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Tuesday, November 15, 2011

Regulatory Incentives for Electricity Transmissions—Issues and Cost Concerns

Richard J. Campbell
Specialist in Energy Policy

Following the August 14, 2003, electric grid blackout which affected large portions of the Northeast United States and Ontario, Canada, Congress acted to promote investment in the nation’s electrical grid to increase the system’s capacity and efficiency. Inadequacies of an antiquated transmission system were blamed for the 2003 blackout. The Energy Policy Act of 2005 (P.L. 109-58) (EPACT) directed the Federal Energy Regulatory Commission (FERC) to hold a rulemaking on incentive rates for construction of critical electric transmission infrastructure “for the purpose of benefitting consumers by ensuring reliability and reducing the cost of delivered power by reducing transmission congestion.” The Final Rule was issued in July 2006 with FERC Order No. 679, “Promoting Transmission Investment through Pricing Reform.” EPACT Section 219 stipulates that “all rates, charges, terms, and conditions be just and reasonable, and not unduly discriminatory or preferential.” FERC reviews the requested incentives under Section 219 to ensure that these are matched to risks and challenges of the proposed investment.

On May 19, 2011, FERC released a Notice of Inquiry (NOI) on the “scope and implementation of its transmission incentives regulations and policies” in Order No. 679. In the NOI, FERC notes that there have been “significant changes in the electric industry,” and it now seeks comments regarding the scope and implementation of its incentives program. FERC states in the NOI that more than 75 FERC applications have been received since the Final Rule was issued, with over $50 billion in proposed investments. As comments by some FERC Commissioners note, increases in transmission rates are “sometimes perceived” to be caused by return-on-equity (ROE) incentive adders. However, FERC’s codification of Section 219(a) changes EPACT’s language to “either ensure reliability or reduce the cost” which can potentially lead to cost increases (especially for reliability-specific projects).

FERC is not required to track or report to Congress on the status of transmission incentives, nor is FERC required to make any determination of the “effectiveness” of these incentives to cause the construction of new transmission facilities. Such a determination is thus beyond the scope of the NOI. In comments submitted to the NOI, the Edison Electric Institute (EEI) stated its opinion that Order No. 679 transmission incentives will provide “regulatory certainty,” and are “supporting the development of transmission.” EEI further notes that while not conclusive, industry data suggest that Order No. 679 incentives have had a “positive impact” on transmission investment in many regions. However, EEI’s own analysis arguably shows a decade-long trend of increasing transmission investment by the industry may have occurred without Order No.679’s transmission incentives.

Going forward, FERC appears to have regulatory discretion with regard to establishing criteria for project approvals, but has declined to do so on the grounds “that to do so now would limit the flexibility of the Rule.” FERC may or may not revisit this decision as a result of its consideration of comments submitted to the NOI. Expectations have been raised as to the large dollar investment possible over the next two decades in transmission systems alone, with one estimate from the electricity industry suggesting $298 billion will be required to meet future electricity demand. However, with the concerns raised over the effects of transmission incentives on consumer rates (especially incentives granting higher ROE incentives to applicants), implications of related federal policies on the electric power sector, additional FERC regulatory policies for transmission, and the aging of electricity infrastructure among key issues, the need for continuing transmission incentives may be a matter for Congress to consider.

Date of Report: October 28, 2011
Number of Pages: 18
Order Number: R42068
Price: $29.95

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