On November 22, NextEra filed an application at FERC to be granted certain transmission rate incentives for its MidAtlantic Resiliency Link, or MARL transmission project.  Of course, we know that the PJM Board of Managers didn't approve the MARL project until December 11.  But somehow NextEra was so certain it would receive the assignment that it felt free to apply for incentives for its proposed project ahead of time.  And let's just leave that fact on the table to contemplate.

Here's a link to MARL's filing.  It's huge, but you may want to only pay attention to the first 17 pages and the supporting testimony... for now.  The weird-looking multi-page tables appended at the end of the filing are MARL's formula rate.  This is how MARL determines how much to charge ratepayers for the project.  The ones attached to this filing are blank, but MARL will be making future filings with the numbers filled in.  That's a whole different process that perhaps we'll examine in the future.  The request for incentives is enough complicated crap for today's menu.

FERC's transmission incentives -- a long, complicated story.  Pull up a chair and get a cup of coffee, you're going to need it.

Back in 2005, Congress decided that not enough electric transmission was being built.  They reasoned this was what caused the 2003 Northeast blackout (I beg to differ, but that's a whole different blog for another day).  Congress passed Sec. 219 of the Energy Policy Act directing the Federal Energy Regulatory Commission to establish, by rule, incentive-based rate treatments to promote capital investment in electric transmission infrastructure.  Over the course of several proceedings, FERC developed a number of incentives to financially reward and protect utilities who undertook new transmission projects.  The incentives have been looked at several times since, with the most recent Notice of Proposed Rulemaking issued in 2020.  Although hundreds comments were filed by regulators, utilities, special interest groups, and consumers, FERC has not yet acted.  That docket, RM20-10, is still sitting around collecting dust.  No one seems to find this more frustrating than FERC Commissioner Mark Christie, who finds himself obligated to approve them every time, but issues virtually the same opinion every time that several of them are unjust and unreasonable and need to be reformed.  FERC is at an impasse.

FERC's incentives include ROE adders, hypothetical capital structure, pre-commercial cost recovery, accelerated depreciation and advanced technology, and two that MARL has requested, abandonment and CWIP in ratebase.  I've explained them ad nauseam in a special section of this blog, here.

MARL begins by telling FERC that it has already requested and been approved for several incentives, along with a formula rate, for an earlier transmission purchase.  Those incentives are:  

What are these two incentives, and what do they do?

First, let's look at the abandonment incentive.  It guarantees that the transmission owner (MARL) may collect all its prudently incurred costs for the project in the event that it is subsequently cancelled (abandoned) before being built.  First of all, the cancellation has to be out of the control of MARL, such as PJM cancelling the project due to an inability to get approvals or meet in-service dates.  PJM could also discover in a subsequent analysis that the project is no longer needed.  If that happens, MARL would need to make another filing with FERC detailing all the money it has spent on the project and a statement that they were all prudently incurred.  If FERC approves that filing, ratepayers would have to reimburse MARL for its costs, even though nothing is ever built.

Abandonment happens all the time.  One of the most famous is the PATH project that was abandoned in 2012 before a shovel ever hit the ground.  That debacle cost ratepayers around $500M, for a project that never happened.

In deciding whether to grant the abandonment incentive, FERC evaluates project risks.  If the project presents financial or other risks to the utility, then FERC grants it.  Therefore, MARL has told FERC that its project is extremely risky in order to be granted this incentive.  Some of the things MARL told FERC:

Could those things happen?  Of course, but consider that MARL is making more of them for FERC's benefit.  Perhaps it's more useful as a list of vulnerable spots for opponents to attack.

The second incentive MARL requested is CWIP in ratebase.  CWIP stands for "Construction Work in Progress."  CWIP (pronounced "quip") is the financial account where all the project's capital costs are recorded until it is completed and enters service.  It can be treated two different ways.   

The first is for the company to add interest to the account each year as it slowly builds during construction, and to begin collecting the costs (plus interest) once the project goes into service.  Utilities find this difficult because they have to handle their debt until the project is finished.  It hurts their financial health to have huge amounts of unreimbursed debt on their books.  It can also hurt ratepayers because when collection begins, it can create huge, lumpy rate increases.

The second is for the company to include CWIP balances in their ratebase and earn a return (interest) on them right away, while the project is being constructed.  With this incentive, MARL will begin earning a profit on the money it spends as it spends it.  This allows MARL to pump this profit back into the project, instead of investing more of its own money or borrowing.  It helps their finances.  It can also help ratepayers because they begin paying for the project during construction, little by little, as the costs of the project add up.  Instead of a huge rate increase all at once, ratepayers pay increasing costs over time.

What's a ratebase?  Now we're going down the rabbit hole of transmission rates.  It's extremely complicated, but I'll try to give you the Cliff's Notes version.  FERC uses formula rates for transmission.  A formula rate is a formula that determines the utility's rate each year so that rates can change without a full rate process each year.  Instead of a dollar amount, the utility's rate is the formula itself.  The formula is that set of schedules, tables, and attachments that is stuck onto the end of MARL's filing.  That's MARL's formula rate.  Each year, the formula is populated with amounts from MARL's financial records and calculated using the formula to come up with an actual dollar figure.  Ratebase is the sum of all the accounts that earn a return (interest).  Ratebase, plus return, is added to the utility's Operations and Maintenance, Administrative and General costs, plus taxes, to come up with the yearly revenue requirement.  We pay the revenue requirement each year.   It is filtered through PJM's billing system and then the billing systems of the local utilities who send us our bills.  The utility must hold public rate meetings each year to present the result of their formula rate calculations.  Interested parties, described as those that pay the rates, can ask questions and submit discovery requests to see how the rate was calculated.  Yes, that includes people like us who pay an electric bill that includes some portion of these costs.  But that's all information for later...

A very simple explanation for how ratepayers pay for transmission is to liken it to the home mortgage that we're all familiar with.  The utility pays to construct the project (like the bank pays for your home) and then we pay the utility back over time, plus interest, just like we pay our home mortgage.

Because MARL made this filing so early, before its project was even approved by PJM, the window to intervene and file comments on its request for incentives has already closed.  We cannot act on it.  However, I can pretty much tell you how it's going to end... FERC will approve it and Commissioner Christie will file a statement saying that those incentives need to be re-examined and possibly cancelled.  Therefore, I can't feel too bad about not having to write another FERC filing that does no good.  Comm. Christie has got our backs.

And, in closing, I'm going to make one more observation.  As we all saw during PJM's planning process, these utilities are falling all over themselves to be selected to build new projects.  It is a COMPETITIVE process, and that only happens when participants WANT to be selected.  FERC's incentives are meant to encourage utilities to build transmission even though they may not want to, or if it is financially risky for them to do so.  Are incentives really necessary in a competitive planning process?  Without them, would these utilities still be competing to be selected?  Transmission is still incredibly profitable, even without incentives.  Transmission owners earn hefty returns on the money they invest building them.  Transmission returns on equity are set much higher than other market returns, so that building transmission is the most profitable place the utility can invest its money.  They have been as high as 16% when interest rates are up, and as low as 9% when the markets are down.  Even then, they are still much higher than anything you can find to invest your own money.  FERC returns are loosely tied to markets, so they fluctuate, but once FERC sets the ROE for a transmission project, it is set in stone until another proceeding is opened to re-examine it.  Begin a project when the market is up, and you get a high return that can persist for years, even when the markets change.  Transmission is a long-lived asset, and it is paid for by ratepayers over its useful life.  The expected life of many transmission projects is 40 years.  It's like a 40-year mortgage that we're going to have to pay.

Transmission's biggest cheerleaders met last month in San Diego to talk about a subject near and dear to their wallets.  During his presentation to his fellow speculators, Ray Wood, head of U.S. power and renewables at Bank of America Merrill Lynch said:

Wood wasn't just bragging, however, but trying to convince everyone that transmission needs big, double-digit rates of return in order to attract capital.

According to Wood, funds for transmission are readily available, however transmission is so risky that no one wants to invest in it until a project has been awarded a "notice to proceed."

This is a lie.  There is no risk involved in building transmission.  Transmission incentives awarded by FERC routinely place all risk on consumers.  One incentive awarded by FERC to all who ask is guaranteed recovery of 100% of prudently-incurred project cost.  Another is the ability to collect a return on investment during  the construction period (CWIP in rate base).  The investor cannot lose if he is guaranteed to receive his entire investment back, plus a generous return, even before the project is constructed.

What Wood is whining about is that brief period of time between the day some transmission owner rolls out of bed with the idea to build a transmission goldmine, and the day incentives and a formula rate are approved by FERC.  This is the only time when investment isn't earning a great big return.  After that, it's all $$$$$!

Wood pretends that there's some further risk during other necessary approvals, such as a state CPCN or an environmental review.  The investor is still earning during this time -- where's the risk?  The only "risk" is that a project may be abandoned if it cannot buy necessary approvals, therefore the "sky's the limit" amount of investment that it was possible to make actually constructing the project is curtailed, and the investor is left with a smaller investment that is still earning around 12%.  Oh, boo hoo.

And what about projects sponsored by transco spinoffs of gigantic investor owned utilities?  These companies often self-finance the early cost of a project by borrowing at the parent company level at extremely low rates, and then earning a 14.3% return on that investment.  In the case of the PATH project, the company never borrowed any money, however they still collected a 14.3 or 12.4 percent return on money they probably borrowed at 3 or 4%.

So, how do we fix this to make both Wood and electric consumers happy?  How about setting limits on incentive rate of return periods to coincide with the "risky" periods of a transmission project?  Transmission is only competing with other investments at the beginning.  Once the investment is made and the project constructed, all risk disappears.  So, what if incentive ROEs were gradually lowered over the life of the asset?  As well, incentive ROEs should not kick in until an actual investment in the project has been made by an entity other than the company or its parent.  Transmission owners are scamming us big time!

The media's favorite, new energy story centers on how traditional utilities are panicking over the ever-shrinking pool of customers created by on-site renewable generation and energy efficiency.  Now the New York Times has also jumped on the bandwagon.  This is it utility friends, change or die!

The smart companies are finding new niche markets that will secure their longevity.  The stupid companies are wasting a whole bunch of money trying to lobby solar out of existence.  Do I have to start handing out  my own series of Utility Darwin Awards?

I'm so happy that the media has now picked up on something we wrote in June 2012.  In comments to the FERC, consumer groups put utilities on notice:

"Because transmission is such a long-term asset, we must be extremely mindful of how new projects relate to each other to achieve comprehensive energy policy goals. If we continue to approach transmission as a hodgepodge, knee-jerk reaction to serve short-term goals and provide sustainable revenue streams to investor-owned utilities, we risk setting ourselves up for a possible future where a huge investment in transmission becomes the financial responsibility of a shrinking pool of ratepayers. Technological advances and affordability are making it possible for an increasing number of consumers to produce their own power and feed it into the local distribution grid by making their own smart, fuel-free, power producing investments. Energy efficiency and demand management gains continue to shatter future demand projections, further decreasing the need for billions of dollars of investment in new transmission infrastructure."


It only took just over a year to get this observation mainstreamed into the pages of the New York Times.    Perhaps NYT isn't getting timely information while worshipping at the alter of for-profit utilities?

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.

It's been so long you've probably forgotten all about FERC's Notice of Inquiry on Promoting Transmission Investment Through Pricing Reform.  Thankfully FERC hasn't.

The NOI, issued in May 2011, solicited public comment on FERC's policies for awarding financial incentives to transmission projects.  And the public responded.  FERC was deluged with hundreds of comments from elected officials, corporate beneficiaries of the incentives, trade groups, and most importantly an avalanche of comments from the most significant "stakeholders" of all -- you, the consumer who pays for the incentives.

Yesterday, FERC issued the agenda for its November 15 public meeting.  Item E-3 is expected to be the first word from the Commission on how incentives policy will be reformed.

If you submitted a comment, you will be served with a copy of the Commission's order after the meeting concludes.

The Commission may comment on the order during the meeting.  You may watch a webcast of the meeting here.  Look under "News and Commission Meetings" to find the link to the video.

And pat yourself on the back... it's time to harvest the fruit of citizen action!