orders found that analysis probative, based on our

experience to date applying our incentives policies and the comments received in

8 120 FERC ¶ 61,084, at PP 52-54 (2007) (BG&E).

9 18 C.F.R

rder Nos. 679 and 679-A.9 The

Commission will no longer rely on the routine/non-routine analysis adopted in BG&E as

a proxy for the nexus test. While prior orders found that analysis probative, based on our

experience to date applying our incentives policies and the comments received in

8 120 FERC ¶ 61,084, at PP 52-54 (2007) (BG&E).

9 18 C.F.R. § 35.35(d).

- 7 -

response to the NOI, we believe it is necessary to analyze the need for each individual

incentive, and the total package of incentives, instead of relying on a proxy. Consistent

with Order No. 679-A, the Commission will continue to require applicants seeking

incentives to demonstrate how the total package of incentives requested is tailored to

address demonstrable risks and challenges. Applicants “must provide sufficient

explanation and support to allow the Commission to evaluate each element of the

package and the interrelationship of all elements of the package. If some of the

incentives would reduce the risks of the project, that fact will be taken into account in any

request for an enhanced ROE.”10

B.

Risk-Reducing Incentives

11.

The Commission authorizes a company’s base ROE utilizing a range of

reasonableness resulting from a discounted cash flow (DCF) analysis that is applied to a

selected proxy group representing firms of comparable risk. The resulting base ROE

authorized by the Commission is designed to account for many of the risks associated

with transmission investment and to support that investment. Nonetheless, the

Commission recognizes that there may be risks associated with investment in particular

transmission projects that are not accounted for in the base ROE. In Order No. 679, the

Commission recognized that some transmission incentives – such as recovery of 100

percent of Construction Work in Progress (CWIP), recovery of 100 percent of pre-

10 Order No. 679-A, FERC Stats. & Regs. ¶ 31,236 at P 27.

ssociated with investment in particular

transmission projects that are not accounted for in the base ROE. In Order No. 679, the

Commission recognized that some transmission incentives – such as recovery of 100

percent of Construction Work in Progress (CWIP), recovery of 100 percent of pre-

10 Order No. 679-A, FERC Stats. & Regs. ¶ 31,236 at P 27.

- 8 -

commercial costs as an expense or as a regulatory asset, and recovery of 100 percent of

prudently incurred costs of transmission facilities that are abandoned for reasons beyond

the applicant’s control – reduce the financial and regulatory risks associated with

transmission investment.11 The Commission reaffirms in this policy statement that these

risk-reducing incentives may mitigate risk not accounted for in the base ROE, and we

therefore expect incentives applicants to first examine the use of risk-reducing incentives

before seeking an incentive ROE based on a project’s risks and challenges.12

12.

The CWIP and pre-commercial cost incentives both serve as useful tools to ease

the financial pressures associated with transmission development by providing up-front

regulatory certainty, rate stability and improved cash flow, which in turn can result in

higher credit ratings and lower capital costs.13 Specifically, the CWIP incentive

addresses timing issues associated with the recovery of financing costs for large

transmission investments and allows recovery of a return on construction costs during the

construction period rather than delaying cost recovery until the plant is placed into

service. The Commission has also found that allowing companies to include 100 percent

11 See Order No. 679, FERC Stats. & Regs. ¶ 31,222 at PP 115, 117, and 163

s for large

transmission investments and allows recovery of a return on construction costs during the

construction period rather than delaying cost recovery until the plant is placed into

service. The Commission has also found that allowing companies to include 100 percent

11 See Order No. 679, FERC Stats. & Regs. ¶ 31,222 at PP 115, 117, and 163.

12 The Commission clarifies that placing a priority on risk-reducing incentives

does not require separate applications for risk-reducing incentives and an incentive ROE

based on a project’s risks and challenges. Rather, in a single application an applicant

could first demonstrate how risk-reducing incentives are utilized and then seek to

demonstrate, as discussed further below, that remaining risks and challenges merit an

incentive ROE based on the project’s risks and challenges.

13 See Order No. 679, FERC Stats. & Regs. ¶ 31,222 at PP 115, 117, and 163.

- 9 -

of CWIP in rate base would result in greater rate stability for customers by reducing the

“rate shock” when certain large-scale transmission projects come on line.14

13.

Regarding 100 percent recovery of pre-commercial cost as an incentive, the

Commission has permitted recipients of this incentive to expense and recover pre-

commercial costs that would otherwise be capitalized in CWIP, thus providing for earlier

cost recovery and improving early stage project cash flows

ducing the

“rate shock” when certain large-scale transmission projects come on line.14

13.

Regarding 100 percent recovery of pre-commercial cost as an incentive, the

Commission has permitted recipients of this incentive to expense and recover pre-

commercial costs that would otherwise be capitalized in CWIP, thus providing for earlier

cost recovery and improving early stage project cash flows. The Commission has also

made deferred cost recovery available to applicants to address cost recovery restrictions

at the state level and to provide greater flexibility for applicants to recover costs,

recognizing that deferred cost recovery is intended to “…increase the certainty of cost

recovery to encourage more transmission investment.” 15 The Commission also

recognizes the usefulness of deferred cost recovery of pre-commercial costs for

applicants who do not have a formula rate in effect prior to incurring pre-commercial

costs, by allowing the applicant to defer all such costs not included in CWIP as a

regulatory asset until the applicant has a formula rate in effect for cost recovery.16 The

Commission has previously found that this incentive provides up-front regulatory

14 See, e.g., PJM Interconnection, L.L.C. and Pub. Serv. Elec. and Gas Co., 135

FERC ¶ 61,229 (2011). See also PPL Elec. Utils. Corp ., 123 FERC ¶ 61,068, at P 43

(2008), reh'g denied 124 FERC ¶ 61,229.

15 Order No. 679, FERC Stats. & Regs. ¶ 31,222 at PP 175, 178.

16 See, e.g., Atlantic Grid, 135 FERC ¶ 61,144 (2011). Like the pre-commercial

cost incentive, all transmission incentives are intended to be available to all existing

utilities and non-incumbent utilities.

¶ 61,229 (2011). See also PPL Elec. Utils. Corp ., 123 FERC ¶ 61,068, at P 43

(2008), reh'g denied 124 FERC ¶ 61,229.

15 Order No. 679, FERC Stats. & Regs. ¶ 31,222 at PP 175, 178.

16 See, e.g., Atlantic Grid, 135 FERC ¶ 61,144 (2011). Like the pre-commercial

cost incentive, all transmission incentives are intended to be available to all existing

utilities and non-incumbent utilities.

- 10 -

certainty and can reduce interest expense, improve coverage ratios, and assist in the

construction of transmission projects.17

14.

Regarding the incentive that allows for 100 percent recovery of prudently

incurred costs of transmission facilities that are abandoned for reasons beyond the control

of the transmission owner, the Commission has found this incentive reduces the

regulatory risk of non-recovery of prudently incurred costs.18 The Commission has

previously stated that, in addition to the challenges presented by the scope and size of a

project, factors like various federal and state siting approvals introduce a significant

element of risk. Granting this incentive ameliorates such risk by providing companies

with more certainty during the pre-construction and construction periods.19

15.

In the NOI, numerous commenters discuss the interplay of risk-reducing

incentives on the need for and appropriate level of an incentive ROE. For example,

Certain State and Consumer-Owned Entities state that if a project’s risks exceed the risk

that is accounted for in the base ROE, incentives may be appropriate.20 Other

17 See, e.g., DATC Midwest Holdings, L.L.C., 139 FERC ¶ 61,224 (2012).

18 Order No. 679, FERC Stats. & Regs. ¶ 31,222 at P 163.

19 See, e.g., PJM Interconnection, L.L.C. and Pub. Serv. Elec. and Gas Co., 135

FERC ¶ 61,229 (2011).

20 Certain State and Consumer-Owned Entities September 12, 2011 Comments at

39

ncentives may be appropriate.20 Other

17 See, e.g., DATC Midwest Holdings, L.L.C., 139 FERC ¶ 61,224 (2012).

18 Order No. 679, FERC Stats. & Regs. ¶ 31,222 at P 163.

19 See, e.g., PJM Interconnection, L.L.C. and Pub. Serv. Elec. and Gas Co., 135

FERC ¶ 61,229 (2011).

20 Certain State and Consumer-Owned Entities September 12, 2011 Comments at

39. Certain State and Consumer-Owned Entities include Connecticut Public Utilities

Regulatory Authority, Attorney General for the State of Connecticut, Connecticut Office

of Consumer Counsel, Attorney General for the State of Delaware, Delaware Public

Service Commission, Public Advocate of Delaware, Attorney General for the State of

(continued…)

- 11 -

commenters state that the Commission should strike an appropriate balance between

consumer and investor interests, and that if incentives are compounded without

consideration of the reduced risk effect of some of the incentives, this approach tips the

risk in favor of the investor and to the detriment of the transmission customer. Numerous

commenters also argue that risk-reducing incentives mitigate the need for an incentive

ROE based on a project’s risks and challenges to attract investment. For example, Joint

Commenters21 note that the biggest risks for transmission projects relate to siting and

Illinois, Maine Public Utilities Commission, Attorney General for the Commonwealth of

Massachusetts, Massachusetts Department of Public Utilities, Massachusetts Municipal

Wholesale Electric Company, New England Conference of Public Utilities

Commissioners, Attorney General for the State of New Hampshire, New Hampshire

Electric Cooperative, Inc., New Hampshire Office of Consumer Advocate, New

Hampshire Public Utilities Commission, Rhode Island Public Utilities Commission and

Division of Public Utilities and Ca

rtment of Public Utilities, Massachusetts Municipal

Wholesale Electric Company, New England Conference of Public Utilities

Commissioners, Attorney General for the State of New Hampshire, New Hampshire

Electric Cooperative, Inc., New Hampshire Office of Consumer Advocate, New

Hampshire Public Utilities Commission, Rhode Island Public Utilities Commission and

Division of Public Utilities and Carriers, Attorney General for the State of Rhode Island,

Vermont Department of Public Service, and Vermont Public Service Board.

21 Joint Commenters include Joint Comments of American Forest & Paper

Association, American Public Power Association, California Municipal Utilities

Association, California Public Utilities Commission, City and County of San Francisco,

Connecticut Office of Consumer Counsel, Electricity Consumers Resource Council,

Indiana Utility Regulatory Commission, Maryland Office of People’s Counsel, Modesto

Irrigation District, Montana Public Service Commission, National Association of State

Utility Consumer Advocates, New England Conference of Public Utilities

Commissioners, New Hampshire Public Utilities Commission, New Jersey Board of

Public Utilities, New Jersey Division of Rate Counsel, Northern California Power

Agency, Office of the Nevada Attorney General, Bureau of Consumer Protection, Office

of the Ohio Consumers’ Counsel, Old Dominion Electric Cooperative, Organization of

MISO States, Pennsylvania Office of Consumer Advocate, Public Power Council, Public

Service Commission of the State of New York, Public Service Commission of

Wisconsin, Sacramento Municipal Utility District, South Dakota Public Utilities

Commission, State of Maine, Office of the Public Advocate, Transmission Agency of

Northern California, the Vermont Department of Public Service, and the Vermont Public

Service Board.

ffice of Consumer Advocate, Public Power Council, Public

Service Commission of the State of New York, Public Service Commission of

Wisconsin, Sacramento Municipal Utility District, South Dakota Public Utilities

Commission, State of Maine, Office of the Public Advocate, Transmission Agency of

Northern California, the Vermont Department of Public Service, and the Vermont Public

Service Board.

- 12 -

permitting delays, cash flow shortage, or abandonment concerns, but argue that, even

where the level of these risks is unusually high, they can be mitigated by granting risk-

reducing incentives. Joint Commenters further contend that, when incentives are

appropriate, risk-reducing incentives should be the first (and often the only) incentives

considered.22 Other commenters point out that risk also is mitigated through the

assurance of cost recovery at the state level.

16.

In Order No. 679-A, the Commission stated that a project that receives risk-

reducing transmission incentives, like those discussed above, would likely face lower

risks. Therefore, that project may not warrant an incentive ROE, or may warrant a lower

incentive ROE, based on the project’s risks and challenges.23 Based on the

Commission’s experience under Order No. 679, and after careful consideration of

comments on the NOI as to the benefits of risk-reducing incentives, the Commission

clarifies that many risks not accounted for in the base ROE can be alleviated through

risk-reducing incentives such as those discussed earlier in this section. In cases where an

incentive ROE based on risks and challenges is requested in combination with risk-

reducing incentives, the Commission must carefully apply its total package analysis to

ensure that the effect of the risk-reducing incentives is appropriately accounted for in

determining whether an incentive ROE based on risks and challenges is warranted,

22 Joint Commenters September 12, 2011 Comments at 80.

23 Order No

in combination with risk-

reducing incentives, the Commission must carefully apply its total package analysis to

ensure that the effect of the risk-reducing incentives is appropriately accounted for in

determining whether an incentive ROE based on risks and challenges is warranted,

22 Joint Commenters September 12, 2011 Comments at 80.

23 Order No. 679-A, FERC Stats. & Regs. ¶ 31,236 at P 27.

- 13 -

and if warranted, what level is appropriate. For this reason, the Commission expects

incentives applicants to seek to reduce the risk of transmission investment not otherwise

accounted for in its base ROE by using risk-reducing incentives before seeking an

incentive ROE based on a project’s risks and challenges.24

C.

Incentive ROEs Based on Project Risks and Challenges

17.

Some commenters in the NOI suggest that the Commission specifically identify

project characteristics or risks and challenges that would merit an incentive ROE. We

decline to do so. Instead, we will continue to allow applicants the flexibility necessary to

demonstrate why their projects may merit an incentive ROE, and at what level, based on

those project’s risks and challenges, but we provide general guidance below that may

inform applications for this type of transmission incentive.

1.

Showings and Commitments for Remaining Risks and

Challenges

18.

As discussed above, many of the risks not captured by traditional ratemaking

policies can be addressed through risk-reducing incentives. While the record in the NOI

proceeding does not show that incentive ROEs have resulted in significant rate increases

24 The Commission appreciates that non-incumbents seeking incentives may face

challenges implementing some risk-reducing incentives because they may not have the

appropriate rate structures in place under which to effectuate these transmission

incentives

NOI

proceeding does not show that incentive ROEs have resulted in significant rate increases

24 The Commission appreciates that non-incumbents seeking incentives may face

challenges implementing some risk-reducing incentives because they may not have the

appropriate rate structures in place under which to effectuate these transmission

incentives. In such instances, the Commission anticipates subsequent section 205 filings

by non-incumbent incentive applicants for cost recovery. As noted above, all

transmission incentives are intended to be available to all existing utilities and non-

incumbent utilities.

- 14 -

for consumers,25 incentive ROEs likely put more upward pressure on transmission rates

than risk-reducing incentives. Therefore incentive applicants should first examine risk-

reducing incentives.

19.

However, a project may face certain risks and challenges that may not be

addressed through either the traditional ratemaking policies or risk-reducing incentives.

In such instances, an incentive ROE based on a project’s risks and challenges may be

appropriate.26 Based on the Commission’s experience under Order No. 679 and the

comments received on the NOI, the Commission expects applicants seeking an incentive

ROE based on a project’s risks and challenges to make the following four showings as

part of their application for that incentive.

a.

Identification of Risks and Challenges

20.

When applying for an incentive ROE based on the project’s risks and challenges,

applicants will first be expected to demonstrate that the proposed project faces risks and

challenges that are not either already accounted for in the applicant’s base ROE or

addressed through risk-reducing incentives. To make this demonstration, the

25 See, ITC Holdings Corp

lying for an incentive ROE based on the project’s risks and challenges,

applicants will first be expected to demonstrate that the proposed project faces risks and

challenges that are not either already accounted for in the applicant’s base ROE or

addressed through risk-reducing incentives. To make this demonstration, the

25 See, ITC Holdings Corp. September 12, 2011 Comments at 16: “The incentives

granted to transmission projects have had generally positive, not negative, effects on

consumer rates and service, especially when improved reliability, reduced congestion and

access to a more diverse supply of generation, including renewable resources, are taken

into account. One reason for this is that the cost of transmission incentives is small

compared to the cost of energy, distribution and congestion.”

26 Order No. 679, FERC Stats. & Regs. ¶ 31,222 at P 94.

- 15 -

Commission suggests that applicants identify risks and challenges specific to the project

for which an incentive ROE is being requested.

21.

Investments in the following types of transmission projects27 may face the types

of risks and challenges that may warrant an incentive ROE based on the project’s risks

and challenges that are not either already accounted for in the applicant’s base ROE or

could be addressed through risk-reducing incentives:

1. projects to relieve chronic or severe grid congestion that has had demonstrated

cost impacts to consumers;

2. projects that unlock location constrained generation resources that previously had

limited or no access to the wholesale electricity markets;

3

allenges that are not either already accounted for in the applicant’s base ROE or

could be addressed through risk-reducing incentives:

1. projects to relieve chronic or severe grid congestion that has had demonstrated

cost impacts to consumers;

2. projects that unlock location constrained generation resources that previously had

limited or no access to the wholesale electricity markets;

3. projects that apply new technologies to facilitate more efficient and reliable usage

and operation of existing or new facilities.28

27 These investments could include both investment in new transmission facilities,

as well as investment in transmission upgrades, retrofits, and projects that modernize the

existing transmission grid.

28 Examples of projects that meet this description include those that create

additional incremental capacity without significant construction (e.g., through the use of

dynamic line rating), that allow for more efficient balancing of variable energy resources,

and/or that provide increased grid stability. In addition, the Commission is concerned

that its current practice of granting incentive ROEs and risk-reducing incentives may not

be effectively encouraging the deployment of new technologies or the employment of

practices that provide demonstrated benefits to consumers. Accordingly, the Commission

remains open to alternative incentive proposals aimed at supporting projects that achieve

these ends.

, the Commission is concerned

that its current practice of granting incentive ROEs and risk-reducing incentives may not

be effectively encouraging the deployment of new technologies or the employment of

practices that provide demonstrated benefits to consumers. Accordingly, the Commission

remains open to alternative incentive proposals aimed at supporting projects that achieve

these ends.

- 16 -

22.

This list is not exhaustive, but rather indicative of the types of projects that the

Commission believes, based on its experience and expertise with respect to industry

trends and system investment needs, may warrant an incentive ROE based on the

project’s risks and challenges. More generally, the Commission anticipates that

applicants will seek an incentive ROE based on a project’s risks and challenges for

projects that provide demonstrable consumer benefits by making the transmission grid

more efficient, reliable, and cost-effective. Thus, consistent with our statements in Order

No. 679, we note that reliability-driven projects may be considered for an incentive ROE

based on a project’s risks and challenges, but only if they present specific risks and

challenges not otherwise mitigated by available risk-reducing incentives.29

23.

Under our current incentive policies, the Commission considers an applicant’s

proposed use of an advanced transmission technology both: 1) as part of the overall nexus

analysis, accounting for the risks and challenges associated with utilizing such advanced

technology into that overall nexus analysis;30 and 2) where an applicant seeks a stand-

alone incentive ROE based on its utilization of an advanced technology.31 The

29 Order No. 679, FERC Stats. & Regs. ¶ 31,222 at P 94

both: 1) as part of the overall nexus

analysis, accounting for the risks and challenges associated with utilizing such advanced

technology into that overall nexus analysis;30 and 2) where an applicant seeks a stand-

alone incentive ROE based on its utilization of an advanced technology.31 The

29 Order No. 679, FERC Stats. & Regs. ¶ 31,222 at P 94.

30 See Tallgrass Transmission, LLC, 125 FERC ¶ 61,248, at P 59 (2008) (“[t]he

associated challenges can be incorporated into the overall nexus analysis, but the

technology does not, in and of itself, appear to justify a separate advanced technology

adder.”); RITELine Indiana & Illinois LLC, 137 FERC ¶ 61,039 at P 62 (2011).

31 See The United Illuminating Co., 126 FERC ¶ 61,043, at P 14 (2009) (“In

reviewing requests for separate adders for advanced technology, the Commission reviews

record evidence to decide if the proposed technology warrants a separate adder because it

(continued…)

- 17 -

Commission continues to encourage the deployment of advanced technologies that

“increase the capacity, efficiency, or reliability of an existing or new transmission

facility.”32 However, the Commission is concerned that its current approach may

contribute to confusion, including with respect to the distinct standards that the

Commission applies in these two contexts. To address this concern, the Commission will

no longer consider requests under Order No. 679 for a stand-alone incentive ROE based

on an applicant’s utilization of an advanced technology. Instead, as noted above, the

Commission will consider transmission projects that apply advanced technologies as

indicative of the types of projects facing risks and challenges that may warrant an

incentive ROE. As a result, we will consider deployment of advanced technologies as

part of the overall nexus analysis when an incentive ROE is sought.

b.

Minimization of Risks

24

ced technology. Instead, as noted above, the

Commission will consider transmission projects that apply advanced technologies as

indicative of the types of projects facing risks and challenges that may warrant an

incentive ROE. As a result, we will consider deployment of advanced technologies as

part of the overall nexus analysis when an incentive ROE is sought.

b.

Minimization of Risks

24.

The Commission expects an applicant that requests an incentive ROE based on a

project’s risks and challenges to demonstrate that it is taking appropriate steps and using

appropriate mechanisms to minimize its risks during project development. For example,

risks may be reduced through the risk-reducing incentives described in section II.B, or

through mitigating costs by implementing best practices in their project management and

reflects a new or innovative domestic use of the technology that will improve reliability,

reduce congestion, or improve technology.”). See also NSTAR Elec. Co., 127 FERC

¶ 61,052 at P 27 (2009).

32 Order No. 679, FERC Stats. & Regs. ¶ 31,222 at P 298.

- 18 -

procurement procedures. Applicants should consider taking measures tailored to mitigate

the various risks associated with their transmission projects and to identify such measures

in their applications. For example, applicants may take measures to mitigate risks

associated with siting and environmental impacts by pursuing joint ownership

arrangements. The Commission encourages incentives applicants to participate in joint

ownership arrangements and agrees with commenters to the NOI that such arrangements

can be beneficial by diversifying financial risk across multiple owners and minimizing

siting risks.33

c.

Consideration of Alternatives

25

sks

associated with siting and environmental impacts by pursuing joint ownership

arrangements. The Commission encourages incentives applicants to participate in joint

ownership arrangements and agrees with commenters to the NOI that such arrangements

can be beneficial by diversifying financial risk across multiple owners and minimizing

siting risks.33

c.

Consideration of Alternatives

25.

The Commission expects applicants for an incentive ROE based on a project’s

risks and challenges to demonstrate that alternatives to the project have been, or will be,

considered in either a relevant transmission planning process or another appropriate

forum. Such a showing should help identify the demonstrable consumer benefits of the

proposed project and its role in promoting a more efficient, reliable and cost-effective

transmission system.34

33 Order No. 679, FERC Stats. & Regs. ¶ 31,222 at PP 354, 357; Order No. 679-A

FERC Stats. & Regs. ¶ 31,236, at P 102. See also Central Maine Power Company, 125

FERC ¶ 61,182, at P 61 (2008); Xcel Energy, 121 FERC ¶ 61,284 at P 55 (2007).

Evidence regarding whether an applicant for incentives considered joint ownership

arrangements may be relevant in assessing whether the applicant took appropriate steps to

minimize its risks during project development.

34 This showing draws on recommendations made by commenters in the NOI, who

suggested that the Commission require an assessment of lower cost alternatives to any

proposed transmission project as part of a filing requesting transmission incentives.

ownership

arrangements may be relevant in assessing whether the applicant took appropriate steps to

minimize its risks during project development.

34 This showing draws on recommendations made by commenters in the NOI, who

suggested that the Commission require an assessment of lower cost alternatives to any

proposed transmission project as part of a filing requesting transmission incentives.

- 19 -

26.

The Commission appreciates that there may be timing challenges for applicants

making this showing, and thus the Commission will be flexible in the approaches it

allows for applicants to make this showing. In particular, this showing could be satisfied

through participation in open processes that are already in existence. For example:

1. The applicant could show that its project was, or will be, considered in an Order

No. 890 or Order No. 1000-compliant transmission planning process that provides

the opportunity for projects to be compared against transmission or non-

transmission alternatives.35

2. The applicant could show that its project was considered by a local regulatory

body, such as a state utility commission, that evaluated alternatives to its proposed

project (transmission or non-transmission alternatives) and determined that the

proposed transmission project is preferable to the alternatives evaluated.

27.

The above approaches should not be seen as exclusive, however, and the

Commission will remain open to alternative methods to making this showing.36

35 In making this showing, the applicant need not show that its project was selected

in a regional transmission plan for purposes of cost allocation. Instead, the focus would

be on whether the project was or will be considered in a process where it could be

compared to other projects and shown to be preferable to any alternatives that were

evaluated

35 In making this showing, the applicant need not show that its project was selected

in a regional transmission plan for purposes of cost allocation. Instead, the focus would

be on whether the project was or will be considered in a process where it could be

compared to other projects and shown to be preferable to any alternatives that were

evaluated.

36 For example, projects that are required to complete an environmental impact

statement (EIS) may submit the analysis on the consideration of alternatives, per the

requirements of the EIS, as making such a showing.

- 20 -

d.

Commitment to Cost Estimates

28.

Finally, the Commission expects applicants for an incentive ROE based on a

project’s risks and challenges to commit to limiting the application of the incentive ROE

based on a project’s risks and challenges to a cost estimate. For example, the

Commission has approved an applicant’s proposal to limit the incentive ROE based on a

project’s risks and challenges to the cost estimate utilized at the time of RTO approval.37

Our intent is not to be prescriptive as to how applicants might structure this commitment;

instead, the Commission is open to approaches that control transmission development

costs and provide more transparency regarding how incentives will be applied to costs

beyond initial estimates.38

29.

The Commission recognizes the challenges of determining the appropriate cost

estimate for a project. For example, most applicants seek incentives from the

Commission at a relatively early stage in the project development process, often before

state siting or other processes raise challenges that can impact the design and ultimate

cost of a project. One option may be for applicants to commit to limiting the application

37 RITELine Illinois & Indiana LLC, 137 FERC ¶ 61,039, at P 5 (2011)

ves from the

Commission at a relatively early stage in the project development process, often before

state siting or other processes raise challenges that can impact the design and ultimate

cost of a project. One option may be for applicants to commit to limiting the application

37 RITELine Illinois & Indiana LLC, 137 FERC ¶ 61,039, at P 5 (2011).

38 Concern about the effects of allowing transmission incentives to be applied to

costs over those estimated was expressed by a number of commenters in the NOI

proceeding.

- 21 -

of an incentive ROE based on a project’s risks and challenges to the last cost estimate

relied upon to include or retain the project in a regional transmission planning process.39

30.

The Southwest Power Pool Regional State Committee (SPP RSC) in its

comments on the NOI identifies a definitive cost estimate that would serve as the initial

threshold limit for an incentive ROE, a 10% dead-band above or below the definitive cost

estimate around which changes in costs are shared equally between shareholders and

customers, and a provision for addressing cost increases that are outside the control of the

transmission owner.40 The Commission believes that aspects of the SPP RSC proposal

highlighted here may provide useful guidance to applicants when seeking incentive ROEs

based on a project’s risks and challenges.

III.

Conclusion

31.

As noted above, the Commission is relying on its experience and expertise with

respect to industry trends and system investment needs to provide additional guidance

and clarity through this policy statement. Six years after issuing Order No. 679, the

Commission believes that it is appropriate and in the public interest to evaluate the

impacts of its incentives policy and give guidance as to how the Commission will

implement that incentives policy going forward

ise with

respect to industry trends and system investment needs to provide additional guidance

and clarity through this policy statement. Six years after issuing Order No. 679, the

Commission believes that it is appropriate and in the public interest to evaluate the

impacts of its incentives policy and give guidance as to how the Commission will

implement that incentives policy going forward. In order to further the mandate of FPA

39 If factors outside applicant’s control cause significant deviation from the cost

estimate upon which the ROE incentive was initially granted, the Commission can revisit

that cost estimate (e.g., a regional planner requires significant acceleration of a project

construction timeline).

40 SPP RSC September 12 Comments at 5, 12-13.

- 22 -

section 219 and encourage transmission investment in the future, the Commission will

continue to monitor its incentives policy and may identify new policy issues, trends, and

developments in transmission investment that may warrant modifications to the

Commission’s incentives policy. As part of this effort, the Commission will continually

assess measures to further transparency in its incentives policy and the impacts of that

policy on consumers.

IV.

Document Availability

32.

In addition to publishing the full text of this document in the Federal Register, the

Commission provides all interested persons an opportunity to view and/or print the

contents of this document via the Internet through FERC's Home Page

(http://www.ferc.gov) and in FERC's Public Reference Room during normal business

hours (8:30 a.m. to 5:00 p.m. Eastern time) at 888 First Street, NE, Room 2A,

Washington, DC 20426.

33.

From FERC's Home Page on the Internet, this information is available on

eLibrary. The full text of this document is available on eLibrary in PDF and Microsoft

Word format for viewing, printing, and/or downloading

://www.ferc.gov) and in FERC's Public Reference Room during normal business

hours (8:30 a.m. to 5:00 p.m. Eastern time) at 888 First Street, NE, Room 2A,

Washington, DC 20426.

33.

From FERC's Home Page on the Internet, this information is available on

eLibrary. The full text of this document is available on eLibrary in PDF and Microsoft

Word format for viewing, printing, and/or downloading. To access this document in

eLibrary, type the docket number excluding the last three digits of this document in the

docket number field.

- 23 -

34.

User assistance is available for eLibrary and the FERC’s website during normal

business hours from FERC Online Support at 202-502-6652 (toll free at 1-866-208-3676)

or email at ferconlinesupport@ferc.gov, or the Public Reference Room at

(202) 502-8371, TTY (202) 502-8659. E-mail the Public Reference Room at

public.referenceroom@ferc.gov.

By the Commission. Commissioner Clark is not participating.

( S E A L )

Nathaniel J. Davis, Sr.,

Deputy Secretary.