Last week, the Federal Energy Regulatory Commission (FERC) approved an abandonment incentive for both companies to recover their investment in the Cardinal Hickory Creek transmission line across Wisconsin and Iowa. FERC has been allowing incentive rate treatments for transmission investment since the mid-2000's. As incentives go, this is one that doesn't have immediate rate impacts and may never actually be used... unless the Cardinal Hickory Creek project is abandoned before being completed.
What's abandonment and what does the incentive do? Abandonment is just a fancy term for project cancellation. In order to collect on this incentive, the utility must have no fault in the abandonment. The project must be cancelled for reason. A utility can't simply cancel a project without reason, and then collect its investment. Like most projects granted this incentive, Cardinal Hickory Creek is the product of a regional planning process. Once ordered to construct the project by the regional authority, the utility must proceed until ordered to stop by the authority. Regional planning authorities sometimes cancel projects before they're built, usually because the case for "need" falters and the authority can no longer support building it. Another reason to abandon a project is if it fails to receive all needed approvals, such as from a state regulator or agency, from a local government, or from a federal agency. Is there ever a "sure thing" when it comes to transmission approvals? There shouldn't be, since states have sole jurisdiction on transmission permitting and siting. Many consider the abandonment incentive unnecessary, because every transmission project faces the risk that it may not be permitted. Why are only some of them awarded the incentive, and not all of them? Is the permitting risk so pervasively routine that incentives to lower the risk are unnecessary? It all depends on what the utility asks for. FERC doesn't award incentives that aren't requested. So, is it indicative of a higher risk when a project applies for the abandonment incentive and is approved? Perhaps... but maybe it's more a product of the amount of money that must be expended before approvals are secured. The more money the utility must put into the project before the approval risk is ameliorated, the greater the loss it may suffer if approvals are not received. Having the abandonment incentive turns on the money spigot, allowing the utility to invest large sums in a transmission project with little to no risk that they won't be able to recover it later, plus interest (return on equity). And it should be noted that FERC is guaranteeing that the utility can apply to recover this investment from ratepayers. There is no special governmental fund behind this incentive, it's your money at risk here.
Now on to how it works... if a project is abandoned, the utility must make a filing with FERC that demonstrates the abandonment wasn't their fault, and detailing the project costs it seeks to recover, as well as the suggested time period for recovery. Other parties may intervene to protest any of these contentions, and eventually FERC makes a determination of whether the abandonment was through no fault of the utility, how much of the claimed expense may be recovered, and over what amount of time. Also likely would be requests by the other parties to reduce the return on equity percentage. On the matter of how much may be recovered, FERC allows "prudent" expenses to be recovered. What's "prudent?" It is defined as an action that would be taken by a similarly situated utility manager at that particular point in time. And there is no Monday morning quarterbacking going on here... nothing that happens AFTER the expense matters because it could not be known to the utility at the time it made the expenditure. As well, the burden of prudence gets shifted to the other parties. All utility expenses are presumed prudent unless another party proves they are not. It's a heavy burden to carry.
Because a utility's FERC formula rate segregates capital (or plant) expenses from Operations & Maintenance expense that is recovered dollar for dollar as it is spent, the abandonment incentive only applies to abandoned plant. Plant expenses are capital expenses -- the cost of the infrastructure, or physical plant. These expenses are not reimbursed through the formula rate until the plant goes in service (is completed and working). Therefore, they're accumulating while the plant is in the approvals, engineering, and construction phases. Once plant is put in service, it slowly depreciates during its useful life, and the utility is paid for its use over that period of time (plus return, or interest) on the remaining balance. If FERC approves an abandonment filing, it would allow the utility to begin recouping its investment in plant, even though it never went in service. Usually recovery times are shortened here to a period between 1 to 5 years, depending on the plant balance and its effect on ratepayers.
What can a utility put in its plant accounts? It's tricky and nuanced and comes with thousands of pages of instructions, known as FERC's Uniform System of Accounts. But generally it includes physical assets, engineering costs, land costs, surveying costs, siting costs, regulatory and permitting costs, and labor. It shall NOT include public relations or advertising costs. (yay, precedent!) So if you notice your utility spending a lot of money on advertising, public relations or lobbying, do not wait until abandonment happens to try to get those costs deemed imprudent. Those costs may have been recovered as O&M in previous years. It's unclear where ATC may try to fit these costs into its recovery (but they do recover them, according to a former executive testifying before a FERC ALJ). FERC's Opinion No. 554 determined that advertising and public relations are not recoverable project cost in any account. Keep this in mind going forward.
This article covers FERC's approval of ATC/ITC's abandonment incentive, but gets somewhat lost on process. It claims:
What's abandonment and what does the incentive do? Abandonment is just a fancy term for project cancellation. In order to collect on this incentive, the utility must have no fault in the abandonment. The project must be cancelled for reason. A utility can't simply cancel a project without reason, and then collect its investment. Like most projects granted this incentive, Cardinal Hickory Creek is the product of a regional planning process. Once ordered to construct the project by the regional authority, the utility must proceed until ordered to stop by the authority. Regional planning authorities sometimes cancel projects before they're built, usually because the case for "need" falters and the authority can no longer support building it. Another reason to abandon a project is if it fails to receive all needed approvals, such as from a state regulator or agency, from a local government, or from a federal agency. Is there ever a "sure thing" when it comes to transmission approvals? There shouldn't be, since states have sole jurisdiction on transmission permitting and siting. Many consider the abandonment incentive unnecessary, because every transmission project faces the risk that it may not be permitted. Why are only some of them awarded the incentive, and not all of them? Is the permitting risk so pervasively routine that incentives to lower the risk are unnecessary? It all depends on what the utility asks for. FERC doesn't award incentives that aren't requested. So, is it indicative of a higher risk when a project applies for the abandonment incentive and is approved? Perhaps... but maybe it's more a product of the amount of money that must be expended before approvals are secured. The more money the utility must put into the project before the approval risk is ameliorated, the greater the loss it may suffer if approvals are not received. Having the abandonment incentive turns on the money spigot, allowing the utility to invest large sums in a transmission project with little to no risk that they won't be able to recover it later, plus interest (return on equity). And it should be noted that FERC is guaranteeing that the utility can apply to recover this investment from ratepayers. There is no special governmental fund behind this incentive, it's your money at risk here.
Now on to how it works... if a project is abandoned, the utility must make a filing with FERC that demonstrates the abandonment wasn't their fault, and detailing the project costs it seeks to recover, as well as the suggested time period for recovery. Other parties may intervene to protest any of these contentions, and eventually FERC makes a determination of whether the abandonment was through no fault of the utility, how much of the claimed expense may be recovered, and over what amount of time. Also likely would be requests by the other parties to reduce the return on equity percentage. On the matter of how much may be recovered, FERC allows "prudent" expenses to be recovered. What's "prudent?" It is defined as an action that would be taken by a similarly situated utility manager at that particular point in time. And there is no Monday morning quarterbacking going on here... nothing that happens AFTER the expense matters because it could not be known to the utility at the time it made the expenditure. As well, the burden of prudence gets shifted to the other parties. All utility expenses are presumed prudent unless another party proves they are not. It's a heavy burden to carry.
Because a utility's FERC formula rate segregates capital (or plant) expenses from Operations & Maintenance expense that is recovered dollar for dollar as it is spent, the abandonment incentive only applies to abandoned plant. Plant expenses are capital expenses -- the cost of the infrastructure, or physical plant. These expenses are not reimbursed through the formula rate until the plant goes in service (is completed and working). Therefore, they're accumulating while the plant is in the approvals, engineering, and construction phases. Once plant is put in service, it slowly depreciates during its useful life, and the utility is paid for its use over that period of time (plus return, or interest) on the remaining balance. If FERC approves an abandonment filing, it would allow the utility to begin recouping its investment in plant, even though it never went in service. Usually recovery times are shortened here to a period between 1 to 5 years, depending on the plant balance and its effect on ratepayers.
What can a utility put in its plant accounts? It's tricky and nuanced and comes with thousands of pages of instructions, known as FERC's Uniform System of Accounts. But generally it includes physical assets, engineering costs, land costs, surveying costs, siting costs, regulatory and permitting costs, and labor. It shall NOT include public relations or advertising costs. (yay, precedent!) So if you notice your utility spending a lot of money on advertising, public relations or lobbying, do not wait until abandonment happens to try to get those costs deemed imprudent. Those costs may have been recovered as O&M in previous years. It's unclear where ATC may try to fit these costs into its recovery (but they do recover them, according to a former executive testifying before a FERC ALJ). FERC's Opinion No. 554 determined that advertising and public relations are not recoverable project cost in any account. Keep this in mind going forward.
This article covers FERC's approval of ATC/ITC's abandonment incentive, but gets somewhat lost on process. It claims:
In 2012, the developers of a proposed transmission line between West Virginia and Maryland sought to recover $121.5 million the company had spent before grid operators decided the $2.1 billion project was no longer needed.
FERC later told the utilities they were ineligible for at least $7 million of the $121.5 million requested, including $6.2 million in advocacy, advertising and lobbying expenses.
Of the $6.2M disallowed, only a very small portion was ever incorrectly recorded in plant accounts. That disallowance flowed from a number of formal challenge rate proceedings that had absolutely nothing to do with PATH's abandonment. Unfortunately FERC consolidated the formal challenges with the abandonment for "consolidation" of two issues that were not at all similar. I can see how the confusion happens. It's a FERCenese problem. (FERCenese |ferk in knees| noun: The incomprehensible, acronym-laden gibberish spoken at FERC that is hard for common folks to understand. Origin: Electric ratepayer Scott Thorsen, standing in a field in Illinois.)
There are some who want to celebrate the fact that ATC/ITC believe they need the abandonment incentive because they believe it indicates a real chance at failure. And there are some who are believe that the granting of the incentive makes the utilities more likely to persist instead of abandoning the project. Let's take a look at what the utilities said to FERC to convince them to grant the incentive.
ITC says:
ITC says:
There is significant uncertainty and risk to the Project due to its scope, size and long lead times, and because the Project requires approval from Iowa, Wisconsin and multiple federal agencies. In particular, there is a risk that the federal agencies may select a different river crossing than that authorized by the IUB or the PSCW. If this occurs, there is a risk of additional delay that may threaten the ability of the Project to move forward.
The Project also involves multiple owners which requires coordination. In addition, the Project may face challenges and objections in the easement acquisition process in Iowa.
These approvals and permits are not guaranteed to be granted, and the Project could be delayed or terminated, or the final route changed, if ATC is unable to obtain any of these approvals or permits. In particular, the federal agencies may select a different Mississippi River crossing than that authorized by the IUB or the PSCW, which could delay or result in termination of the Project.
The scope, size, cost, long-lead times and participation by multiple owners pose inherent risks for the Project. As my description of the Project makes clear, the size, scope and complexity of the Project – involving approximately 102- to 120-miles of new 345 kV transmission line and a new substation and related facilities, spanning multiple states and jurisdictions, crossing the Mississippi River, with multiple owners for a cost of approximately $492 Million to $543 Million – is significant. Further, the easement acquisition process may be contentious, resulting in delays or increased costs.
Both companies are concerned about the Mississippi River crossing. Both companies are concerned about permitting. Both companies are concerned about easement acquisition. Aren't these all things that the utilities can seek to overcome by spending more money?
I think there's merit to both arguments. First, the utilities have tipped their hand to reveal their greatest weaknesses. Yay! But they have also been encouraged by the incentive to spend whatever it takes to steamroll permitting agencies and resistant landowners and drag this project out as long as possible before abandoning it. Boo!
I think there's merit to both arguments. First, the utilities have tipped their hand to reveal their greatest weaknesses. Yay! But they have also been encouraged by the incentive to spend whatever it takes to steamroll permitting agencies and resistant landowners and drag this project out as long as possible before abandoning it. Boo!
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