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:
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:
(i) recovery of all pre-commercial costs not capitalized and authorization to establish a regulatory asset that will include all such expenses that are incurred prior to the time costs first flow through to customers, including authorization to accrue carrying charges and amortize the regulatory asset over five years for cost recovery purposes (“Regulatory Asset Incentive”); (ii) use of a hypothetical capital structure of 60% equity and 40% debt until NEET MidAtlantic Indiana’s first project achieved commercial operations (“Hypothetical Capital Structure Incentive”); and (iii) use of a 50-basis point return on equity (“ROE”) adder for Regional Transmission Organization Participation (“RTO Participation Adder”).
Now NextEra wants two additional incentives for MARL, along with the ability to use them for any subsequent projects.
(i) recovery of 100 percent of prudently-incurred transmission-related costs of the Project if it is abandoned or canceled for reasons beyond the control of NEET MidAtlantic Indiana (“Abandoned Plant Incentive”); (ii) authorization to include 100 percent of prudently incurred Construction Work in Progress (“CWIP”) in rate base for the Project (“CWIP Incentive”); and (iii) authorization to assign the requested Abandoned Plant and CWIP Incentives, if approved, to any newly-formed PJM affiliate of NEET MidAtlantic Indiana that is involved in the development and construction of the MidAtlantic Resiliency Link Project.
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:
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:
In addition, the Project requires construction of approximately 129-line miles of 500 kV transmission lines, 24 miles of which is located in a greenfield corridor that crosses through Loudoun County, Virginia, which is one of the wealthiest counties in America. Project opposition from residents in this County is foreseeable and may result in permitting delays, undergrounding requirements that may increase the costs associated with the Project, and/or litigation over the Project’s scope and construction. The Project also spans across four different states—West Virginia, Virginia, Maryland, and Pennsylvania—which will require NEET MidAtlantic Indiana to obtain necessary permits and approvals from a large number of different state and local regulatory bodies and will subject the Project to numerous different environmental and other regulatory standards and requirements. Finally, the Project is directly reliant on the construction of a 36-mile increment of 500 kV transmission lines being developed by First Energy as the incumbent transmission owner. Delays or cancellation associated with First Energy’s construction of its 36-mile increment may impact NEET MidAtlantic Indiana’s ability to obtain permits, finalize construction, and place into service the MidAtlantic Resiliency Link Project in a timely fashion.
Additionally, the Commission has also recognized that large, new interstate projects can face substantial risks and challenges not presented by more ordinary transmission investments. Like other large interstate projects, the MidAtlantic Resiliency Link Project will span across four different states and many more localities, each with its own regulatory permitting requirements. The Project also traverses across regions of Virginia, such as Loudon County, that have traditionally been litigious when it comes to new, significant transmission build, and similar opposition is expected here. This opposition could result in Project delays or the inability to obtain certain required permits, such as a certificate of public convenience and necessity, ultimately resulting in cancellation of the Project for reasons outside of NEET MidAtlantic Indiana’s reasonable control.
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.
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.
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