State utility regulators in MISO and PJM have voiced concerns that FERC’s proposed changes to transmission rate-setting could drive up costs while hampering development of more efficient non-transmission alternatives.
In separate letters last month, the Organization of MISO States and the Organization of PJM States Inc. urged the commission to examine whether current return on equity incentives on top of a new base ROE will result in excessive customer costs.
FERC in October signaled it will allow changes to how transmission owners set ROE rates, no longer relying solely on the discounted cash flow (DCF) model it has used for about four decades. Instead, it will rely equally on results from the DCF and three other techniques: the capital asset pricing model, the expected earnings model and the risk premium model. (See FERC Changing ROE Rules; Higher Rates Likely.)
The changes come in response to a D.C. Circuit Court of Appeals 2017 ruling vacating Opinion 531, FERC’s 2014 order on New England TOs’ ROE rates. The new policy would evaluate and incorporate industry-wide risk into ROE estimates — and likely raise rates.
In its Dec. 19 letter, OMS urged the commission to “balance the authorization of sufficient rates of return to encourage the investment on needed transmission against concerns about excessive costs to customers.”
ROE incentives on top of the base ROE should be “targeted and exceptional,” OMS wrote in the letter, signed by board President Ted Thomas, chairman of the Arkansas Public Service Commission.
“Supporters have concerns that at least some incentive adders have become overly generous and do not change or incent the intended behavior on the part of the transmission owners, resulting in excessive costs to customers. Ineffective adders may also be an unintended disincentive to development of non-transmission alternative solutions for reliability and congestion concerns,” OMS said.
Following OMS’s letter, OPSI on Dec. 28 also cautioned the commission that ROE incentives may become too generous under the new ROE. The organization said FERC should be careful to craft ROE incentives that are “truly merited.”
“OPSI has concerns that at least some incentive adders have become overly generous and do not change or incent the intended behavior on the part of the transmission owners, resulting in excessive costs to customers. Such adders may also be an unintended disincentive to development of non-transmission alternative solutions for reliability and congestion concerns,” the organization said.
RTO Adder ‘Questionable’
Both organizations singled out FERC’s 50-basis point adder incentive for RTO participation. OMS said the adder is of “particular concern and warrants scrutiny by FERC,” noting it’s worried the adder “will last in perpetuity.”
“[T]he landscape has changed drastically since 2006 when these adders were first initiated. After more than 15 years of experience with RTOs, the resulting benefits to utility members are now better understood. RTOs are no longer a new policy experiment. Moreover, transmission owners may no longer need an additional incentive adder to simply join an RTO,” OMS said.
OMS also pointed out that FERC over the years has provided other regulatory mechanisms such as formula rates, projected revenue requirements — trued up to reflect under-recovery — abandoned plant and construction work in progress, “all of which reduce transmission owners’ risk.” The group said the mechanisms “should be carefully examined in the context of this and other ROE incentives.”
OPSI called the RTO adder “questionable” since the benefits of RTO participation are now well understood.
OPSI recommended FERC open a notice of inquiry on the ROE issues “for the purpose of examining not only policy around the application of new incentive requests, but also the ability of existing incentives to achieve desired outcomes.”
OMS likewise requested a review of ROE incentive policy “to ensure that customers pay no more than is necessary to develop and to maintain a reliable and efficient transmission grid.”
OMS has previously expressed concern about whether it would be able to contribute its views to the New England ROE docket.
“You have these pretty impactful policy discussions taking place … and it’s not a docket that we are party to,” former OMS Executive Director Tanya Paslawski said during the organization’s Oct. 29 annual meeting.