On November 15, 2012, the US Federal Energy Regulatory Commission (FERC) issued a Policy Statement to provide additional and revised guidance regarding its evaluation of applications for electric transmission incentives under section 219 of the Federal Power Act. These incentives include increases to the authorized rate of return (ROE), construction work in progress (CWIP) rate treatment and recovery of the costs of abandoned projects under specified circumstances.
As we discussed in our prior Legal Update, FERC has been challenged to provide clear and non-controversial guidance regarding its transmission incentive policy since the adoption of Order No. 6791 in 2006. Some parties argued that FERC was too liberal in providing incentives, while others argued that FERC’s tests were applied inconsistently. Accordingly, in May of 2011, FERC issued a related Notice of Inquiry (NOI) soliciting comments on 74 questions ranging from overarching transmission incentive program issues to more specific technical matters. FERC received more than 1500 pages of comments to the NOI reflecting, in FERC’s view, “robust participation by a diverse group of commenters…”
In the Policy Statement, FERC:
- Reframes its “nexus test” to focus more directly on the requirements of Order 679;
- Confirms its expectation that applicants for transmission incentives take all reasonable steps to mitigate risks of the related project, including those requesting incentives designed to reduce the risk of the project, before seeking an incentive ROE based on the project’s risks and other challenges;
- Provides general guidance that may inform applications for an incentive ROE; and
- Promotes additional transparency with respect to the impacts of FERC’s transmission incentive policy.
Reframed Nexus Test
In Order 679, FERC required the demonstration of a connection (i.e., the “nexus”) between the incentives requested and the proposed investment, including a showing that such incentives address the risks and challenges that the project faces. Order 679-A refined the nexus test and required an examination of the total package of incentives to determine whether they were rationally tailored to the risks and challenges of constructing new transmission.
In implementing Orders 679 and 679-A, FERC further refined its application of the nexus test. FERC held that the determination of whether a project was “routine” or “non-routine” was particularly probative in determining whether the nexus test is satisfied: i.e., the nexus test was satisfied, and the project was deemed to address the risks and challenges needed to justify the incentives, once an applicant demonstrated that the proposed transmission project was not routine.
However, based on FERC’s experience (and the related difficulty in providing guidance that adequately distinguishes the routine from the non-routine), it has reframed the nexus test by abandoning the routine/non-routine “proxy.” Instead, FERC will examine how the total package of incentives is tailored to address the demonstrable risks and challenges of the related transmission project.
In the Policy Statement, FERC reaffirms its policy of awarding risk-reducing incentives, including: CWIP; treatment of pre-commercial costs not included in CWIP as a regulatory asset, including deferred cost recovery; and recovery of prudently incurred costs if the project is abandoned. However, because each of the incentives reduces risk these should be examined before an applicant seeks an incentive ROE for a project.
Additional Incentive ROE Guidance
FERC states that in order to qualify for an incentive ROE, an applicant needs to make four showings:
- That the related project has risks and challenges that are not addressed by the applicant’s base ROE and any applicable rate-reducing incentives (FERC cites approving projects that relieve chronic or severe grid congestion with demonstrable cost impacts to customers, projects that unlock constrained generation and projects that apply new technologies);
- That the project has taken appropriate measures to mitigate and minimize risks during the related project’s development;
- That the applicant has considered alternatives to the related project and can demonstrate consumer benefits of the project (although FERC anticipates that an applicant may face timing challenges for this showing and states that it will be flexible in the approaches that it will permit applicants to take for this showing); and
- That the applicant is willing to limit the incentive ROE to a specific cost estimate (again FERC acknowledges that there may be timing issues for this showing, especially for an applicant’s request for incentive ROE at an early stage of a project’s development and before siting and other development process that impact ultimate project cost), and that the applicant states that it is open to approaches that control development costs and provide transparency regarding how incentives will be applied to costs beyond initial estimates.
1 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).