The Federal Energy Regulatory Commission received a wave of conflicting praise and criticism July 1 on a proposal to revamp what many industry stakeholders agreed is as an out-of-date incentive policy for electric transmission projects.

At issue is a proposed rule released in March that would depart from an approach FERC established more than a decade ago by focusing on economic and reliability benefits instead of risks and challenges that projects face.

FERC adopted its risks-and-reward approach after the U.S. Congress passed the Energy Policy Act of 2005, which added Section 219 to the Federal Power Act. Under that section, FERC must provide incentive-based rates for transmission projects that benefit consumers by both ensuring reliability and reducing costly grid congestion.

In issuing the proposed rule, FERC cited significant changes to transmission planning and development as well as an increased number of renewable energy generators seeking to connect to the grid.

Under the proposed rule, the commission would offer an additional 50 basis points of return on equity for projects that meet an economic benefit-to-cost ratio in the top 75% of transmission projects within a sample period. Another 50-basis-point ROE adder would be given to projects that demonstrate ex-post cost savings that fall in the 90th percentile of transmission projects studied over the same sample period, as measured at the end of construction.

In addition, FERC proposed to establish a uniform 100-basis-point adder to ROE for utilities that place their wholesale transmission facilities under the control of a regional grid operator, an increase from a 50-basis-point adder the commission already provides.

The commission also proposed to establish a 250-basis-point cap on total ROE incentives available to utilities instead of limiting ROE incentives to a utility's zone of reasonableness, a calculation intended to reflect how investors would view a transmission project. Among other provisions, FERC proposed to eliminate ROE incentives available to stand-alone transmission companies, also known as transcos.

In a partial dissent, Commissioner Richard Glick agreed with some elements of the proposal, such as eliminating ROE incentives for transcos. But he also encouraged commenters to address the issue of whether the proposed incentives "would actually incentivize anything" in addition to whether they would be just and reasonable.

'A handout'

Echoing a concern raised in Glick's dissent, Connecticut Attorney General William Tong led five other state attorneys general and agencies in denouncing the 50-basis-point increase for participation in a regional transmission organization or independent system operator.

"The proposed RTO participation incentive is a handout and must be rejected," the group said, noting that the current 50-basis-point incentive has already encouraged robust participation in RTOs. "Increasing the incentive by an additional 50 basis points, without evidentiary support that there is a need for such an increase, is arbitrary and capricious, and will do nothing but reduce benefits for ratepayers, resulting in unjust and unreasonable rates."

The California Public Utilities Commission noted separately that the proposal would reward utilities that are already required by state law to participate in the California ISO.

WIRES, a nonprofit trade group that promotes North American transmission investments, argued that utilities participating in RTOs and ISOs should be compensated for additional risks and responsibilities that have recently materialized. Utilities that cede control of their transmission facilities to a regional grid operator can also lose out in competitive solicitations and be directed to build new facilities, WIRES noted.

Utility, environmental groups

While generally supportive of the proposed rule, the Edison Electric Institute, or EEI, a trade group representing the nation's investor-owned utilities, said FERC should avoid attempting to fit transmission projects into distinct "economic" and "reliability" categories.

"Transmission projects can provide multiple types of benefits contemporaneously and the commission's transmission incentives policy should reflect this fact," the EEI said.

The EEI said it also supports a provision of the proposed rule that would allow transmission developers to recover 100% of prudently incurred costs from the date a project is selected in a regional transmission planning process. Under FERC's current rules, recovery of those costs is only allowed after the commission signs off on an abandoned plant incentive.

The EEI also expressed support for the proposed 250-basis-point cap on total ROE incentives, saying the change would avoid future uncertainty given multiple recent changes to how FERC calculates the zone of reasonableness under its base ROE methodology. The trade group added that FERC should consider allowing transmission projects that integrate renewable resources to be designated as economic projects.

In contrast, a coalition of environmental groups that included the Natural Resources Defense Council and the Sierra Club said allowing ROE incentives to exceed the zone of reasonableness would be unjust and unreasonable. "There is no incentive to do so as the project will be invested in even without the additional ROE adder," the group said. It also urged FERC to account for state public policy objectives such as greenhouse gas emission reductions when it calculates the benefits of a proposed project.

The National Rural Electric Cooperative Association said FERC's proposed incentive structure departs from its current "nexus test," which is aimed at ensuring incentives are rationally related to proposed investments. "The nexus test is compatible with, and indeed essential to the lawfulness of, a 'benefits-based' incentives policy under the FPA," the association said.

Advanced technology, infrastructure companies

Touting the benefits of "non-wires" solutions, a group of companies that develop technology that allows transmission infrastructure to be used more efficiently proposed an incentive designed to promote the use of advanced transmission technology.

The WATT Coalition teamed up with the trade group Advanced Energy Economy to urge FERC to recognize that advanced technology deployments are generally "low-cost and rapidly deployable," while FERC incentives and RTO/ISO planning processes are structured around projects "costing hundreds of millions to billions of dollars and take years to implement."

Americans for a Clean Energy Grid, a coalition that works on grid expansion and grid operations, said FERC should focus on reviewing its planning and cost allocation policies. Doing so offers "the best opportunities to advance the significant expansion of the grid which is needed to enable a clean energy portfolio," Rob Gramlich, the coalition's executive director, said in a July 1 email.

LS Power Group, a developer and infrastructure investor, argued for changes that recognize shifts in market dynamics since the current regulatory structure was put in place. "Incentives should be targeted and linked to a specific goal, such as ensuring there is transmission planned to meet the public policy requirements that are driving the evolution of the resource mix and eliminating congestion as load patterns shift," the company said.

Independent transmission company ITC Holdings Corp. said it supports FERC's proposal to increase the RTO participation incentive but asked the regulator to reconsider eliminating the transco business model incentive.

Benefits flowing to customers through organized regional power markets include transmission congestion mitigation, reliability coordination, regional planning and economic dispatch, Nina Plaushin, vice president of regulatory and federal affairs at ITC, said in an emailed statement. "These customer benefits continue over time and likewise so should any incentive." (FERC docket RM20–10)

Jared Anderson is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.