FERC’s proposed new approach to awarding transmission incentives drew some support but also generated much sticker shock among stakeholders, who said it would increase costs in many cases without providing additional benefits (RM20-10).

Wednesday was the deadline for comments on FERC’s March Notice of Proposed Rulemaking that would, among many other things, double the adder for participating in an RTO and shift from awarding benefits based on the risks and challenges of a project to one focused on economic and reliability benefits. (See FERC Proposes Increased Tx Incentives.)

FERC, which gained authority to issue incentives in the Energy Policy Act of 2005, implemented its policy in Order 679 in 2006 and opened a Notice of Inquiry to reconsider the policy in 2019 (PL19-3).

‘But For’ Projects

Alliant Energy and DTE Electric, identifying themselves as “transmission-dependent utilities,” said incentives should only be available for “transmission development that is not otherwise occurring or to accomplish specific policy objectives,” saying bonuses are not needed in MISO’s footprint, which “has experienced robust transmission development over the last 10 years without them.”

The companies said incentives should be reserved for high-risk and high-reward projects such as interregional transmission. “Blanket approval of incentives does little to drive desired behaviors; instead, such actions may encourage overbuild and add unnecessary costs to customers.”

Similarly, the American Council on Renewable Energy (ACORE) said incentives should be limited to projects that prove their proposals “would not be built but for the award of the incentive.”

“FERC explained it has not proposed such a ‘but for’ provision because Congress did not clearly direct the commission to include such a provision. However, Congress did direct FERC to incentivize new transmission capacity if it benefits customers. Awarding ratepayer funds to project applicants that would be built in the absence of an incentive are not being incentivized by the award.”

A coalition of consumer and environmental groups that have opposed transmission projects — including Transource Energy’s Independence Energy Connection project in PJM and Central Maine Power’s New England Clean Energy Connect merchant line — said the commission seemed to ignore the comments in response to its NOI “in favor of proceeding with a predetermined agenda.”

The groups said Congress’ legislation authorizing incentives had a dual purpose of both ensuring reliability and reducing the cost of delivered power by reducing congestion. “As written, the statute clearly intends that the cost of incentives to consumers shall be ameliorated by reduction in their power costs. In practice, the commission’s incentives policy has historically taken liberty with the stated purpose of the statute and congressional intent.”

From ‘Risks and Challenges’ to ‘Benefits’

FERC’s proposal to shift from awards based on “risks and challenges” to one based on “benefits” resulting from the project drew both support and opposition.

ACORE supported the change, saying it would help ensure deployment of energy storage as transmission as well as new technologies. “Dynamic line ratings and other technological innovations can provide quantifiable economic benefits and reduced power costs by increasing the capacity of transmission infrastructure at lower costs than new wire solutions, but these innovations are not properly compensated for their benefits under the current approach.”

Among FERC’s proposals was a 50-basis-point (bp) adder to projects that meet a pre-construction benefit-to-cost ratio in the top 25% of projects examined over a sample period, with another 50 basis points for projects that meet a post-construction b/c ratio in the top 10% of projects.

The commission also proposed up to 50 bp for projects that show reliability benefits through quantitative or qualitative analysis.

The R Street Institute, a free-market advocacy think tank, said that the proposed 100-point economic benefits adder, “on its face, seems absurd, as any project should pass a cost-benefit analysis prior to approval. Increasing ROE [return on equity] for something that should already be happening does not incentivize transmission projects to be more cost effective.”

The American Public Power Association said the ex ante economic benefit adder “would unreasonably grant incentives based on analysis of congestion cost savings that might never materialize, and the ex post economic benefit adder rewards projects that have already been built.”

APPA said any reliability incentive should be limited to the portion of the project investment that is needed to produce reliability benefits above NERC reliability standards. It also said reliability incentives should not be “based on qualitative reliability benefit claims alone.”

The National Association of State Utility Consumer Advocates (NASUCA) said the change “will result in the payment of costly incentives to transmission projects likely to be built anyway, with or without incentives, and thereby serves to increase the cost of transmission projects borne by customers while providing no clear customer benefit.”

“The NOPR fails to provide evidence that the incentives are needed,” said Paul N. Cicio, president of the Industrial Energy Consumers of America, which filed comments jointly with 37 other groups under the name “American Manufacturers.”

“Transmission projects that are needed are getting built,” Cicio said. “Every dollar of financial incentive would be passed onto us, the consumer ratepayer. Given today’s economic uncertainty, this is a terrible time to consider increasing electricity rates on manufacturers, our nation’s job creators.”

Advanced Tech

The Working for Advanced Transmission Technologies (WATT) Coalition and Advanced Energy Economy submitted joint comments noting that FERC has never implemented the requirement in EPAct 2005 that it encourage the deployment of new transmission technologies.

“For all the hundreds, if not thousands, of proceedings on energy market design, significant efficiencies lie untapped in the operation of the physical network hardware,” they said.

The groups proposed “a modest, targeted incentive to support the adoption of advanced transmission technologies like dynamic line ratings, topology optimization, and similar tools that increase the capacity and efficiency of the existing grid.” They said their proposal would fulfill FERC’s statutory obligations.

R Street said, “The number of adders that are available to transmission projects is already quite generous and should be examined before handing out more customer dollars for these ventures.” It called FERC’s proposal to replace the current limit on incentives with a 250-basis-point cap on total ROE adders “a good start,” but it said “there needs to be a stop to the layering of incentives, as it is not attracting new and innovative technologies.” It also said the proposed 100-point adder for new technologies is “not enough to retool the transmission system.”

“FERC needs to be … setting up a regulatory paradigm that can usher in new innovations and technology,” R Street said. “Any enhancements to the electric grid need to include more than just ROE incentives; for new technology to be pushed forward, FERC must look to other models to properly incentivize innovation.”

The Energy Storage Association said storage should be eligible for incentives because of its ability to “enhance the flexibility and efficient use” of existing transmission facilities.

“Returns for transmission owners are largely based on allowed rates of return from capital investment. Even if less expensive investments can attain operational capabilities that achieve equal or superior outcomes as a conventional transmission solution, transmission owners would face a reduction in return by undertaking the less expensive investment,” ESA said. “For example, fast-acting energy storage can provide rapid injections pre- or post-contingency events to maintain reliability of the transmission system and reduce congestion on key lines or interfaces. Use of storage in this way can be far less expensive than building redundant transmission conductors, which is the standard way to handle transmission contingencies.”

Doubling RTO Adder

FERC’s proposal to double the adder for participation in an RTO from 50 to 100 basis points attracted much opposition, with some critics saying it should be eliminated altogether.

“What action or decision is influenced by an incentive that rewards a continued payment years after the joining of the RTO?” the Union of Concerned Scientists asked, noting that most RTOs and ISOs already had most of their current members in 2005. “Simply rewarding continued membership seems to provide additional revenue to member utilities without commensurate increase in benefits to consumers,” it said.

“No evidence has been put forth demonstrating that the existing benefits of RTO membership are insufficient incentive for TOs to join and remain in RTOs absent an ROE adder,” the Maryland Public Service Commission said. “The existing 50-bps RTO ROE adder as it stands … provides no incremental benefit to customers. Therefore … the commission’s proposed 100-bps RTO ROE adder [is] simply wholly untenable.”

“The commission’s proposal to double the RTO participation incentive ROE adder in perpetuity will only add costs and provide no discernable benefits to customers who have paid very expensive RTO participation adder for many years,” NASUCA said.

The proposal also drew fire from the California Public Utilities Commission. (See CPUC Calls FERC Tx Incentive Plan ‘Atrocious.’)

But the PJM Transmission Owners sector said the increased incentive is justified because “the risks to transmission owners of RTO membership are significant, such as giving up control of their system and assets to join and participate in RTOs.”

The TOs said, however, that incentives are not sufficient, saying the commission must also “ensure a stable and equitable policy on transmission owners’ ‘base’ return on equity.”

Need for Transmission Planning Reform

The Electricity Consumers Resource Council, filing with the American Chemistry Council and the American Forest & Paper Association, said they understand the need for new transmission but disagree with that incentives “should be — or can be — a key driver of that development.”

“The root cause of underdevelopment, to the extent underdevelopment is pervasive and problematic, is a set of institutional barriers that should be addressed head-on instead of tangentially, expensively and ineffectively via transmission incentives policy,” the groups said. “The appropriate tools available to federal policymakers to address barriers to development include improvements to transmission planning and cost allocation, as well as new legislation from Congress if it chooses to address any additional federal role in transmission siting.”

ACORE also called for changes to transmission planning procedures. “The incorporation of grid optimization and advanced technologies in the planning process, more standard and broad cost allocation, and increased inter-RTO transfer capability will lead to a more robust and efficient electric grid,” it said. “Where possible within its authority, FERC should enhance efforts to streamline transmission siting and enable construction of necessary transmission lines.”

The group cited research from the National Renewable Energy Laboratory that increased transmission development at regional seams could save consumers more than $47 billion and return more than $2.50 for every dollar invested.

ITC also called for a broader review, saying for incentives to proceed “it is necessary to revisit other commission policies and potentially abandon them (e.g., competitive solicitation processes) or reform them (e.g., transmission planning).”

The company said Order 1000’s competitive solicitation processes are “in direct conflict with the commission’s incentives policy” by encouraging TOs to adopt least-cost projects to address transmission needs.

Instead, it said the commission should use a risk-sharing approach similar to that of the New York Public Service Commission for public policy transmission, which gives the developer 20% of cost savings below the targeted cost with the remaining 80% going to consumers. Developers are responsible for 80% of any cost overruns.

UCS noted that the NOPR does not include any incentives for interregional transmission projects.

“Amongst the topics under review in this process, the insufficient attention and lack of incentives for interregional transmission stands out,” the group said. “The commission should acknowledge in this rulemaking that there is a problem when the borders of the ISOs/RTOs create gaps in market-based transfers of energy, increase costs due to congestion, and introduce obstacles and risks to the planning, evaluation and ultimate construction of interregional transmission.”

Eliminate Transco Adder

ITC Holdings said FERC’s proposal to eliminate incentives for standalone transmission companies (transcos) “is premature and based on flawed assumptions.”

“The last decade has been characterized by steady economic growth in tandem with a transformation in the energy sector once thought unimaginable, thus creating an environment that has allowed transcos and vertically integrated utilities alike to make significant investments in transmission infrastructure,” ITC said. “However, the real measure of a transco’s value is better captured in more challenging economic conditions when vertically integrated utilities are required to make difficult choices between investments in generation, distribution and transmission. Indeed, when one looks at the period from 2000 to 2010 — a period that includes the last major recession — transcos far outpaced vertically integrated utilities in terms of transmission investments.”