Let's start with incentive ROE adders. When a company makes an investment in something like a new transmission project, they will be tying up their capital (and/or borrowing) to finance the capital assets of the project. They are not reimbursed dollar for dollar as the money is spent for the entire cost of the project. We wouldn't be able to afford it if we were charged for something like the PATH project's $2.1B cost over the 5 year construction period.
There are two different sets of costs going on -- expense and capital assets. Expense includes the operation & maintenance costs of the project and are reimbursed dollar for dollar as they occur. The capital asset costs (in the case of a transmission project, mainly the fixtures and land) are reimbursed over time during the useful life of the project as they depreciate. So, in exchange for tying up their capital and/or borrowing money to finance these assets, the company is entitled to a return on their investment. It wouldn't be fair to equate this with an investment return you'd earn on your own money. If returns on these projects aren't lucrative, the company could find a better place to invest their money and nothing would ever get built.
Utility returns are usually somewhere in the neighborhood of 9 - 11%. However, in order to incentivize transmission, FERC felt it necessary to sweeten the pot with incentive ROE adders. The return is calculated through something called the DCF analysis and then incentive adders boost the return to what FERC calls "the zone of reasonableness" arrived at through an anaysis of a selected proxy group of similar utility returns. An "adder" is a certain number of points added to the DCF base rate of return. 100 points equals an additional 1%.
In the case of our poster child, PATH, the company's DCF analysis produced a 12.3% base rate and they requested an additional 50 points for being a member of an RTO, and an additional 150 points for their project's above average risks. These abnormal risks, according to PATH, were the large amount of investment needed ($2.1 billion price tag); the coordination needed between two different companies; regulatory risk (the uncertainty of approvals); the need to attract needed investment (so PATH could borrow money to finance the project); siting and approvals needed in 2 different states (which ended up being 3 after re-routing); and PJM's aggressive construction timetable (originally "needed" in 2012). The requested incentive ROE adders, which were conditionally approved and set for re-hearing (currently in process), added 200 points, or 2%, to PATH's return on equity, for a total of 14.3%, which was in the high end of the "zone of reasonableness," although not at the top of the zone.
Sounds pretty sweet, doesn't it? But the incentives didn't stop there! There were more! But, that's discussion for another time.
In the NOI, beginning on page 23, FERC discusses the incentive ROE adder and asks several specific questions. Now that you know what a ROE adder is... go look at the questions and formulate your comments/suggestions for FERC. I'm sure you creative consumer "stakeholders" can make suggestions that the industry won't even ponder. The industry will be letting FERC know how they can and should sweeten the pot even further for them. It's up to you to provide balance with a little real world sanity.
Keep checking back... there's lots more incentives to come!
If you found this helpful in crafting your comments, you are encouraged to browse the entire FERC Transmission NOI category at StopPATHwv.com for other useful material. You don't have to comment on all aspects of the NOI if that's too burdensome. In fact, if you want to concentrate in detail on just one aspect that interests you and about which you have strong feelings, that's a perfectly acceptable approach to producing effective comments.