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July 25, 2014

FERC Reframes Nexus Test for Transmission Incentives Applications

Rate incentives may become more difficult to obtain; applicants are provided guidance on showings they are expected to make.

On November 15, the Federal Energy Regulatory Commission (FERC) issued a Policy Statement providing guidance on its evaluation of requests for rate incentives associated with electric transmission service.[1] FERC reframed the nexus test of its earlier Order No. 679[2] to focus more directly on the requirements of that order and emphasized its expectation that applicants take all reasonable steps to mitigate the risks of a project before seeking incentive returns on equity (ROEs). As a result of the Policy Statement, FERC will apply a more rigorous analysis to determine whether incentives are appropriate, and it may become more difficult to obtain rate incentives, particularly an increased ROE.

In Order No. 679, FERC established several rate incentives for investments in electric transmission infrastructure. FERC grants incentives for transmission projects if an applicant can show that (a) the project either ensures reliability or reduces the cost of delivered power through reduced congestion and (b) there is a nexus between the incentive sought and the investment being made. In applying the nexus test, FERC stated that it would consider whether the total package of incentives is rationally tailored to the risks and challenges of constructing new transmission. FERC subsequently concluded that it would evaluate whether a transmission project is "routine" or "non-routine" and that, once an applicant demonstrated that a project is not routine, it would be deemed to have satisfied the nexus test.[3]

In the Policy Statement, FERC replaced the routine/non-routine analysis with an analysis of the need for each individual incentive and the total package of incentives to determine whether an applicant satisfies the nexus test. Also, FERC reaffirmed that certain risk-reducing incentives may mitigate risk not accounted for in a transmission owner's base ROE. FERC emphasized that it expects applicants to first examine the use of non-ROE risk-reducing incentives before seeking an incentive ROE based on the project's risks and challenges.

FERC declined to specifically identify project characteristics or risks and challenges that would merit an incentive ROE but provided the following showings it expects an incentive applicant to demonstrate in the application:

  • The proposed project faces risks and challenges not accounted for in the base ROE or addressed through risk-reducing incentives.
  • The applicant is taking appropriate steps and using appropriate mechanisms to minimize its risks during project development.
  • Alternatives to the project have been or will be considered in a relevant transmission planning process or a similar forum.

FERC also stated that an applicant should limit the application of the incentive ROE based on the project's risks and challenges.

Finally, FERC identified the following three categories of projects that are likely to face the risks and challenges that could justify an incentive ROE:

  • Projects that relieve chronic or severe grid congestion that has had demonstrated cost effects on consumers
  • Projects that provide access to location-constrained generation resources for those that previously had limited or no access to the wholesale electricity markets
  • Projects that apply new technologies to allow more efficient and reliable usage and operation of existing or new facilities

[1]. Promoting Transmission Investment Through Pricing Reform, 141 FERC ¶ 61,129 (2012), available here [hereinafter Policy Statement].

[2]. Promoting Transmission Investment Through Pricing Reform, 116 FERC ¶ 61,057, order on reh'g, 117 FERC ¶ 61,345 (2006).

[3]. Baltimore Gas & Elec. Co., 120 FERC ¶ 61,084, at PP 52–54 (2007).

Copyright © 2014 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

About the Author

Partner

John D. McGrane is a partner in Morgan Lewis's Energy Practice. Mr. McGrane has more than 30 years of experience representing electric utilities and other participants in the electric power industry. He is listed in Chambers USA: America's Leading Lawyers for Business, Chambers Global: The World’s Leading Lawyers, and The Best Lawyers in America as one of America's leading energy attorneys.

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About the Author

Partner

Glen S. Bernstein is a partner in Morgan Lewis's Energy Practice. Mr. Bernstein represents clients in all aspects of electric utility regulation and deregulation, with an emphasis on transmission and interconnection access, rates, and planning; independent transmission providers; electricity markets; and compliance with Federal Energy Regulatory Commission (FERC) Standards of Conduct and Codes of Conduct, affiliate transaction rules, and antimarket manipulation rules.

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Associate

Pamela C. Tsang is an associate in Morgan Lewis's Energy Practice. Attorneys in this practice counsel clients in the electric, nuclear, oil, gas, and water industries on a broad range of energy issues. We offer clients advice on domestic and international energy regulations and represent them in arbitration, in high-stakes regulatory and commercial disputes, and in litigation before state and federal courts. Our Energy Practice provides an array of services-transactional, counseling, regulatory, and litigation-to address all of our energy clients' legal needs.

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