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FERC Provides Guidance on Use of Transmission Incentives

The Federal Energy Regulatory Commission (FERC) recently issued a policy statement providing further guidance on criteria it will use in determining when a proposed transmission project will be eligible for incentive pricing or Return on Equity (ROE) incentive adders.  FERC released the guidance based on over 1,500 pages of comments received in response to a May 2011 Notice of Inquiry on the subject.   The NOI was prompted by multiple comments by trade and transmission user groups expressing concern that existing policy was so broad that nearly every major transmission project was found to be eligible for incentive pricing.  The guidance is intended to strike a better balance between providing incentives necessary to cause needed transmission to be built while observing just and reasonable rate considerations for transmission customers.

In the statement, FERC announced that it has reframed its “nexus test” to focus more directly on the requirements of the incentive policy ordered six years ago in Order No. 679. Among other things, Order No. 679 established the nexus test, which requires applicants to demonstrate a connection between the incentive(s) requested under FERC’s transmission investment incentive policy as announced in Order No. 679 and the proposed investment, and that the incentive(s) requested address the risks and challenges that a project faces.

Since implementing the policy, FERC had allowed applicants to make a showing of whether a project was routine or non-routine as a proxy for the nexus test.   The recent statement is a return to the nexus test.  FERC will no longer rely on the routine/non-routine analysis as a proxy for that test.

FERC provided guidance on how Applicants can demonstrate a nexus between the incentive requested and the proposed investment, and how the incentive will address the risks and challenges of the specific project in question.  Applicants will now be required to make a specific showing of need by demonstrating that alternatives had been considered before selecting the proposed project as the best option.  Further, the applicant will be expected to make specific showings to indicate the risks inherent in constructing the project justify incentive treatment.  This will include demonstrations such as providing evidence that the risk of constructing the project is greater than the general level of risk assumed in the base return for the developer.  FERC also stated that it expects the developer to use risk-mitigating factors first, such as requesting the ability to include Construction Work in Progress for the project in rates before requesting an incentive ROE on the completed project.  Finally, FERC stated that it expects some cost containment measures in return for incentive treatment.  An example FERC provided in this area is limiting the incentive treatment to the estimated project cost used in obtaining regulatory approvals and permits from state regulatory bodies.

The refinement in FERC’s transmission incentive rate policy is prospective and will not affect existing projects or pending project applications.

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