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Morongo Transmission Requests a 100 BP ROE Incentive from FERC

Paul Dumais's picture
CEO, Dumais Consulting

Owner and CEO of Dumais Consulting (www.DumaisConsulting.com) which provides expert ratemaking services to energy companies. Dr. Dumais is a ratemaking and regulatory expert who specializes on...

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  • Jan 21, 2021
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In Docket No. ER21-669, on December 16, 2020, Morongo Transmission LLC (“Morongo”) requested a transmission formula rate for its investment in the West of Devers Upgrade Project (the “Project”), currently being developed by Southern California Edison Company (“SCE”).  Morongo has entered into an agreement with SCE that provides Morongo with an option to enter a 30-year lease of a percentage of the transfer capability of a segment of the Project (the “Option”).  To fund its interest, Morongo may choose to invest up to the greater of $400 million or 50% of the final estimated cost of the Project, in the form of prepaid rent. The amount that Morongo chooses to invest will determine the amount of transfer capability that Morongo will turn over to the CAISO’s operational control.  Most of the interests in Morongo are owned by the Morongo Band of Mission Indians (“Morongo Band”), a federally recognized American Indian Tribe exercising jurisdiction over lands within the boundaries of the Morongo Reservation (“Reservation”). The remainder of Morongo is owned by Coachella Partners LLC, a limited liability company formed for the purposes of facilitating and investing in the Project. Axium Coachella Holdings LLC (“Axium Coachella”), a Delaware limited liability company, owns 100% of the membership interests in Coachella Partners. Axium Coachella is a direct, wholly owned subsidiary of AxInfra US LP (“AxInfra”). AxInfra, an investment fund focused on infrastructure investments in the United States, is managed by Axium Infrastructure US Inc. (“Axium US”), acting on behalf of AxInfra’ s general partner, Axium US Partner LLC.
 
The Project will provide for the transmission of electricity between the Devers Substation (located near Palm Springs, California), El Casco Substation (located near the City of Calimesa in Riverside County, California), Vista Substation (located in the City of Grand Terrace, California), and San
Bernardino Substation (in San Bernardino County, California). The Project will allow SCE to increase the power transfer capability of current transmission facilities by approximately 3,200 MW – from approximately 1,600 MW to 4,800 MW – thereby enabling the deliverability of electrical power from renewable generation sources that require the Project to deliver energy to California load, and improving the transfer capability for resource adequacy imports.  The Project is replacing existing transmission facilities, portions of which cross the Reservation.  At the time SCE began planning for the Project, it occupied a 300-foot wide, six-mile expired right-of-way on the Reservation, pursuant to temporary licenses issued by the Morongo Band.  SCE requested that the Morongo Band agree to grant to SCE an expanded 50-year, six-mile, right-of-way in the existing transmission corridor through the Reservation to construct the Project.  SCE lacked the ability to condemn the right-of-way because states (and therefore utilities) do not have eminent domain authority on Indian reservations.   As a means of resolving the impasse, the Morongo Band offered to agree to the grant a right-of-way through the Reservation on the existing transmission corridor if SCE gave Morongo (newly formed for purposes of the parties’ agreement) an option to finance a portion of the Project upon completion. This creative solution was modeled on the then-recently entered agreement between San Diego Gas and Electric and Citizens Energy for the Sunrise Powerlink Transmission Project. Morongo would hold an Option to lease a percentage of the transfer capability of the Project (the “Lease”). The agreement on the Option and the Lease by SCE and Morongo is the first of its kind between a transmission utility and an Indian tribe.
 
Morongo’s Transmission Revenue Requirement is established on a formulaic basis and is the sum of two parts: (1) Capital Costs and (2) Operating Costs. The annual Capital Cost revenue requirement is calculated based on Morongo’s annual capital costs of leasing the Transfer Capability, with the rate for annual capital cost recovery being fixed, and the sum of that fixed rate plus Morongo’s share of property taxes can be no higher than the rate that SCE would charge for Morongo’s interest in the Project absent Morongo’s participation in the Project. The annual Capital Cost revenue requirement will be
fixed and levelized for the 30-year term of the lease. The annual Capital Cost revenue requirement incorporates a hypothetical capital structure of 50% equity and 50% debt, previously allowed by FERC pursuant to a 2014 Declaratory Order.  The operating costs included in the annual revenue requirement are those operating costs directly attributable to Morongo’s Transfer Capability for the Project.  The operating costs include those costs SCE bills to Morongo as well as those costs Morongo incurs directly by managing and administering its Transfer Capability (“Operating Costs”). Morongo is proposing that the Operating Costs be billed to the CAISO on an estimated basis, with an annual after-the-fact true-up to actual costs. 
 
Morongo proposes to use SCE’s current authorized return on equity of 10.3% as a proxy for Morongo’s base return on equity.  Morongo requests that FERC grant a 100-basis point adder to Morongo’s base return on equity, based upon Morongo’s commitment to become a new member of CAISO and transfer operational control of its transfer capability under the Lease to CAISO once the Project has been placed in service and Morongo has exercised its Option and closed on the Lease.  Morongo asserts that the 100-basis point RTO participation incentive is just and reasonable based upon FERC’s policy encouraging new investment in transmission infrastructure, benefits from Morongo’s participation in the Project and membership in the CAISO and risks specific to Morongo Transmission by comparison to SCE and other diversified transmission utilities.  In Order No. 679, Morongo states that FERC did not make a finding on the appropriate size or duration of the RTO Participation incentive, with the result that transmission utilities seek, on a case-by-case basis, an RTO participation adder of a specific size. Additionally, Morongo  requested a 100-basis point adder for joining the CAISO as FERC has proposed a standard RTO Participation adder of 100 basis points in its current NOPR.  

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