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Legal Update

FERC Issues Orders Regarding Several Merchant Electric Transmission Projects and Commits to Reviewing its Transmission Rate Incentive Policies

26 May 2011
Mayer Brown Legal Update

At its last meeting on May 19, 2011, the US Federal Energy Regulatory Commission (FERC) issued final orders in several important and high-profile electric transmission cases, granting (or reaffirming) incentive rates, including return adders, construction work in progress (CWIP) treatment, and collection of costs of abandoned projects. At the same time, reflecting the disputes that have accompanied its transmission investment incentive policy, FERC initiated an notice of inquiry (NOI) on the underlying program.

These orders all address requests for various rate incentives for proposed transmission infrastructure projects under FERC’s Order No. 679 and Order No. 679-A; the NOI requests further comment on the scope and implementation of its transmission incentives regulations and policies, as FERC considers possible prospective changes to the program. Order Nos. 679 and 679-A implement Section 219 of the Federal Power Act (FPA) that was added by the Energy Policy Act of 2005.

In Green Power Express, FERC authorized a settlement for Green Power’s contested request for certain rate incentives, accounting treatments and a formula rate for transmission service. In an earlier order, FERC had conditionally¹ approved the requested rate incentives (namely, (i) the recovery of costs of facilities abandoned for reasons beyond the control of the project, (ii) the deferred recovery of start-up, development and pre-construction costs through the creation of regulatory assets, (iii) the inclusion of 100 percent of CWIP in rate base, (iv) a hypothetical capital structure of 60 percent equity and 40 percent debt, and (v) a 160-basis point (bp) incentive adder to the return on equity (ROE), consisting of a 50bp adder for participation in a regional transmission organization (RTO), a 100bp adder for being an independent transmission-only company (Transco), and a 10bp adder for special risks of the project, for an overall ROE of 12.38 percent, reflecting a base return of 10.78 percent). Finding that the requested formula rate raised issues of material fact, FERC scheduled the case for further evidentiary hearing and settlement procedures. The instant order reaffirmed FERC’s earlier determinations and approved a settlement establishing a pro forma rate template.

In Ameren Services Company, Ameren had requested various rate incentives for four proposed transmission infrastructure projects; however, FERC only found two projects—the Illinois Rivers and the Big Muddy projects—as sufficiently “non-routine” to merit rate incentives and conditionally² granted Ameren’s request for CWIP incentive, the recovery of prudently incurred costs of abandoned facilities, and hypothetical 56:44 equity debt capital structure. FERC confirmed that Ameren could use the then-current ROE used by transmission-owning members of the Midwest ISO (as opposed to the current 12.28 percent ROE that Ameren had requested), but deferred decision on Ameren’s requested formula rates until the required proceeding under FPA section 205. FERC also approved Ameren’s request that so-called “underbuild” (investments in lower voltage infrastructure necessary to ensure that reliability and congestion relief benefits of the projects are not impaired) be included to the extent that the MTEP includes these investments.

In Desert Southwest Power, FERC approved the requested rate incentives for the project (but not for a possible second circuit project), even though the project had not yet been approved in the California Independent System Operator (CAISO) transmission planning process, as FERC found that Desert Southwest had sufficiently demonstrated the reliability and congestion relief benefits of the project and had satisfied FPA section 219’s requirements. FERC also approved a combined 150bp ROE adder (although Desert Southwest had requested a total of 200bp in adders), subject to the required FPA section 205 proceeding.

In Atlantic Grid Operations, noting that the projects had not yet been approved in an open transmission planning process (and, as a result, the rebuttable presumptions under FPA section 219 did not apply) and that the applicants had not sufficiently demonstrated that the projects would provide reliability and congestion relief, nevertheless, FERC found that the projects were not routine and approved an up-front incentive 12.59 percent ROE, including a combined 250bp of incentive adders (the applicants had requested a total 13.58 percent incentive ROE, including a request for 300bp of adders) and certain other requested transmission infrastructure incentives. The approved adders included 50bp for RTO membership, 50bp for being a Transco, 50bp for using advanced technology (multiple advanced technologies are proposed) and 100bp for the complexity of the projects (the applicants had noted that there is no comparable project anywhere else and that, with an estimated cost of $5 billion, with underwater construction extending 250 miles from northern Virginia to southern New Jersey, with interconnections with land-based systems in four states and multiple regulatory approvals, the projects are complicated).

Last, in Central Transmission, FERC conditionally³ approved the requested transmission infrastructure incentives, comprising (i) recovery of pre-commercial costs through regulatory assets, (ii) recovery of abandonment costs beyond the control of Central Transmission, (iii) a 50bp ROE adder for RTO participation and (iv) a 30-year depreciable life, but denied without prejudice the requested forward-looking formula rate.

Collectively, these cases demonstrate the complexity of the issues raised by FERC’s current policy, including (i) issues relating to the timing and interaction of FERC, regional planning, and state approval processes for transmission infrastructure investment, (ii) the difficulty of separating routine from non-routine projects and providing useful guidance to market participants that distinguishes them, and (iii) the barriers that remain to a new market entrant actually recovering the costs of an abandoned project.

In FERC’s NOI Promoting Transmission Investment Through Pricing Reform, FERC notes that, in the nearly 5 years since the adoption of Order 679, there have been more than 75 applications for transmission infrastructure incentives in connection with over $50 billion of investments to ensure reliability or to reduce the cost of delivered power to customers by reducing transmission congestion.

Specifically, FERC seeks comments on 74 questions ranging from overarching program issues to more specific technical matters. FERC has stated that it will apply any new policies on a prospective basis only. Coupled with pending FERC initiatives, the coming year will see a complete re-evaluation of many of the underpinnings of FERC’s existing transmission infrastructure incentive program. Comments are due within 60 days of publication in the Federal Register.

For more information about the topics addressed in this Legal Update, please contact at +1 202 263 3204 or at +1 312 701 7366.

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1. Subject to the approval under the applicable open access transmission planning process of the Midwest Independent System Operator (Midwest ISO) and PJM.
2. Subject to these projects being approved in the Midwest ISO Transmission Expansion Planning Process (MTEP).
3. Subject to PJM approving the project as an economic enhancement in PJM’s Regional Transmission Expansion Plan (RTEP).

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