FERC Refines Its Approach to Transmission Rate Incentives

November 21, 2012

Last week, the Federal Energy Regulatory Commission ("FERC") issued a policy statement revising its approach to transmission rate incentives. FERC's revised approach promises to better integrate its transmission rate incentives policy with existing risk-reduction policies, as well as new transmission planning requirements arising from Order No. 1000. The new approach also promises to better align rate incentives so that they are awarded only to high-risk projects, thus answering critics who have argued that FERC has routinely awarded rate incentives to transmission projects presenting no unusual risks.

The new policy statement arises from Section 219 of the Federal Power Act, enacted as part of the Energy Policy Act of 2005, which requires FERC to offer incentive-based rates to encourage new investment in transmission infrastructure. In response to Section 219, FERC in 2006 issued Order No. 679, a policy statement setting forth FERC's approach to incentive rates for transmission investments. In order to qualify for incentive rates, Order No. 679 required the sponsor of a transmission project to demonstrate a "nexus" between the incentive rate provided and the investment being made, and subsequently refined the "nexus" test to focus on whether a project is "routine" or "non-routine." In the new policy statement, FERC "reframes" the nexus test so that it focuses more directly on the comparative risks of transmission investment.

Specifically, FERC abandons the "routine/non-routine" distinction, and instead requires applicants for transmission rate incentives to make a focused showing that incentive rates are justified by overall project risks. In making this determination, the applicant must take into account other risk-reducing incentives awarded by the Commission (for example, recovery of Construction Work In Progress, recovery of pre-commercial costs as an expense, and recovery of costs incurred in a project abandoned for reasons beyond the applicant's control), and demonstrate that the additional project risks and challenges justify an additional rate incentive. In particular, the policy statement indicates FERC will favor incentive rates where the project sponsor demonstrates that new transmission will relieve chronic congestion, unlock transmission-constrained generation, or use new technologies that improve performance of the transmission system.

In addition, the policy statement sets forth a requirement that the project sponsor demonstrate that it has taken appropriate steps to minimize project risks, such as use of best construction management practices. FERC also expects that alternatives to the proposed project will have been considered through, for example, the transmission planning process required by Orders No. 890 and 1000 or through an Environmental Impact Statement. Finally, FERC will require incentives to be based upon a specific project cost estimate.

If you have any questions about the FERC policy statement discussed here, other FERC matters, or other issues related to the utility industry, please contact a member of GTH's Energy, Telecommunications and Utilities practice group. We have years of experience in FERC and BPA matters, the Northwest's energy industry, complex administrative matters, appellate litigation, and related fields.