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FERC transmission incentive policy to focus on consumers and economic benefits

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Kent Knutson's picture
Energy Market Specialist Hitachi Energy USA Inc.

Kent Knutson is a market specialist focusing on energy industry intelligence for Hitachi Energy.  He has more than 30 years of experience designing and developing intelligence products for some...

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  • Apr 1, 2020
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On March 19, 2020, the Federal Energy Regulatory Commission (FERC), proposed new revisions to its electric transmission incentive policy to help stimulate the development of new transmission infrastructure.  The reforms will align closely with the Commission’s current statutory obligation through Section 219 of the Federal Power Act (FPA) that was added to the Energy Policy Act of 2005.

On July 20, 2006, the FERC implemented a transmission project stimulus package through Order-679 and then added additional guidance through a policy statement written in 2012.  Order-679 was created to encourage developers to take on high-risk transmission projects by allowing a myriad of economic incentives including return-on-equity (ROE) adders and full recovery of prudently incurred costs like pre-commercial and abandoned plant costs.  The order also allowed for creative capital structures, accelerated depreciation, and other incentives to support transmission development.

The implementation of Order-679 spurred a tremendous amount of investment over the past 12 years – with data compiled by the ABB Velocity Suite research team from FERC Form-730 filings, it’s estimated that more than $65 billion in capital expenditures (CapEx) has been invested in the nation’s high-voltage transmission grid because of Order-679 incentives. 

A closer look at transmission investment over time

Driven by attractive Order-679 investment incentives, sometimes as high as 300 basis point adders to ROE rates, companies started an unprecedented buildout of high voltage transmission infrastructure.  In 2013, during the last year of the nearly $7 billion Texas CREZ buildout, transmission in-service plant additions increased by 33.2% for major electric utilities across the U.S.1   Electric plant-in-service additions include the original cost of new infrastructure added during the year, making it a great indicator of company investment in the electric grid.

Over the seven-year period from 2012-18, the average annual in-service transmission additions increased at 12.3% per year, while during the past five years, overall spend on transmission averaged over $20.6 billion per year. 

Transmission additions, major U.S. electric utilities, $bn

 

The decision to revise the current policy is driven by the change in how transmission is planned, developed, operated and maintained today, which is quite different from the original intent of the Order written back in 2006. 

According to the Commission’s announcement, the proposed rules will shift the focus from granting incentives based on ‘risk’ and ‘challenges’ to a process based on benefits for power consumers, improvement in reliability, and economic factors.

The proposed Order would enhance approved ROE rates in the following way:

  • Increase the incentive for joining and remaining a member of an organized market or other commission approved transmission organization from 50 basis points to 100 basis points.
  • Provide 50 basis points to projects that meet a pre-construction benefit-to-cost ratio in the top 25% of projects studied over a sample period, and an additional 50 basis points for projects that meet a post-construction benefit-to-cost ratio in the top 10 percent of those studied over the same time period.
  • Allow up to 50 basis points for projects that demonstrate reliability benefits by providing both ‘quantitative’ and ‘qualitative’ analysis when possible.
  • Offer 100 basis points for transmission technologies that enhance reliability, efficiency, capacity, and improve the operation of new and existing transmission facilities.       

The new proposed rules would replace the ‘nexus test’ that based ROE adders on a “zone of reasonableness” with a 250 basis-point cap on total ROE incentives. The change, according to FERC, implies that base ROE and transmission ROE incentives serve different functions.  It should be noted that the new NOPR has retained many existing incentives, including those related to construction-work-in-progress and hypothetical capital structures. 

There are several recent announcements that support the need for high-voltage grid projects including:

  • In the upper northcentral region of the country, the CapX2020 initiative, put together more than a decade ago by a consortium of ten grid operators, recently began exploring the need for additional high-voltage transmission under a new, appropriately-named initiative, CapX2050.  This new initiative comes after successfully supporting and building the $2.0+ billion CapX2020 project portfolio over the past decade.  The CapX2050 study is an ambitious plan to develop the transmission grid of the future to enable the wind-rich northcentral region, with much needed additional expansion, to keep renewables growing throughout the region.
  • In New England, several high-voltage long-haul transmission projects, designed to move carbon-free hydropower from Canada to the northeastern states, have been held up by public opposition – demonstrating the complexity and difficulty of clearly developing projects with customer and reliability benefits necessary to support billion-dollar investments needed within the region.

The proposed changes are particularly relevant today with the recent high-growth in utility-scale wind and solar generation capacity across the U.S., including the tremendous number of renewable projects currently in the interconnection queues in organized and independent power markets. 

Comments on the transmission incentive NOPR are due 90 days after publication in the Federal Register.

___

1The ABB Velocity Suite research team compiled the data from the Federal Energy Regulatory Commission (FERC) Form-1 annual filings that included 273 operating electric companies – mostly investor-owned utilities.  Each reporting company must meet at least one of the following criteria; over one million MWh of total annual power sales, over 100 MWh of wholesale power sales, or report over 500 MWh of wheeling either for, or by, other companies.    

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