Last year, the Federal Energy Regulatory Commission opened an investigation of formula rate protocols in the Midwest Independent Transmission System Operator (MISO) region. MISO's outdated formula rate protocols (and those of its regional transmission owners) were woefully inadequate to ensure just and reasonable transmission rates.
At issue was participation, transparency and a recognized procedure to challenge rates. MISO's pro forma protocols and those of the subject transmission owners lacked clarity on all three issues. Yesterday, FERC ordered the parties to make compliance filings to revise their formula rate protocols within 60 days to set methods to define participation, ensure transparency and provide a method for challenge.
Formula rates provide a mechanism for transmission owners to set a yearly revenue requirement that enables the transmission owner to recover its costs in real time as they are incurred. Under a formula rate, a transmission owner files a yearly projected revenue requirement, which is then collected from customers over the upcoming year. After the year ends, the company must file a true-up comparison between the estimate it collected and the actual amount it spent. If too much has been collected, ratepayers will receive a refund in a subsequent year. If not enough has been collected, ratepayers will pay the balance due in a subsequent year. The formula rate (which is a series of calculations used to arrive at the actual dollar amount of the revenue requirement) is the transmission owner's FERC-approved, filed rate. Formula rates produce an annual revenue requirement, which can change from year to year. This obviates the need for transmission owners to file traditional rate cases at set intervals and prevents regulatory lag. The annual formula rate filings are informational only and deemed to be just and reasonable unless an interested party raises a challenge to the revenue requirement as filed. FERC does not audit, review or approve annual formula rate filings. FERC relies on those who pay these annual revenue requirements to review them yearly, settle any disputes with the transmission owner, or to challenge the formula rate annual update if a transmission owner and interested party cannot settle their dispute without intervention by the Commission.
Formula rate protocols are a set of rules for yearly filing and review of the particular formula rate that the transmission owner and interested parties must follow. If you want to review transmission rates you are paying, the protocols are your instruction manual.
FERC toughened up the lax protocols under which MISO had been operating, requiring that revised protocols more closely resemble formula rate protocols in use in the PJM region.
MISO transmission owners are going to have to clean up their act or they may be facing annual challenges to the accuracy and prudence of the costs making up their annual revenue requirements. Several challenges to formula rates in the PJM region have been filed and granted by the Commission.
The best part of this Order comes right at the end, where FERC makes reference to a prudence challenge that it granted as an example to follow:
"We will, however, continue to apply our well-established precedent with respect to challenges to the prudence of costs incurred by a transmission owner. The Commission has historically recognized that “managers of a utility have broad discretion in conducting their business affairs and in incurring costs necessary to provide services to their customers.”[1] Consequently, parties seeking to challenge the prudence of a transmission owner’s expenditures must first create a serious doubt as to the prudence of those expenditures before the burden of proof shifts to the transmission owner.[2]"
[1] New England Power Co., 31 FERC ¶ 61,047, at 61,084 (1985).
[2] Potomac-Appalachian Transmission Highline, LLC, 140 FERC ¶ 61,229, at P 81 (2012) (citing Midwest Indep. Transmission Sys. Operator, Inc., 115 FERC ¶ 61,224, at P 28 (2006)).
Despite a whole bunch of transmission owner and MISO whining that FERC was wrecking formula rates, FERC believes it is preserving the use of formula rates. It's only transmission owner imprudence and over recovery that took a hit. This is good news for consumers in MISO states, but only if someone steps up to actually use the new protocols.
At issue was participation, transparency and a recognized procedure to challenge rates. MISO's pro forma protocols and those of the subject transmission owners lacked clarity on all three issues. Yesterday, FERC ordered the parties to make compliance filings to revise their formula rate protocols within 60 days to set methods to define participation, ensure transparency and provide a method for challenge.
Formula rates provide a mechanism for transmission owners to set a yearly revenue requirement that enables the transmission owner to recover its costs in real time as they are incurred. Under a formula rate, a transmission owner files a yearly projected revenue requirement, which is then collected from customers over the upcoming year. After the year ends, the company must file a true-up comparison between the estimate it collected and the actual amount it spent. If too much has been collected, ratepayers will receive a refund in a subsequent year. If not enough has been collected, ratepayers will pay the balance due in a subsequent year. The formula rate (which is a series of calculations used to arrive at the actual dollar amount of the revenue requirement) is the transmission owner's FERC-approved, filed rate. Formula rates produce an annual revenue requirement, which can change from year to year. This obviates the need for transmission owners to file traditional rate cases at set intervals and prevents regulatory lag. The annual formula rate filings are informational only and deemed to be just and reasonable unless an interested party raises a challenge to the revenue requirement as filed. FERC does not audit, review or approve annual formula rate filings. FERC relies on those who pay these annual revenue requirements to review them yearly, settle any disputes with the transmission owner, or to challenge the formula rate annual update if a transmission owner and interested party cannot settle their dispute without intervention by the Commission.
Formula rate protocols are a set of rules for yearly filing and review of the particular formula rate that the transmission owner and interested parties must follow. If you want to review transmission rates you are paying, the protocols are your instruction manual.
FERC toughened up the lax protocols under which MISO had been operating, requiring that revised protocols more closely resemble formula rate protocols in use in the PJM region.
MISO transmission owners are going to have to clean up their act or they may be facing annual challenges to the accuracy and prudence of the costs making up their annual revenue requirements. Several challenges to formula rates in the PJM region have been filed and granted by the Commission.
The best part of this Order comes right at the end, where FERC makes reference to a prudence challenge that it granted as an example to follow:
"We will, however, continue to apply our well-established precedent with respect to challenges to the prudence of costs incurred by a transmission owner. The Commission has historically recognized that “managers of a utility have broad discretion in conducting their business affairs and in incurring costs necessary to provide services to their customers.”[1] Consequently, parties seeking to challenge the prudence of a transmission owner’s expenditures must first create a serious doubt as to the prudence of those expenditures before the burden of proof shifts to the transmission owner.[2]"
[1] New England Power Co., 31 FERC ¶ 61,047, at 61,084 (1985).
[2] Potomac-Appalachian Transmission Highline, LLC, 140 FERC ¶ 61,229, at P 81 (2012) (citing Midwest Indep. Transmission Sys. Operator, Inc., 115 FERC ¶ 61,224, at P 28 (2006)).
Despite a whole bunch of transmission owner and MISO whining that FERC was wrecking formula rates, FERC believes it is preserving the use of formula rates. It's only transmission owner imprudence and over recovery that took a hit. This is good news for consumers in MISO states, but only if someone steps up to actually use the new protocols.
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