Energy Law

FERC to Be Less Generous with Incentive Rates for Transmission Projects

By Andrew McLain

At a time when investment wells are bone dry and credit unavailable, FERC ironically seems to have reversed earlier policies that liberally extended economic incentives to new transmission projects under FPA section 219 and Order No. 679. In a December 4, 2008 order, FERC denied Commonwealth Edison's (ComEd) petition asking the agency to declare that 22 transmission projects are eligible for rate incentives, even though each project had been approved in the PJM Interconnection's regional transmission expansion plan (RTEP) process. The projects ranged from capacitor and transformer installations, transmission line upgrades, and circuit breaker replacements, costing approximately $215 million. Although PJM approved these projects in its 2006, 2007, and 2008 as RTEP baseline projects, FERC nevertheless rejected ComEd's petition, finding that ComEd failed to satisfy Order No. 679's "nexus" test. That test requires an applicant for incentive rates to demonstrate that its project is not routine and that the total package of incentives is needed in light of the risks and challenges faced by the project. Increasing criticism has been directed at the agency for granting incentives where no "nexus" had been demonstrated.

In its order, FERC acknowledged that rejection of ComEd's petition represented a departure from earlier orders in which FERC appeared to apply a more deferential standard to award rate incentives to projects that stakeholders of a regional transmission organization (RTO) had determined would improve grid reliability. For example, in a 2007 order involving Baltimore Gas & Electric, FERC held that "[p]rojects . . . identified as 'baseline' in the PJM RTEP process are . . . by definition, regional projects are thus, not routine." In contrast, in the December 4 Order FERC held that, "[d]espite their status as PJM RTEP baseline projects, ComEd has not demonstrated how [its] projects present risks or challenges to warrant an incentive ROE under our nexus requirement."

Imprimatur of an RTO planning processes alone will apparently no longer entitle a project to incentive returns. Now, applicants will be required to independently satisfy the "nexus test." Even though the Commission will continue to allow such projects to qualify for the rebuttable presumption under the Commission's so-called "219 test," which is a threshold determination as to whether a project ensures reliability or reduces congestion, independently supporting the nexus test will undoubtedly increase the amount of support of incentive applications going forward. Among other things, the December 4 Order could result in increased Commission scrutiny and reduced administrative certainty, even for risky projects requiring large capital outlays.

Full post as published by Energy Legal Blog on December 05, 2008 (boomark / email).