Norris urges FERC to reassess policies on transmission incentive rates
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The Federal Energy Regulatory Commission’s transmission rate incentive policies "have become too one-sided, approving a similar level of incentives for nearly all transmission projects that are proposed," Commissioner John Norris said in a Nov. 22 statement. The commission "should reassess its policies regarding transmission rate incentives, to ensure that those incentives are working to encourage the construction of transmission projects that meet identified needs and ultimately provide benefits to consumers," he said in a concurring statement on a Nov. 18 rehearing order on incentives for the Potomac-Appalachian Transmission Highline (PATH) project (see story, this issue).
As a result of this one-sided approach, "it has become difficult for the commission to weigh what particular level of incentives is appropriate for individual projects, and to balance the potential impacts of these incentives on consumers," Norris said. "While there may be periods where it makes sense to provide greater incentives across the board to help new transmission projects compete for capital, these incentives must always work to benefit consumers."
An overly generous incentive rates policy "runs the risk that in the future the commission will not have a good basis on which to target rate incentives to particular projects," Norris said. "Rate incentives can and should be a regulatory tool to address the risks and challenges of particularly difficult projects, or provide an additional possible reward for projects that have the potential to provide significant benefits to consumers."
Norris said he is "troubled by the lack of a limit on incentive rate amounts, and the absence of a clear analysis that articulates the balance achieved by the project’s risks and rewards and its benefits to consumers." With no limit on incentive rate amounts, the current policy "will naturally lead to a ratcheting up of transmission rates over time," he said. Also, with no range set for incentive rates, "it is difficult to determine a project’s incentive award relative to its impact on consumer benefits or relationship to risks and challenges compared to other projects."
Setting incentive rates is more art than science, Norris said, but FERC "has not articulated a range of potentially acceptable incentive [return on equity] adders, and then drawn meaningful conclusions in individual cases as to why a particular level of incentive ROE adders within that range was awarded."
The commission "must clearly articulate the rationale for granting incentives to each individual project in order to mitigate increasing public opposition to new transmission infrastructure that will be vital to our nation’s energy future," he said.
The commission’s current approach "may not appropriately balance the different types of incentives awarded to a project," Norris said. Some incentives, such as collection of rates during construction work in progress, significantly lower risk for investors, while others such as return on equity adders offer greater rewards. He cited as an example the PATH case, in which FERC’s order "does not balance the effect of the risk-reducing rate treatments granted to PATH, including [construction work in progress] and abandoned plant, against the incentive ROE adders that are also granted."
Norris questioned the commission’s decision to award a 200 basis point incentive to PATH. That "is a significant amount to add on top of a base ROE that has been determined to be just and reasonable," he said. "According to the Maryland [Public Service] Commission, 200 basis points added to PATH will cost ratepayers in PJM at least $18 million per year."
If the commission had established an incentive rate range, for example zero to 200 basis points, "PATH may not have been at the high end but still higher than most projects, given the benefits to consumers it will provide."
The PATH project is worthy of some level of rate incentives since it "involves a number of high risk factors such as crossing multiple state boundaries and deploying new technologies to address a critical reliability need and relieve transmission constraints along a critical mid-Atlantic corridor," Norris said. "Regulatory certainty benefits consumers by lowering the overall cost of capital for utility businesses and it is important to allow PATH and similarly situated entities to continue with their projects."
While Norris voted to affirm the package of incentives for PATH for those reasons, he said he might have supported a different set and level of incentives had he been on the commission in 2008 when it first voted on PATH's request for incentives. —ROBERT VARELA