FERC was directed by Congress in 2005 to "establish, by rule, incentive-based (including performance-based) rate treatments for the transmission of electric energy in interstate commerce by public utilities for the purpose of benefitting consumers by ensuring reliability and reducing the cost of delivered power by reducing transmission congestion."
This was one of several transmission fixes designed by the utility industry and ushered through Congress in response to the 2003 blackout. In that instance, lack of vegetation maintenance and poor management by investor-owned utility FirstEnergy, caused a cascading blackout of much of the Northeast, including parts of Canada. Although a joint task force was formed to investigate the issue, little blame was placed where it belonged, instead utilities used the blackout to increase their earnings through the building of new transmission. Sec. 219 is one of the industry-led changes to come from that effort. Others include Sec. 1221, which tasks the U.S. Department of Energy with triennial "congestion studies" that may lead to the designation of "National Interest Electric Transmission Corridors" (NIETCs), where federal authority to site and permit transmission in a corridor shifts from states to FERC in the event that a state cannot make a decision on a transmission proposal within one year. Another is Sec. 1222, which allows the DOE to "participate" in transmission projects for the express purpose of using federal eminent domain authority to override state siting authority. However, Sections 1221 and 1222 have not worked in practice. Sec. 1221 was neutered by two separate federal court opinions, making it useless. Sec. 1222 sat on a back burner for many years, until DOE tried to use it to help transmission for renewables get built. That didn't work out either, as the project "selected" by DOE (coincidentally the only one that applied) couldn't find any customers and eventually went belly up. Sec. 219 has yet to be challenged, but it's another example of a poorly-written energy statute that has been wrongly interpreted and put into practice to do things not written in the statute.
Before even thinking about the questions FERC poses in its Incentives Inquiry, let's look at Sec. 219, and discern exactly what it says (because that's how a court would look at a conflict between the statute and how it was carried out).
In Sec. (a), Congress defines the purpose of Sec. 219. "...for the purpose of benefitting consumers by ensuring reliability and reducing the cost of delivered power by reducing transmission congestion." So, any rule derived by FERC must benefit consumers by ensuring reliability AND reducing the cost of delivered power by reducing transmission congestion. Not "or". AND. Simply ensuring reliability is not reason enough for transmission incentives, a project receiving incentives must also reduce the cost of delivered power by reducing transmission congestion. FERC's initial interpretation of the statute substituted the word "or" for the word "and," and FERC has subsequently granted incentives for straight up reliability projects that only increased the cost of delivered power. There are a host of other laws and regulations that ensure the reliability of the electric grid. These investments are mandated in other ways, should we pay a premium to have reliable electric service? Or is this just gold plating? Conversely, it looks like a transmission congestion reducing project that does not also ensure reliability should not receive incentives. Keep this in mind as we move forward exploring this inquiry.
Sec. 219 says that FERC must create a rule for performance-based rate treatments. FERC has not done this. There are no performance standards attached to any FERC rate treatments or incentives. Once incentives are granted, they continue on for the life of the transmission project, without another thought. Should transmission owners granted incentives have to perform in some way? What performance standards should be in place?
It also says incentives are for public utilities. FERC cannot award incentives to private utilities or other energy enterprises that do not have captive customers. There would be no one to pay them, first of all, second of all, private utility ideas are not for public benefit. They're for private profit.
Sec. (b) (1) of 219 says the rule shall: "promote reliable and economically efficient transmission and generation of electricity by promoting capital investment in the enlargement, improvement, maintenance, and operation of all facilities for the transmission of electric energy in interstate commerce, regardless of the ownership of the facilities;" This section includes the word "generation." That's odd. There are no incentives for generation. So we're supposed to provide incentives for transmission that serves reliable and economically efficient generation? What kind of generation is reliable and economically efficient? Nuclear? It can't be wind or solar, they're not reliable and cannot always produce when called. It's probably not more expensive fossil fuel generation. What kind of generation did Congress mean here? But this section also says this incentivized transmission must for the enlargement, improvement, maintenance and operation of all facilities. Obviously, this doesn't cover new transmission and is meant for the enlargement, improvement, maintenance and operation of existing transmission. Any other interpretation would be sort of inapt.
Sec. (b) (2) says that the rule shall: "provide a return on equity that attracts new investment in transmission facilities (including related transmission technologies);" New investment in transmission is quite different than investment in new transmission, which is how FERC has designed their rule in the past. It looks like Congress intended to attract investment in all kinds of transmission, including transmission that meets (b)(1) above. It's also meant to encourage new technologies that make transmission more economic and reliable.
Sec. (b) (3) says that the rule shall: "encourage deployment of transmission technologies and other measures to increase the capacity and efficiency of existing transmission facilities and improve the operation of the facilities;" This requires FERC to develop incentives for technology and "other measures" to increase the capacity and efficiency of existing facilities. "Other measures" could include simple re-builds of existing transmission to increase capacity, although FERC has never developed an incentive for this kind of efficient use of existing resources. In fact, FERC has no incentives to improve the operation of existing facilities. Is it time to create some?
Sec. (b) (4) says that the rule shall: "allow recovery of--
(A) all prudently incurred costs necessary to comply with mandatory reliability standards issued pursuant to section 824o of this title; and
(B) all prudently incurred costs related to transmission infrastructure development pursuant to section 824p of this title." So the statute says FERC must simply allow recovery of prudent costs of reliability projects. It doesn't say it must provide incentives for reliability projects. It also says the rule shall allow recovery of prudent costs of transmission under Section 824p. Section 824p is also Sec. 1221, the NIETC corridors and FERC backstop permitting. It also says "allow recovery," not provide incentives for. So, therefore, there shall be no incentives for reliability projects and Sec. 1221 projects.
Sec. (c) of Sec. 219 says FERC must: "provide for incentives to each transmitting utility or electric utility that joins a Transmission Organization. The Commission shall ensure that any costs recoverable pursuant to this subsection may be recovered by such utility through the transmission rates charged by such utility or through the transmission rates charged by the Transmission Organization that provides transmission service to such utility." Incentives for each entity that JOINS a transmission organization. A logical reading of this section would mean that the entity has to join, not already be a member of, a transmission organization (like PJM, MISO, SPP, etc.). However, FERC has previously interpreted this to mean any transmission owner who joins or is already a member of an organization shall receive this incentive (which is an additional .5% added to the allowed return). Sec. 219 does not provide for incentives for transmission owners who are already members of a transmission org. This should also apply to spin-offs of companies who are already members of a transmission organization. An additional .5% return over the life of a billion dollar transmission asset is a sizable chunk of change for a utility who is doing NOTHING in exchange for it.
And finally, Sec. (d) says that the rules are subject to the terms of other sections of the Federal Power Act that say rates must not be unduly discriminatory or preferential, particularly "make or grant any undue preference or advantage to any person or subject any person to any undue prejudice or disadvantage." Therefore, incentive rules shall not pick and choose among generation types to provide any advantage (or disadvantage) to certain ones. In other words, FERC cannot provide incentives to certain transmission projects that primarily serve certain kinds of generation.
To sum it up... what has FERC done wrong in previous transmission incentive iterations:
This was one of several transmission fixes designed by the utility industry and ushered through Congress in response to the 2003 blackout. In that instance, lack of vegetation maintenance and poor management by investor-owned utility FirstEnergy, caused a cascading blackout of much of the Northeast, including parts of Canada. Although a joint task force was formed to investigate the issue, little blame was placed where it belonged, instead utilities used the blackout to increase their earnings through the building of new transmission. Sec. 219 is one of the industry-led changes to come from that effort. Others include Sec. 1221, which tasks the U.S. Department of Energy with triennial "congestion studies" that may lead to the designation of "National Interest Electric Transmission Corridors" (NIETCs), where federal authority to site and permit transmission in a corridor shifts from states to FERC in the event that a state cannot make a decision on a transmission proposal within one year. Another is Sec. 1222, which allows the DOE to "participate" in transmission projects for the express purpose of using federal eminent domain authority to override state siting authority. However, Sections 1221 and 1222 have not worked in practice. Sec. 1221 was neutered by two separate federal court opinions, making it useless. Sec. 1222 sat on a back burner for many years, until DOE tried to use it to help transmission for renewables get built. That didn't work out either, as the project "selected" by DOE (coincidentally the only one that applied) couldn't find any customers and eventually went belly up. Sec. 219 has yet to be challenged, but it's another example of a poorly-written energy statute that has been wrongly interpreted and put into practice to do things not written in the statute.
Before even thinking about the questions FERC poses in its Incentives Inquiry, let's look at Sec. 219, and discern exactly what it says (because that's how a court would look at a conflict between the statute and how it was carried out).
In Sec. (a), Congress defines the purpose of Sec. 219. "...for the purpose of benefitting consumers by ensuring reliability and reducing the cost of delivered power by reducing transmission congestion." So, any rule derived by FERC must benefit consumers by ensuring reliability AND reducing the cost of delivered power by reducing transmission congestion. Not "or". AND. Simply ensuring reliability is not reason enough for transmission incentives, a project receiving incentives must also reduce the cost of delivered power by reducing transmission congestion. FERC's initial interpretation of the statute substituted the word "or" for the word "and," and FERC has subsequently granted incentives for straight up reliability projects that only increased the cost of delivered power. There are a host of other laws and regulations that ensure the reliability of the electric grid. These investments are mandated in other ways, should we pay a premium to have reliable electric service? Or is this just gold plating? Conversely, it looks like a transmission congestion reducing project that does not also ensure reliability should not receive incentives. Keep this in mind as we move forward exploring this inquiry.
Sec. 219 says that FERC must create a rule for performance-based rate treatments. FERC has not done this. There are no performance standards attached to any FERC rate treatments or incentives. Once incentives are granted, they continue on for the life of the transmission project, without another thought. Should transmission owners granted incentives have to perform in some way? What performance standards should be in place?
It also says incentives are for public utilities. FERC cannot award incentives to private utilities or other energy enterprises that do not have captive customers. There would be no one to pay them, first of all, second of all, private utility ideas are not for public benefit. They're for private profit.
Sec. (b) (1) of 219 says the rule shall: "promote reliable and economically efficient transmission and generation of electricity by promoting capital investment in the enlargement, improvement, maintenance, and operation of all facilities for the transmission of electric energy in interstate commerce, regardless of the ownership of the facilities;" This section includes the word "generation." That's odd. There are no incentives for generation. So we're supposed to provide incentives for transmission that serves reliable and economically efficient generation? What kind of generation is reliable and economically efficient? Nuclear? It can't be wind or solar, they're not reliable and cannot always produce when called. It's probably not more expensive fossil fuel generation. What kind of generation did Congress mean here? But this section also says this incentivized transmission must for the enlargement, improvement, maintenance and operation of all facilities. Obviously, this doesn't cover new transmission and is meant for the enlargement, improvement, maintenance and operation of existing transmission. Any other interpretation would be sort of inapt.
Sec. (b) (2) says that the rule shall: "provide a return on equity that attracts new investment in transmission facilities (including related transmission technologies);" New investment in transmission is quite different than investment in new transmission, which is how FERC has designed their rule in the past. It looks like Congress intended to attract investment in all kinds of transmission, including transmission that meets (b)(1) above. It's also meant to encourage new technologies that make transmission more economic and reliable.
Sec. (b) (3) says that the rule shall: "encourage deployment of transmission technologies and other measures to increase the capacity and efficiency of existing transmission facilities and improve the operation of the facilities;" This requires FERC to develop incentives for technology and "other measures" to increase the capacity and efficiency of existing facilities. "Other measures" could include simple re-builds of existing transmission to increase capacity, although FERC has never developed an incentive for this kind of efficient use of existing resources. In fact, FERC has no incentives to improve the operation of existing facilities. Is it time to create some?
Sec. (b) (4) says that the rule shall: "allow recovery of--
(A) all prudently incurred costs necessary to comply with mandatory reliability standards issued pursuant to section 824o of this title; and
(B) all prudently incurred costs related to transmission infrastructure development pursuant to section 824p of this title." So the statute says FERC must simply allow recovery of prudent costs of reliability projects. It doesn't say it must provide incentives for reliability projects. It also says the rule shall allow recovery of prudent costs of transmission under Section 824p. Section 824p is also Sec. 1221, the NIETC corridors and FERC backstop permitting. It also says "allow recovery," not provide incentives for. So, therefore, there shall be no incentives for reliability projects and Sec. 1221 projects.
Sec. (c) of Sec. 219 says FERC must: "provide for incentives to each transmitting utility or electric utility that joins a Transmission Organization. The Commission shall ensure that any costs recoverable pursuant to this subsection may be recovered by such utility through the transmission rates charged by such utility or through the transmission rates charged by the Transmission Organization that provides transmission service to such utility." Incentives for each entity that JOINS a transmission organization. A logical reading of this section would mean that the entity has to join, not already be a member of, a transmission organization (like PJM, MISO, SPP, etc.). However, FERC has previously interpreted this to mean any transmission owner who joins or is already a member of an organization shall receive this incentive (which is an additional .5% added to the allowed return). Sec. 219 does not provide for incentives for transmission owners who are already members of a transmission org. This should also apply to spin-offs of companies who are already members of a transmission organization. An additional .5% return over the life of a billion dollar transmission asset is a sizable chunk of change for a utility who is doing NOTHING in exchange for it.
And finally, Sec. (d) says that the rules are subject to the terms of other sections of the Federal Power Act that say rates must not be unduly discriminatory or preferential, particularly "make or grant any undue preference or advantage to any person or subject any person to any undue prejudice or disadvantage." Therefore, incentive rules shall not pick and choose among generation types to provide any advantage (or disadvantage) to certain ones. In other words, FERC cannot provide incentives to certain transmission projects that primarily serve certain kinds of generation.
To sum it up... what has FERC done wrong in previous transmission incentive iterations:
- Provide incentives for straight up reliability projects.
- Not provide incentives to make the best use of existing transmission.
- Not creating performance-based rate treatments.
- Awarding incentives only to NEW transmission projects.
- Not providing incentives for new technology.
- Awarding existing transmission org. membership.
And what things can FERC not do this time around?
- Provide incentives to non-public utilities.
- Provide incentives to projects designed to provide advantage to certain types of generation.
- Provide incentives to projects designed for the express purpose of relieving congestion.
Sec. 219 is your touchstone for answering FERC's inquiry questions. No matter the suggestion posed in the question, it's important to find some foundation for it in Sec. 219. Familiarizing yourself with Sec. 219 will help you ground your comments so that they stay within the intent of the statute.
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