In an order1 issued January 8, 2016, the Federal Energy Regulatory Commission (FERC) announced that it will probe the novel question of whether there is a place for competitively awarded transmission projects to receive return on equity (ROE) incentives. Last year, NextEra Energy Transmission West (“NEET West”) was awarded the 230 KV +300/-100 MV Ar Suncrest Reactive Power Project and the 230/70 kV Estrella Substation Project through CAISO’s competitive transmission developer selection process. NEET West committed to a binding cap on capital expenditures and O&M expenditures (during the first five years of commercial operation) for the projects. In a subsequent filing at FERC seeking rate incentives pursuant to FERC’s Order No. 679,2 NEET West pointed out that cost containment commitments carry with them the risk of unrecoverable cost overages and represent a significant departure from the risk profile of the traditional utility. To that end, NEET West requested a conditional ROE incentive adder equaling the difference between 10 percent and the base ROE in NEET West’s Formula Rate, to be applied only if the base ROE is determined to be below 10 percent, and in no case to exceed 150 basis points. The purpose of this incentive is to provide greater assurance that NEET West will earn the 10 percent ROE that was the basis for its successful competitive bids for the projects.3
FERC denied NEET West’s ROE incentive, finding that it had not provided adequate support for its request. FERC noted that one of its concerns was whether it “strike[s] the appropriate balance between the risk assumed by NEET West and the risk assumed by ratepayers,” since it would “shift to ratepayers cost increases in the form of a potential premium on the ROE” if the ROE “is determined to be below a specified level.”4 However, FERC clarified that its denial of NEET West’s requested conditional ROE was limited to the specific facts of this case, observing that the request “highlights broader policy considerations related to the potential benefits of cost containment proposals in the context of competitive transmission development.”5
Thus, FERC announced its intention to convene a technical conference to explore these issues. One issue it will look at is whether and how risks associated with cost containment proposals relate to FERC’s policies on transmission rate incentives,6 including whether a proposed project faces risks and challenges not already accounted for in an applicant’s base ROE or addressed through risk-reducing incentives.7 Another issue for exploration is “whether and how voluntarily assuming” the type of risk NEET West took in this case fits with the minimization of risk envisioned in FERC’s transmission policy statement.8 This technical conference has not yet been scheduled.
Reprinted with permission from the Friday Burrito, published by 2016 Foothill Services Nevada Inc.
1 NextEra Energy Transmission West, LLC¸ 154 FERC ¶ 61,009 (2016) (NEET West).
2 Promoting Transmission Investment through Pricing Reform, Order No. 679, FERC Stats. & Regs. ¶ 31,222 (2006), order on reh’g, Order No. 679-A, FERC Stats. & Regs. ¶ 31,236, order on reh’g, Order No. 679-B, 119 FERC ¶ 61,062 (2007).
3 NEET West at P 40.
4 Id. at P 75.
5 Id. at P 76.
6 Id. at P 77.
8 See Promoting Transmission Investment Through Pricing Reform, 141 FERC ¶ 61,129 (2012).