By Michael J. Gergen and Jared W. Johnson

On November 15, 2012, the Federal Energy Regulatory Commission (“FERC”) issued a Policy Statement to provide new guidance for applicants seeking rate incentives for new transmission infrastructure projects.  FERC’s transmission rate incentives policy stems from a package of amendments to the Federal Power Act (“FPA”) enacted by Congress in 2005, specifically Section 219 of the FPA, which was added to provide incentive-based rate treatments for investments in transmission infrastructure that would bolster reliability and/or reduce the cost of delivered power by reducing transmission congestion.  FERC implemented Section 219 by issuing new regulations in Order No. 679 which, among other things, set forth several categories of available incentives and also established a “nexus test” that requires applicants to demonstrate a connection between the various incentives requested for a particular project and the risks and challenges that the project faces.  The Policy Statement is the first significant refinement of FERC’s transmission incentives guidelines since issuance of Order No. 679.  It provides further guidance on four interrelated aspects of FERC’s incentives policy which appear primarily intended to address concerns regarding excessive or unjustified reliance by applicants on the asserted non-routine nature of proposed projects to support requests for basis point adders to their return on equity (“ROE”) to address the risks associated with development and construction of these projects.  Indeed, in a statement issued in conjunction with issuance of the Policy Statement, Commissioner John Norris said “we will raise the bar for applicants to demonstrate why incentive [ROE] adders are necessary on top of the base ROE (which already accounts for risk) and the risk-reducing incentives.”

First, FERC has changed how it will evaluate satisfaction of the “nexus” requirement.  Following issuance of Order No. 679, in a case involving Baltimore Gas and Electric Company, FERC had said it would evaluate the nexus test by determining whether a project was “routine” or “non-routine” and, if a project could be shown to be “non-routine” it would satisfy the test.  The Policy Statement abandons the “routine” and “non-routine” distinction and “re-frames” the nexus test to focus on the original requirements adopted in the Order No. 679 rulemaking.  FERC said that it would require applicants to provide sufficient support to allow FERC to evaluate each element of the package and the interrelationship of those elements together.  FERC also said that if some incentives would reduce the risks of the project such risk reduction would be taken account when evaluating requests for ROE adders. 

Second, and in a similar vein, FERC clarified that it expects applicants to examine the use of “risk-reducing incentives before seeking an incentive ROE based on the projects risks and challenges.”  The Policy Statement cites as examples of incentives that reduce risk:  (i) recovery of construction work in progress (“CWIP”), (ii) recovery of pre-commercial costs as an expense or a regulatory asset, and (iii) recovery of 100 percent of prudently incurred costs of transmission facilities that are abandoned for reasons beyond the applicant’s control.  The Policy Statement provides that incentives applicants will be expected to seek to reduce risk by using these risk-reducing incentives before seeking an incentive ROE based on a project’s risks.

Third, the Policy Statement provides additional guidance as to the types of projects that might warrant incentive ROE adders, namely: 

  • Projects to relieve chronic or severe grid congestion that has demonstrated consumer cost impacts.
  • Projects that unlock location-constrained resources that previously had limited or no access to wholesale electricity markets.
  • Projects that apply new technologies to facilitate more efficient and reliable usage and operation of existing or new facilities.

FERC further clarified that it will no longer consider requests for a stand-alone ROE incentive based on an applicant’s use of an advanced technology.  Instead, FERC will consider transmission projects that apply advanced technologies as one part of the overall nexus analysis when an incentive ROE is sought.  FERC also stated that it will require applicants for an incentive ROE to demonstrate that alternatives to the project have been considered in a relevant transmission planning process or an alternative forum.

Finally, the Policy Statement clarifies that it expects applicants for incentive ROE adders to commit to limiting application of the incentive ROE to a “cost estimate” of the project.  Recognizing the difficulty of determining an appropriate cost estimate for a planned project, FERC cited as one option for choosing an appropriate estimate the last cost estimate relied upon to include the project in a regional transmission planning process.

It remains to be seen how application of the Policy Statement will impact new applications for incentives, but it appears intended to establish more stringent criteria for justifying incentive ROE adders as part of FERC’s efforts to balance the need for new infrastructure with concerns over the impact new facilities will have on consumer costs.