Daily Rules, Proposed Rules, and Notices of the Federal Government
2. Section 1241 of the Energy Policy Act of 2005 added a new section 219 to the FPA. The Commission implemented section 219 by issuing Order No. 679, which established by rule incentive-based rate treatments for investment in electric transmission infrastructure for the purpose of benefiting consumers by ensuring reliability and reducing the cost of delivered power by reducing transmission congestion. Since the issuance of Order No. 679, the Commission has evaluated more than 85 applications representing over $60 billion in potential transmission investment.
3. On May 19, 2011, the Commission issued a notice of inquiry (NOI) seeking public comment regarding the scope and implementation of the Commission's incentives policies. The Commission received over 1,500 pages of comments reflecting a wide range of perspectives on the Commission's incentives policies. The Commission appreciates the robust participation by the diverse group of commenters, and has carefully considered the comments received in formulating this policy statement. The Commission's issuance of this policy statement is driven by its experience applying its incentives policies to individual incentive
4. As noted above, the Commission through this policy statement provides additional guidance with respect to certain aspects of its incentives policies. Specifically, the Commission: reframes the nexus test to focus more directly on the requirements of Order No. 679; expects applicants to take all reasonable steps to mitigate the risks of a project, including requesting those incentives designed to reduce the risk of a project, before seeking an incentive ROE based on a project's risks and challenges; provides general guidance that may inform applications for an incentive ROE based on a project's risks and challenges; and promotes additional transparency with respect to the impacts of the Commission's incentives policies. Each of these issues and the Commission's corresponding clarifications are discussed further below.
5. We note that many aspects of the Commission's incentives policies are not addressed in this policy statement. For example, in Order No. 679, the Commission stated that applicants could seek incentives thereunder regardless of their ownership structure,
6. Order No. 679 established the "nexus test," which requires applicants to demonstrate a connection between the incentive(s) requested under Order No. 679 and the proposed investment, and that the incentive(s) requested address the risks and challenges that a project faces. In Order No. 679, the Commission stated that each incentive:
"* * * will be rationally tailored to the risks and challenges faced in constructing new transmission. Not every incentive will be available for every new investment.
Rather, each applicant must demonstrate that there is a nexus between the incentive sought and the investment being made. Our reforms therefore continue to meet the just and reasonable standard by achieving the proper balance between consumer and investor interests on the facts of a particular case and considering the fact that our traditional policies have not adequately encouraged the construction of new transmission."
7. The Commission refined the nexus test in Order No. 679-A, finding that, in applying the nexus test, the Commission should look at whether the total package of incentives is rationally tailored to the risks and challenges of constructing new transmission.
8. Subsequent to Order No. 679 and Order No. 679-A, the Commission further refined its application of the nexus test by clarifying that the determination of whether a project is "routine" or "non-routine" is particularly probative in evaluating whether the nexus test was satisfied. In
9. The Commission recognizes that there are a wide range of views on its application of the nexus test and, in particular, the Commission's use of the routine/non-routine analysis as a proxy for the nexus test. Most commenters in the NOI are supportive of the nexus test's focus on evaluating risks and challenges to determine whether a project merits incentives. Some commenters offer additional criteria for assessing risks and challenges, while others are more critical of the nexus test and assert that it is insufficient and requires change. With respect to the Commission's use of the routine/non-routine analysis in reviewing incentive applications since
10. Based on experience to date with the application of Order No. 679, the Commission now believes it is essential to re-frame its application of the nexus test to focus more directly on the requirements adopted in Order Nos. 679 and 679-A.
11. The Commission authorizes a company's base ROE utilizing a range of reasonableness resulting from a discounted cash flow (DCF) analysis that is applied to a selected proxy group representing firms of comparable risk. The resulting base ROE authorized by the Commission is designed to account for many of the risks associated with transmission investment and to support that investment. Nonetheless, the Commission recognizes that there may be risks associated with investment in particular transmission projects that are not accounted for in the base ROE. In Order No. 679, the Commission recognized that some transmission incentives--such as recovery of 100 percent of Construction Work in
12. The CWIP and pre-commercial cost incentives both serve as useful tools to ease the financial pressures associated with transmission development by providing up-front regulatory certainty, rate stability and improved cash flow, which in turn can result in higher credit ratings and lower capital costs.
13. Regarding 100 percent recovery of pre-commercial cost as an incentive, the Commission has permitted recipients of this incentive to expense and recover pre-commercial costs that would otherwise be capitalized in CWIP, thus providing for earlier cost recovery and improving early stage project cash flows. The Commission has also made deferred cost recovery available to applicants to address cost recovery restrictions at the state level and to provide greater flexibility for applicants to recover costs, recognizing that deferred cost recovery is intended to "* * * increase the certainty of cost recovery to encourage more transmission investment."
14. Regarding the incentive that allows for 100 percent recovery of prudently incurred costs of transmission facilities that are abandoned for reasons beyond the control of the transmission owner, the Commission has found this incentive reduces the regulatory risk of non-recovery of prudently incurred costs.
15. In the NOI, numerous commenters discuss the interplay of risk-reducing incentives on the need for and appropriate level of an incentive ROE. For example, Certain State and Consumer-Owned Entities state that if a project's risks exceed the risk that is accounted for in the base ROE, incentives may be appropriate.
16. In Order No. 679-A, the Commission stated that a project that receives risk-reducing transmission incentives, like those discussed above,
17. Some commenters in the NOI suggest that the Commission specifically identify project characteristics or risks and challenges that would merit an incentive ROE. We decline to do so. Instead, we will continue to allow applicants the flexibility necessary to demonstrate why their projects may merit an incentive ROE, and at what level, based on those project's risks and challenges, but we provide general guidance below that may inform applications for this type of transmission incentive.
18. As discussed above, many of the risks not captured by traditional ratemaking policies can be addressed through risk-reducing incentives. While the record in the NOI proceeding does not show that incentive ROEs have resulted in significant rate increases for consumers,
19. However, a project may face certain risks and challenges that may not be addressed through either the traditional ratemaking policies or risk-reducing incentives. In such instances, an incentive ROE based on a project's risks and challenges may be appropriate.
20. When applying for an incentive ROE based on the project's risks and challenges, applicants will first be expected to demonstrate that the proposed project faces risks and challenges that are not either already accounted for in the applicant's base ROE or addressed through risk-reducing incentives. To make this demonstration, the Commission suggests that applicants identify risks and challenges specific to the project for which an incentive ROE is being requested.
21. Investments in the following types of transmission projects
1. Projects to relieve chronic or severe grid congestion that has had demonstrated cost impacts to consumers;
2. Projects that unlock location constrained generation resources that previously had limited or no access to the wholesale electricity markets;
3. Projects that apply new technologies to facilitate more efficient and reliable usage and operation of existing or new facilities.
22. This list is not exhaustive, but rather indicative of the types of projects that the Commission believes, based on its experience and expertise with respect to industry trends and system investment needs, may warrant an incentive ROE based on the project's risks and challenges. More generally, the Commission anticipates that applicants will seek an incentive ROE based on a project's risks and challenges for projects that provide demonstrable consumer benefits by making the transmission grid more efficient, reliable, and cost-effective. Thus, consistent with our statements in Order No. 679, we note that reliability-driven projects may be considered for an incentive ROE based on a project's risks and challenges, but only if they present specific risks and challenges not otherwise mitigated by available risk-reducing incentives.
23. Under our current incentive policies, the Commission considers an applicant's proposed use of an advanced transmission technology both: (1) as part of the overall nexus analysis, accounting for the risks and challenges associated with utilizing such advanced technology into that overall nexus analysis;
24. The Commission expects an applicant that requests an incentive ROE based on a project's risks and challenges to demonstrate that it is taking appropriate steps and using appropriate mechanisms to minimize its risks during project development. For example, risks may be reduced through the risk-reducing incentives described in section II.B, or through mitigating costs by implementing best practices in their project management and procurement procedures. Applicants should consider taking measures tailored to mitigate the various risks associated with their transmission projects and to identify such measures in their applications. For example, applicants may take measures to mitigate risks associated with siting and environmental impacts by pursuing joint ownership arrangements. The Commission encourages incentives applicants to participate in joint ownership arrangements and agrees with commenters to the NOI that such arrangements can be beneficial by diversifying financial risk across multiple owners and minimizing siting risks.
25. The Commission expects applicants for an incentive ROE based on a project's risks and challenges to demonstrate that alternatives to the project have been, or will be, considered in either a relevant transmission planning process or another appropriate forum. Such a showing should help identify the demonstrable consumer benefits of the proposed project and its role in promoting a more efficient, reliable and cost-effective transmission system.
26. The Commission appreciates that there may be timing challenges for applicants making this showing, and thus the Commission will be flexible in the approaches it allows for applicants to make this showing. In particular, this showing could be satisfied through participation in open processes that are already in existence. For example:
1. The applicant could show that its project was, or will be, considered in an Order No. 890 or Order No. 1000-compliant transmission planning process that provides the opportunity for projects to be compared against transmission or non-transmission alternatives.
2. The applicant could show that its project was considered by a local regulatory body, such as a state utility commission, that evaluated alternatives to its proposed project (transmission or non-transmission alternatives) and determined that the proposed transmission project is preferable to the alternatives evaluated.
27. The above approaches should not be seen as exclusive, however, and the Commission will remain open to alternative methods to making this showing.
28. Finally, the Commission expects applicants for an incentive ROE based on a project's risks and challenges to commit to limiting the application of the incentive ROE based on a project's risks and challenges to a cost estimate. For example, the Commission has approved an applicant's proposal to limit the incentive ROE based on a project's risks and challenges to the cost estimate utilized at the time of RTO approval.
29. The Commission recognizes the challenges of determining the appropriate cost estimate for a project. For example, most applicants seek incentives from the Commission at a relatively early stage in the project development process, often before state siting or other processes raise challenges that can impact the design and ultimate cost of a project. One option may be for applicants to commit to limiting the application of an incentive ROE based on a project's risks and challenges to the last cost estimate relied upon to include or retain the project in a regional transmission planning process.
30. The Southwest Power Pool Regional State Committee (SPP RSC) in its comments on the NOI identifies a definitive cost estimate that would serve as the initial threshold limit for an incentive ROE, a 10% dead-band above or below the definitive cost estimate around which changes in costs are shared equally between shareholders and customers, and a provision for addressing cost increases that are outside the control of the transmission owner.
31. As noted above, the Commission is relying on its experience and expertise with respect to industry trends and system investment needs to provide additional guidance and clarity through this policy statement. Six years after
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By the Commission. Commissioner Clark is not participating.