July 22, 2014

Down But Not Completely Out: Transmission Rate Incentives

On November 15, 2012, the Federal Energy Regulatory Commission issued a policy statement providing guidance on its evaluation of applications for electric transmission incentives under section 219 of the Federal Power Act and its Order No. 679 (the Incentive Rate Policy Statement). The Incentive Rate Policy Statement reflects a continuation of the trend of scaling back the incentives awarded to transmission developers, most notably, making it more difficult to obtain a substantial incentive return on equity (ROE), if any at all.

Since the issuance of Order No. 679, the Commission has evaluated more than 85 applications representing over $60 billion in potential transmission investment. In its more recent evaluation of incentive rate applications, however, FERC, under Chairman Jon Wellinghoff, had trended towards less “generous” packages of incentives awarded even when an applicant appeared to qualify under FERC precedent and regulations for a more “generous” incentive package, particularly with respect to the level of incentive ROEs. Whereas incentive ROE adders could be as high as 200 basis points in earlier years, more recent incentive ROE adders granted were 50 or 100 basis points, if any were granted at all.

The Incentive Rate Policy Statement continues the trend towards a prospective reduction of incentive packages granted by FERC. Among other things, the Commission stated that it expects that before an applicant seeks an incentive ROE based on the risks and challenges of a project, the applicant would take all reasonable steps to mitigate risks, including seeking incentives designed to reduce those risks, such as the CWIP recovery, pre-commercial cost recovery and abandoned plant cost recovery incentives. The Commission is signaling that incentive ROEs should be seen as a kind of “last line of defense” for mitigating the risks associated with transmission development. The Commission stated it will carefully apply its total package analysis to ensure that the effect of the risk-reducing incentives is appropriately accounted for in determining whether an incentive ROE based on risks and challenges is warranted, and if warranted, what level is appropriate. 

As noted, this aspect of the Incentive Rate Policy Statement formally recognizes a shift that already has occurred. The Incentive Rate Policy Statement does, however, provide guidance on the additional showings that FERC expects from an applicant seeking an incentive ROE based on a project’s risks and challenges. Essentially, the Commission is looking for a demonstration that, in its effort to develop new transmission, the applicant faces risks and challenges that are not either already accounted for in the applicant’s base ROE or addressed through risk-reducing incentives. Notably, FERC expects an applicant to commit to cost containment in the application of the ROE incentive.

One issue to look at prospectively is the Commission’s application of the Incentive Rate Policy Statement to non-incumbent transmission developers. For many non-incumbent developers the benefits of the risk-reducing incentives, such as CWIP and abandonment, are illusory. That is because they often have no customers from which to recover the risk-reducing incentives prior to entering service. FERC’s incentive rate orders regularly question whether non-incumbents will have customers from which to recover these incentives. FERC might be more forgiving to non-incumbent developers with respect to its application of its incentive ROE policy in recognition of the limited value of risk-reducing incentives to non-incumbents.

The Incentive Rate Policy Statement, along with Commissioners’ Statements on the issuance, are available here.

Boost: AJAX core statistics

Legal Disclaimer

You are responsible for reading, understanding and agreeing to the National Law Review's (NLR’s) and the National Law Forum LLC's  Terms of Use and Privacy Policy before using the National Law Review website. The National Law Review is a free to use, no-log in database of legal and business articles. The content and links on are intended for general information purposes only. Any legal analysis, legislative updates or other content and links should not be construed as legal or professional advice or a substitute for such advice. No attorney-client or confidential relationship is formed by the transmission of information between you and the National Law Review website or any of the law firms, attorneys or other professionals or organizations who include content on the National Law Review website. If you require legal or professional advice, kindly contact an attorney or other suitable professional advisor.  

Some states have laws and ethical rules regarding solicitation and advertisement practices by attorneys and/or other professionals. The National Law Review is not a law firm nor is  intended to be  a referral service for attorneys and/or other professionals. The NLR does not wish, nor does it intend, to solicit the business of anyone or to refer anyone to an attorney or other professional.  NLR does not answer legal questions nor will we refer you to an attorney or other professional if you request such information from us. 

Under certain state laws the following statements may be required on this website and we have included them in order to be in full compliance with these rules. The choice of a lawyer or other professional is an important decision and should not be based solely upon advertisements. Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Statement in compliance with Texas Rules of Professional Conduct. Unless otherwise noted, attorneys are not certified by the Texas Board of Legal Specialization, nor can NLR attest to the accuracy of any notation of Legal Specialization or other Professional Credentials.

The National Law Review - National Law Forum LLC 4700 Gilbert Ave. Suite 47 #230 Western Springs, IL 60558  Telephone  (708) 357-3317 If you would ike to contact us via email please click here.