More than a decade since issuing Order No. 1000, FERC is formally developing new rules for regional transmission planning and cost allocation after what FERC calls “mounting evidence” that existing planning processes are inadequate to meet transmission needs of the future. In a notice of proposed rulemaking (NOPR) issued on April 21, 2022, FERC proposed a series of reforms to build on its existing body of landmark transmission rulemaking.
In this series of posts, we discuss each of the key pillars of FERC’s proposed reforms: long-term regional transmission planning; regional transmission cost allocation; incentives for construction work in progress (CWIP); and revisiting a federal right of first refusal.
FERC believes that barriers to transmission investment pose significant risks to the energy economy. Inadequate transmission can lead to transmission congestion, which in turn impedes capital investment in energy infrastructure and the facilities necessary to ensure reliable and efficient service. That problem is compounded by changing supply and demand conditions and an increasingly diverse generation mix, which can create ripple effects on competitive wholesale markets.
Years ago, FERC identified financial pressures on utilities developing transmission facilities as a significant risk to new transmission investment. Normally, transmission-providing utilities obtain cost recovery only when their transmission plant is placed into service and the costs can be recovered from transmission customers in transmission rates for use of those facilities. Before that point, transmission developers can run into cash flow issues when constructing capital intensive projects with long delays between the investment and the cost recovery. To address this issue, FERC revised its policies to grant public utility transmission providers incentive-based rate treatments to promote capital investment in certain transmission infrastructure. In particular, FERC has allowed for the recovery of 100% of CWIP costs in rate base in certain circumstances, which makes cash flow available to public utility transmission providers prior to when the transmission facilities go into service.
In the NOPR, the Commission proposed to prevent public utility transmission providers from taking advantage of the CWIP incentive for “Long-Term Regional Transmission Facilities” selected in a regional plan for purposes of cost allocation. These facilities are the subset of regional transmission projects selected in the regional transmission plan for purposes of cost allocation through the Commission’s newly proposed long-term regional transmission planning reforms.
FERC is concerned that providing the CWIP incentive for Long-Term Regional Transmission Facilities may shift too much project risk to ratepayers while disproportionately benefitting public utility transmission providers in a manner that would produce rates that are unjust and unreasonable. FERC noted that the CWIP incentive eases financial pressures associated with transmission development by providing up-front regulatory certainty, rate stability, and improved cash flow, which in turn can result in higher credit ratings and lower capital costs. However, FERC explained, ratepayers do not receive benefits from regional transmission facilities while they are under construction, but would be paying for the construction of those facilities under the CWIP incentive. As a result, “[s]hould the regional transmission facilities not be placed in service, then ratepayers will have financed the construction of such facilities that were not used and useful, while ultimately receiving no benefits from such facilities.”
FERC is seeking comment on whether this proposed reform would reasonably balance consumer and investor interests.
Check Power and Pipes for further updates on other key aspects of FERC’s new Transmission NOPR.