By Michael Brooks

WASHINGTON — FERC will seek comments on how it could improve its transmission incentives and return on equity policies under two Notices of Inquiry issued Thursday.

The commission will examine whether transmission incentives “should continue to be granted based on a project’s risks and challenges or … on the benefits that a project provides,” FERC said at its monthly open meeting (PL19-3).

Under the other inquiry, the commission will examine whether, and if so how, to change how it calculates ROEs for electric infrastructure, as well as for natural gas and oil pipelines (PL19-4).

“Given the complexity and scale of building new transmission projects, the decisions my colleagues and I make now will have impacts for decades to come,” FERC Chairman Neil Chatterjee said. “What all this boils down to is [that] getting these policies right will be critical to ensuring the energy revolution we’re currently undergoing results in more reliable services and lower prices for customers. To that end, I think the two NOIs we are issuing today are an important step toward getting our transmission policies right.”

Initial comments on both NOIs are due 90 days after their publication in the Federal Register, with reply comments due 30 days after that.

Transmission Incentives

FERC noted in its transmission incentives policy NOI that 13 years have passed since it established its current policy in Order 679, after Congress in the Energy Policy Act of 2005 directed the commission “to promulgate a rule providing incentive-based rates for electric transmission for the purpose of benefiting consumers through increased reliability and lower costs of power.”

“During that time, the landscape for planning, developing, operating and maintaining transmission infrastructure has changed considerably,” FERC said, including issuance of Order 1000, the shift in the generation mix, the increase in the number of new resources seeking transmission service, shifts in load patterns and an increased emphasis on the reliability of transmission infrastructure.

“I believe we are really at an inflection point in the energy future of our nation, and FERC’s transmission policies are going to be key to shaping that future,” Chatterjee said.

Order 679 required “that each applicant demonstrate that there is a nexus between the incentive sought and the risks and challenges of the investment being made.” FERC asked stakeholders whether it should stick with this “risks-and-challenges” approach, if it should be retained while also considering other factors, or if it should just be replaced entirely. The commission asked stakeholders to weigh in on other approaches, such as considering the economic and reliability benefits of a project or considering project characteristics (such as location in areas of persistent need or interregional efforts) as a “proxy” to benefits.

Commissioner Cheryl LaFleur said she was particularly interested in comments on the transmission-only company and RTO participation adders, and on the interplay between the incentives policy and Order 1000.

“I do believe there’s a clear need to construct more transmission to ease the interconnection of location-constrained renewables,” LaFleur said. “And I think that’s evidenced by the choking interconnection queues in several of the regions, suggesting there might be transmission that’s needed rather than just hundreds of interconnections, and we have to make sure the processes support that.”

“It is not clear to me that in some cases the incentives we are handing out are actually incenting anything,” Commissioner Richard Glick said. “If we’re going to design the right approach, we need to be reasonably certain the incentives are necessary or whether the investments in question would occur anyway. In other words, we shouldn’t be handing out what some people refer to as ‘FERC candy’ without actually achieving something beneficial in return.”

Return on Equity

The NOI on the commission’s ROE policies comes in response to the D.C. Circuit Court of Appeals’ 2017 ruling that remanded a FERC order setting the base ROE for a group of New England transmission owners at 10.57%. (See Court Rejects FERC ROE Order for New England.)

FERC set the ROE at the midpoint of the upper half of the zone of reasonableness produced by a two-step discounted cash flow (DCF) analysis. In Emera Maine v. FERC, the court found that FERC had failed to show how this was just and reasonable, though it did not challenge the commission’s methodology. Nevertheless, in October, FERC proposed a new policy for how it would set transmission ROEs, suggesting it would no longer rely solely on the DCF method. (See FERC Changing ROE Rules; Higher Rates Likely.)

The NOI issued Thursday will take a much broader look at FERC’s ROE policies, including whether any changes to its transmission ROE policies should be applied to interstate natural gas and oil pipelines. The commission noted that the NOI won’t affect the docket it opened in October, nor other current ROE proceedings.

“The commission recognizes the potentially significant and widespread effect of our ROE policies upon public utilities,” FERC said. “The importance of ROE policy for public utilities extends beyond the particular interests of the parties to the Emera Maine proceeding.”

FERC asks more than 70 questions in the NOI. In a press release, it divided them into eight general areas:

• The role of FERC’s base ROE in investment decision-making and what objectives should guide the commission’s approach;
• Whether uniform application of FERC’s base ROE policy across the electric, natural gas pipeline and oil pipeline industries is appropriate and advisable;
• The DCF model’s performance;
• The composition of proxy groups;
• The choice of financial model used;
• The mismatch between market-based ROE determinations and book-value rate base;
• How FERC determines whether an existing ROE is unjust and unreasonable under the first prong of FPA Section 206; and
• The mechanics and implementation of the models.

“The questions we ask are extremely detailed and comprehensive, and this has been a notoriously difficult area of our work, around which to develop a consensus and sustain in court,” LaFleur said. “I strongly encourage commenters to be focused and concise in their comments.” She stressed that commenters need not answer every single question.