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FERC provides guidance for electric transmission rate incentives

Kevin M. Downey

Kevin M. Downey,

Washington, D.C.

16 November 2012
FERC has issued a policy statement to provide further guidance regarding its evaluation of applications for electric transmission rate incentives pursuant to Section 219 of the Federal Power Act and Order No. 679. FERC explained that it had acted on numerous applications for transmission rate incentives since issuing Order No. 679, and that it would be beneficial at this time to provide further guidance and clarity regarding its transmission rate incentive policy. FERC will apply the policy statement to applications for transmission rate incentives received after November 15, 2012, the date of issuance of the policy statement.
FERC provides guidance for electric transmission rate incentives

The principal effect of the policy statement will be to tighten the standards used by FERC in reviewing incentive rate proposals, in response to concerns that FERC has been overly liberal in granting incentives. The policy statement addresses three specific issues that arise in the context of transmission rate incentive filings:

  • Nexus test. Order No. 679 requires applicants to demonstrate (1) a connection between the incentive(s) requested and the proposed investment, and (2) that the incentive(s) requested address the risks and challenges that a project faces. In the past, FERC has relied on a determination of whether a project is “routine” or “non-routine” as a proxy for the “nexus” analysis. Henceforth, FERC will no longer utilize this proxy approach, and instead will analyze the need for each individual incentive, and the total package of incentives.
  • Risk-Reducing Incentives. FERC has granted incentive returns on equity (ROE) for projects that face particular risks and challenges that may not be accounted for in the determination of a base ROE. The policy statement emphasizes that other transmission rate incentives (e.g., 100 percent recovery of certain types of costs) reduce the financial and regulatory risks associated with transmission investment, and that applicants should examine the use of such risk-reducing incentives before seeking an incentive ROE.
  • Incentive ROEs. The policy statement provides additional guidance for project developers seeking incentive ROEs. An applicant must show: (1) the existence of project-specific risks and challenges that are not accounted for in base ROE and that are not addressed by risk-reducing incentives; (2) that it is using appropriate mechanisms to minimize its risks during project development; (3) that alternatives to the project have been or will be considered in an appropriate forum, such as a transmission planning process; and (4) that it commits to limiting the application of the incentive ROE to a cost estimate (e.g., the last cost estimate relied upon to include or retain the project in a regional transmission planning process).

FERC also notes that incentive ROEs may be particularly appropriate for projects that (1) relieve chronic or severe grid congestion that has had demonstrated cost impacts to consumers, (2) unlock location constrained generation resources with limited access to wholesale electricity markets, and/or (3) apply new technologies to facilitate more efficient and reliable usage of the grid.

Kevin M. Downey

Kevin M. Downey,

Washington, D.C.

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