In the NOI, Promoting Transmission Investment Through Pricing Reform, FERC is seeking comments about the effect of its incentives in promoting transmission. If you're going to comment, you need to understand what the incentives are, and what they are intended to do.
A hypothetical capital structure pre-determines how much of the project capital will be equity (capital provided by the company, or in PATH's case, the parent companies) and how much will be debt (financed/borrowed capital). In order to earn a yearly return (or interest) on project capital, capital costs must be split between equity (which in PATH's case we know earns a 14.3% return) and debt (which earns at a much lower rate - in PATH's case 6.64%). Every year, PATH's return (earnings) is calculated upon the amount of capital in the rate base. What FERC's incentive does is provide a hypothetical split of equity/debt to make it possible to calculate the return. Let's say that PATH's rate base is $106,594,443 in 2010 and the hypothetical capital structure granted to them by FERC is 50%-50%. Half of the rate base would earn 14.3% and the other half would earn 6.64%. This would score PATH a return (profit) for 2010 in the amount of $11,193,509. As you can probably tell, I'm not being "hypothetical" -- it actually happened. (Now you know why I'm livid that PATH thinks they can sit back while "suspended" for eternity and continue to earn a yearly return.)
The hypothetical capital structure incentive is generally geared toward a higher percentage of equity than will actually happen in practice. FERC's reasoning is that equity has a higher cost and the larger return earned with a hypothetical capital structure will enhance cash flows, lower financing costs and improve credit ratings. It might, if companies like PATH didn't toss a bunch of it away every year on lobbying and "donations" and other income deductions intended to influence state approvals for their project, by means either fair or foul.
FERC says it has placed limitations on this incentive by requiring the actual capital structure to match the hypothetical structure at some point in time. Let's hope we all live that long, because FERC hypothesizes that hypothetical and actual will come in sync when a project commences operations. Ut-oh! PATH is now looking like it's going to be completed right around the 12th of Never.
In the NOI, beginning on page 33, FERC discusses the hypothetical capital structure incentive and asks several specific questions. Now that you know what a hypothetical capital structure 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.
A hypothetical capital structure pre-determines how much of the project capital will be equity (capital provided by the company, or in PATH's case, the parent companies) and how much will be debt (financed/borrowed capital). In order to earn a yearly return (or interest) on project capital, capital costs must be split between equity (which in PATH's case we know earns a 14.3% return) and debt (which earns at a much lower rate - in PATH's case 6.64%). Every year, PATH's return (earnings) is calculated upon the amount of capital in the rate base. What FERC's incentive does is provide a hypothetical split of equity/debt to make it possible to calculate the return. Let's say that PATH's rate base is $106,594,443 in 2010 and the hypothetical capital structure granted to them by FERC is 50%-50%. Half of the rate base would earn 14.3% and the other half would earn 6.64%. This would score PATH a return (profit) for 2010 in the amount of $11,193,509. As you can probably tell, I'm not being "hypothetical" -- it actually happened. (Now you know why I'm livid that PATH thinks they can sit back while "suspended" for eternity and continue to earn a yearly return.)
The hypothetical capital structure incentive is generally geared toward a higher percentage of equity than will actually happen in practice. FERC's reasoning is that equity has a higher cost and the larger return earned with a hypothetical capital structure will enhance cash flows, lower financing costs and improve credit ratings. It might, if companies like PATH didn't toss a bunch of it away every year on lobbying and "donations" and other income deductions intended to influence state approvals for their project, by means either fair or foul.
FERC says it has placed limitations on this incentive by requiring the actual capital structure to match the hypothetical structure at some point in time. Let's hope we all live that long, because FERC hypothesizes that hypothetical and actual will come in sync when a project commences operations. Ut-oh! PATH is now looking like it's going to be completed right around the 12th of Never.
In the NOI, beginning on page 33, FERC discusses the hypothetical capital structure incentive and asks several specific questions. Now that you know what a hypothetical capital structure 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.
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