Yesterday, FERC issued a Policy Statement intended to further refine their policy for awarding financial incentives to transmission projects. The Policy Statement was the Commission's response to the extensive, 42-page, 74-question Notice of Inquiry it issued in May of 2011.
The financial feeding frenzy has been scaled back for now and transmission owners have had their bag limits on consumer wallets reduced.
If you want the quick and dirty summary, here's FERC's press release.
If you want to know exactly what was in the Policy Statement, read on.
"In particular, the Commission: reframes its nexus test to focus more directly on the requirements of Order No. 679; expects applicants to take all reasonable steps to
mitigate the risks of a project, including requesting those incentives designed to reduce the risk of a project, before seeking an incentive return on equity (ROE) based on a project’s risks and challenges; provides general guidance that may inform applications for an incentive ROE based on a project’s risks and challenges; and promotes additional transparency with respect to the impacts of the Commission’s incentives policies."
1. "The Commission will no longer rely on the routine/non-routine analysis adopted in BG&E as
a proxy for the nexus test."
What this means: The nexus test requires an applicant for incentives to demonstrate a connection between the incentive(s) requested and the risks and challenges that a project faces. Previously, once an applicant demonstrated that a project was not routine, the nexus test was satisfied and the project was deemed to face risks and challenges that merit incentives. In the refined policy, FERC tosses out the routine/non-routine analysis and will require project applicants seeking incentives to demonstrate how the total package of incentives requested is tailored to address demonstrable risks and challenges and must provide sufficient explanation and support to allow the Commission to evaluate each element of the package and the interrelationship of all elements of the package. If some of the incentives would reduce the risks of the project, that fact will be taken into account in any
request for an enhanced ROE. In short, applicants will have to do more to demonstrate risks and challenges that merit incentives.
2. "The Commission expects incentives applicants to seek to reduce the risk of transmission investment not otherwise accounted for in its base ROE by using risk-reducing incentives before seeking an incentive ROE based on a project’s risks and challenges."
What this means: A transmission's base ROE (the interest a project earns on its investment) is already set to account for the riskiness of transmission investment. However, when a transmission project is riskier than a "normal" transmission project, it can be granted additional incentives to compensate for additional risk. However, a project must request and utilize risk-reducing incentives before requesting an incentive ROE (extra interest) on a particular project. A project owner must show how their project is riskier than "normal" and then how certain risk-reducing incentives will compensate for or reduce risk. If the project is still so risky that risk has not adequately been reduced through the base ROE and risk reducing incentives, it may also request further risk compensation in the form of an enhanced ROE (extra interest). The Commission is getting tougher judging risk and the need for a full spectrum of every available incentive. No more using the same risk as the basis for every incentive. Each incentive granted will reduce risk and a company would have to prove further risk that has not already been compensated for with other incentives in order to be awarded an incentive ROE.
3. "Investments in the following types of transmission projects may face the types of risks and challenges that may warrant an incentive ROE based on the project’s risks and challenges that are not either already accounted for in the applicant’s base ROE or could be addressed through risk-reducing incentives:
1. projects to relieve chronic or severe grid congestion that has had demonstrated cost impacts to consumers;
2. projects that unlock location constrained generation resources that previously had limited or no access to the wholesale electricity markets;
3. projects that apply new technologies to facilitate more efficient and reliable usage and operation of existing or new facilities."
What this means: I think it's pretty self-explanatory.
4. "The Commission will no longer consider requests under Order No. 679 for a stand-alone incentive ROE based on an applicant’s utilization of an advanced technology."
What this means: No more incentive ROEs based solely on advanced technology, this will be considered as part of a project's risks and challenges (see 3 above).
5. "Risks may be reduced through the risk-reducing incentives described in section II.B, or through mitigating costs by implementing best practices in their project management and procurement procedures. Applicants should consider taking measures tailored to mitigate the various risks associated with their transmission projects and to identify such measures
in their applications."
What this means: Transmission Owners need to stop creating risks through poor management or bad choices and then asking to be compensated for it.
6. "The Commission expects applicants for an incentive ROE based on a project’s risks and challenges to demonstrate that alternatives to the project have been, or will be, considered in either a relevant transmission planning process or another appropriate
forum. Such a showing should help identify the demonstrable consumer benefits of the proposed project and its role in promoting a more efficient, reliable and cost-effective transmission system."
What this means: No more PATHetic projects! An applicant must demonstrate to the Commission how its project was compared to alternatives and found to be the most cost-effective solution. Of course, a showing could be that an RTO/ISO has made this determination. And since RTO/ISOs are nothing but industry cartels that will choose the projects of their favored incumbents and then make up a justification to support their choice afterward, this really doesn't solve the problem. However, the transmission owner now has to convince the Commission that it was done properly.
7. "The Commission expects applicants for an incentive ROE based on a project’s risks and challenges to commit to limiting the application of the incentive ROE based on a project’s risks and challenges to a cost estimate."
What this means: Any incentive ROE will only be applied to a project cost amount that was used to determine the project's cost effectiveness as evaluated by an RTO/ISO. So, say a project is found to be superior to other alternatives at a certain price when evaluated by an RTO/ISO, and then is awarded an incentive ROE by FERC. The project can no longer apply the incentive to amounts that go over budget. Historically, projects have floated bogus cost estimates at RTOs in order to get projects approved, and then spent a lot more actually building the project, and collected extra interest on the overspend. This situation perpetuated the "the more you spend, the more you make" scenario that has plagued transmission projects and is breaking consumers while unjustly enriching transmission owners and contractors. The Commission also gives a nod to SPP's cost containment proposal submitted in comments as a reasonable example.
While these are generally positive changes, they don't go nearly far enough and completely fail to tackle the underlying problems with FERC's transmission incentives policy. FERC has merely set the stage for another long, slow decline toward lazy rubber stamp approval of ridiculous incentive packages that cause consumer concern. The PATH project was the impetus for the NOI and the refinement handed down yesterday. How long before another PATH happens?
I'm not sure what happened between FERC's rather auspicious and ambitious beginning in issuing such a great NOI, and this Policy Statement that feels like a punt. It could be that there was too much controversy among the Commissioners. It could be that there was too much political pushback from a greedy industry. And don't forget those personal visits to the Commissioners from transmission owning CEOs. Whatever happened, it looks like the Commission lost their nerve and took what they feel is the easy way out.
See statements of Commissioners Norris and LaFleur here. It's interesting that they didn't publish a statement from Commissioner Moeller, since he had plenty to say yesterday. Maybe he's part of the problem. Wellinghoff didn't have much to say about it, and Clark was not participating.
It seems like the Commission was afraid if they came down too hard on transmission incentives that they would stifle investment. However, they have quite effectively managed to do just that with their Policy Statement. Which transmission owner do you think is going to be brave enough to step into the void and be the first to apply for incentives under the refinement (which was effective yesterday, btw)? Not a one of them. They're all going to hang back and wait for someone else to poke the first stick into the lion's cage so they can begin the process of finding ways to work around well-intended changes in order to continue to unjustly enrich themselves building unnecessary transmission.
I guess if Congress really wants transmission incentive policy reform, they're going to have to do it themselves through amendments to the Energy Policy Act. I can only wish them luck.
The financial feeding frenzy has been scaled back for now and transmission owners have had their bag limits on consumer wallets reduced.
If you want the quick and dirty summary, here's FERC's press release.
If you want to know exactly what was in the Policy Statement, read on.
"In particular, the Commission: reframes its nexus test to focus more directly on the requirements of Order No. 679; expects applicants to take all reasonable steps to
mitigate the risks of a project, including requesting those incentives designed to reduce the risk of a project, before seeking an incentive return on equity (ROE) based on a project’s risks and challenges; provides general guidance that may inform applications for an incentive ROE based on a project’s risks and challenges; and promotes additional transparency with respect to the impacts of the Commission’s incentives policies."
1. "The Commission will no longer rely on the routine/non-routine analysis adopted in BG&E as
a proxy for the nexus test."
What this means: The nexus test requires an applicant for incentives to demonstrate a connection between the incentive(s) requested and the risks and challenges that a project faces. Previously, once an applicant demonstrated that a project was not routine, the nexus test was satisfied and the project was deemed to face risks and challenges that merit incentives. In the refined policy, FERC tosses out the routine/non-routine analysis and will require project applicants seeking incentives to demonstrate how the total package of incentives requested is tailored to address demonstrable risks and challenges and must provide sufficient explanation and support to allow the Commission to evaluate each element of the package and the interrelationship of all elements of the package. If some of the incentives would reduce the risks of the project, that fact will be taken into account in any
request for an enhanced ROE. In short, applicants will have to do more to demonstrate risks and challenges that merit incentives.
2. "The Commission expects incentives applicants to seek to reduce the risk of transmission investment not otherwise accounted for in its base ROE by using risk-reducing incentives before seeking an incentive ROE based on a project’s risks and challenges."
What this means: A transmission's base ROE (the interest a project earns on its investment) is already set to account for the riskiness of transmission investment. However, when a transmission project is riskier than a "normal" transmission project, it can be granted additional incentives to compensate for additional risk. However, a project must request and utilize risk-reducing incentives before requesting an incentive ROE (extra interest) on a particular project. A project owner must show how their project is riskier than "normal" and then how certain risk-reducing incentives will compensate for or reduce risk. If the project is still so risky that risk has not adequately been reduced through the base ROE and risk reducing incentives, it may also request further risk compensation in the form of an enhanced ROE (extra interest). The Commission is getting tougher judging risk and the need for a full spectrum of every available incentive. No more using the same risk as the basis for every incentive. Each incentive granted will reduce risk and a company would have to prove further risk that has not already been compensated for with other incentives in order to be awarded an incentive ROE.
3. "Investments in the following types of transmission projects may face the types of risks and challenges that may warrant an incentive ROE based on the project’s risks and challenges that are not either already accounted for in the applicant’s base ROE or could be addressed through risk-reducing incentives:
1. projects to relieve chronic or severe grid congestion that has had demonstrated cost impacts to consumers;
2. projects that unlock location constrained generation resources that previously had limited or no access to the wholesale electricity markets;
3. projects that apply new technologies to facilitate more efficient and reliable usage and operation of existing or new facilities."
What this means: I think it's pretty self-explanatory.
4. "The Commission will no longer consider requests under Order No. 679 for a stand-alone incentive ROE based on an applicant’s utilization of an advanced technology."
What this means: No more incentive ROEs based solely on advanced technology, this will be considered as part of a project's risks and challenges (see 3 above).
5. "Risks may be reduced through the risk-reducing incentives described in section II.B, or through mitigating costs by implementing best practices in their project management and procurement procedures. Applicants should consider taking measures tailored to mitigate the various risks associated with their transmission projects and to identify such measures
in their applications."
What this means: Transmission Owners need to stop creating risks through poor management or bad choices and then asking to be compensated for it.
6. "The Commission expects applicants for an incentive ROE based on a project’s risks and challenges to demonstrate that alternatives to the project have been, or will be, considered in either a relevant transmission planning process or another appropriate
forum. Such a showing should help identify the demonstrable consumer benefits of the proposed project and its role in promoting a more efficient, reliable and cost-effective transmission system."
What this means: No more PATHetic projects! An applicant must demonstrate to the Commission how its project was compared to alternatives and found to be the most cost-effective solution. Of course, a showing could be that an RTO/ISO has made this determination. And since RTO/ISOs are nothing but industry cartels that will choose the projects of their favored incumbents and then make up a justification to support their choice afterward, this really doesn't solve the problem. However, the transmission owner now has to convince the Commission that it was done properly.
7. "The Commission expects applicants for an incentive ROE based on a project’s risks and challenges to commit to limiting the application of the incentive ROE based on a project’s risks and challenges to a cost estimate."
What this means: Any incentive ROE will only be applied to a project cost amount that was used to determine the project's cost effectiveness as evaluated by an RTO/ISO. So, say a project is found to be superior to other alternatives at a certain price when evaluated by an RTO/ISO, and then is awarded an incentive ROE by FERC. The project can no longer apply the incentive to amounts that go over budget. Historically, projects have floated bogus cost estimates at RTOs in order to get projects approved, and then spent a lot more actually building the project, and collected extra interest on the overspend. This situation perpetuated the "the more you spend, the more you make" scenario that has plagued transmission projects and is breaking consumers while unjustly enriching transmission owners and contractors. The Commission also gives a nod to SPP's cost containment proposal submitted in comments as a reasonable example.
While these are generally positive changes, they don't go nearly far enough and completely fail to tackle the underlying problems with FERC's transmission incentives policy. FERC has merely set the stage for another long, slow decline toward lazy rubber stamp approval of ridiculous incentive packages that cause consumer concern. The PATH project was the impetus for the NOI and the refinement handed down yesterday. How long before another PATH happens?
I'm not sure what happened between FERC's rather auspicious and ambitious beginning in issuing such a great NOI, and this Policy Statement that feels like a punt. It could be that there was too much controversy among the Commissioners. It could be that there was too much political pushback from a greedy industry. And don't forget those personal visits to the Commissioners from transmission owning CEOs. Whatever happened, it looks like the Commission lost their nerve and took what they feel is the easy way out.
See statements of Commissioners Norris and LaFleur here. It's interesting that they didn't publish a statement from Commissioner Moeller, since he had plenty to say yesterday. Maybe he's part of the problem. Wellinghoff didn't have much to say about it, and Clark was not participating.
It seems like the Commission was afraid if they came down too hard on transmission incentives that they would stifle investment. However, they have quite effectively managed to do just that with their Policy Statement. Which transmission owner do you think is going to be brave enough to step into the void and be the first to apply for incentives under the refinement (which was effective yesterday, btw)? Not a one of them. They're all going to hang back and wait for someone else to poke the first stick into the lion's cage so they can begin the process of finding ways to work around well-intended changes in order to continue to unjustly enrich themselves building unnecessary transmission.
I guess if Congress really wants transmission incentive policy reform, they're going to have to do it themselves through amendments to the Energy Policy Act. I can only wish them luck.
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