Week Ending April 16, 2021

Transmission Efforts at FERC Praised on Workshop, Criticized on ROE

This Article Appears as Published in Foster Report No 3345
Transmission Efforts at FERC Praised on Workshop, Criticized on ROE

Efforts at FERC to improve electric transmission planning, cost allocation and other measures in consultation with state regulators received praise from a few groups in initial reactions to the April 15 announcement at the Commission’s open meeting.

More details on a workshop with state regulators to assess the value of grid-enhancing technologies through a shared-savings approach will be announced soon, FERC Chairman Richard Glick said.

Enhancements for the transmission grid have been a priority for Glick, who mentioned that such steps are a key component of President Joe Biden’s infrastructure plan. The shared-savings approach stems from proposals mentioned by the WATT Coalition and former FERC Chairman Jon Wellinghoff at a past technical conference on transmission enhancements, Glick noted during a press conference after the meeting.

Clean energy groups and parties pursuing grid enhancements applauded the move, as did commissioners at the meeting. A novel approach to enabling more grid-enhancing technologies should not deter FERC from examining any options, Commissioners Allison Clements and Neil Chatterjee said, with Chatterjee dubbing the move “a step in the right direction when it comes to needed grid reforms.”

Chatterjee termed an order on return on equity (ROE) incentives a misstep, however, when the order to supplement a notice of proposed rulemaking (NOPR) was addressed at the meeting. He said the move to reduce the ROE adder for utilities to be in regional transmission organizations (RTOs) is misguided and a move in the wrong direction. “At a time when we recognize the need to construct thousands of miles of transmission lines, it’s illogical to make it more difficult for utilities to attract capital,” Chatterjee said.

Chatterjee said the supplemental NOPR (RM20-10) that was adopted takes the Commission backwards from what the initial NOPR, issued in March of 2020, intended, which was to improve incentives for transmission enhancements. He and Commissioner James Danly dissented on the order presented, and Commissioner Mark Christie concurred.

The head of transmission trade group WIRES also criticized the proposal as sending the wrong signal at a time when transmission investment is needed. Glick is right to note that President Biden’s infrastructure plan includes transmission grid enhancements as a key component, “but it’s hard to reconcile that statement with today’s action,” said Larry Gasteiger, executive director of WIRES. He hopes FERC is open to “rethinking this one,” Gasteiger said on Twitter.

Rethinking the ROE incentive for utilities in RTOs is what prompted the supplemental NOPR adopted at the meeting. Section 219 of the FPA instructs FERC to provide incentives for utilities to join an RTO, but that language does not mean the incentive should remain in perpetuity, FERC staff said during a presentation at the meeting.

Glick picked up on that point and when he asked staff about the cost to utility customers from what was proposed in the March 2020 NOPR to the reduced ROE incentive in the supplemental NOPR, staff responded that the difference is about $350 million. Utilities are not leaving RTOs, and the 100 basis point ROE adder for remaining in an RTO is the equivalent of “handing out free money,” Glick said.

Chatterjee referred to the benefits of RTOs and Glick agreed with him on the benefits. The proposed ROE change would not remove or threaten those benefits, Glick said. The supplemental NOPR would not award utilities with an ROE adder for being in RTOs beyond three years after joining.

Having consumers pay $350 million annually for utilities being in an RTO that utilities have no intention of leaving does not result in just and reasonable rates and is inconsistent with the language of the FPA, Glick said.

Glick noted that the incentives outlined in the initial NOPR remain on the table and are not affected by the supplemental NOPR, which only addresses the ROE adder for utilities in RTOs.

The initial NOPR, in an element Glick disagreed with at the time, proposed a 100 basis point ROE adder for utilities that join and remain in an RTO, which altered a previous 50 basis point adder, FERC staff explained. Following comments received to date, the supplemental NOPR narrows the incentive to encourage utilities to join an RTO, but not to extend the ROE adder for remaining in the organizations.

The supplemental NOPR would grant a 50 basis point ROE adder for utilities that join an RTO, with the incentive being effective for three years after a utility transfers operational control of its facilities to an RTO. It also would require utilities that have received the ROE adder for three or more years to submit, within 30 days of the effective date of a final rule, a compliance filing to eliminate the incentive from its tariff.

Utilities currently receiving the ROE adder for membership in RTOs would either revise their tariffs to eliminate the incentive or terminate the incentive three years from the date that they turned over operational control of their transmission facilities to an RTO.

Christie concurred with the proposal, noting that ROE adders can needlessly burden consumers with higher costs without demonstrating that they actually provide incentives they are designed to achieve. He agreed with parties in the proceeding who expressed concern that the ROE incentive for RTO participation “provides an unnecessary windfall” to utilities unconnected to the decision to join or remain in an RTO. He agreed with consumer advocates from different jurisdictions that said Congress did not intend for FPA Section 219 “to unjustly enrich utilities and RTO members at the customers’ expense.”

The use of ROE adders should be subject to reassessment and taking care to ensure costs paid by consumers are prudent is a core component of effective utility regulation, Christie said.

Commissioner Allison Clements said it is important to note that when consumer costs are involved over a long period of time – such as the ROE incentive for joining utilities joining an RTO – it is valuable to consider whether the costs are justified. FERC needs to be “especially judicious” on incentives, and they should be used wisely. There is a legitimate question on whether the sums paid over the years for utilities to remain in RTOs have brought expanded markets or are needlessly costing consumers money, she said.

Clements agreed with Chatterjee and others about the benefits of RTOs. She pointed out that consumer advocates are among those who have asked FERC to narrow or curtail the ROE incentive for RTO membership.

Comments on the supplemental NOPR are due 30 days after publication in the Federal Register.

Addressing the workshop announced by Glick and improved coordination with the National Association of Regulatory Utility Commissioners (NARUC), Clements praised efforts to improve transmission planning and technologies to make existing facilities more efficient. She referred to a Princeton University study that estimates reaching net zero greenhouse gas emission targets by 2050 would require roughly 60% more high-voltage transmission assets by 2030, with a tripling of the infrastructure by 2050. It is appropriate to engage with state regulators given their integral role on transmission siting, Clements said.

Outreach with NARUC took place over the past few weeks to figure out a way for federal and state regulators to work in a more formal manner on transmission issues, where authority is split, Glick said. He has a sense of urgency on grid enhancements and is interested in pursuing the shared-savings approach further to supplement the record at FERC, he said at the press conference.

The technical conference had a good discussion on the shared savings approach and Glick hopes the workshop with NARUC can supplement the record for a way to proceed on that particular issue, he said.

Not surprisingly, since it raised the issue at the technical conference, the WATT Coalition praised the move to examine it further. “We are confident that this approach would lead to much wider deployment of grid-enhancing technologies, leading to a multitude of benefits,” said Rob Gramlich, executive director of the WATT Coalition. Those benefits include lower transmission congestion costs for consumers, increased deployment of renewable resources and jobs/revenue for localities where grid enhancements are added.

The current regulatory structure puts utilities in an unenviable position of choosing between the interests of their customers and their shareholders when it comes to transmission enhancements, Gramlich said in a statement. The shared savings model would align the incentives to reward both constituencies and position utilities to lead on transmission improvements for a clean energy transition, he said.

By Tom Tiernan ttiernan@fosterreport.com

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