Electric Transmission Incentives Policy Under Section 219 of the Federal Power Act

AGENCY:

Federal Energy Regulatory Commission.

ACTION:

Supplemental notice of proposed rulemaking.

SUMMARY:

The Federal Energy Regulatory Commission has proposed in this proceeding to revise its existing regulations that implemented section 219 of the Federal Power Act (FPA) in light of the changes in transmission development and planning over the last few years. This supplemental notice of proposed rulemaking proposes to modify the incentive proposed for transmitting and electric utilities that join Transmission Organizations in the March 20, 2020 notice of proposed rulemaking in this proceeding. In addition, pursuant to FPA section 206, we propose to require each utility that has received an incentive for joining and remaining in a transmission organization for three or more years to submit a compliance filing revising its tariff to remove the incentive from its transmission tariff.

DATES:

Comments are due May 26, 2021. Reply comments are due June 10, 2021.

ADDRESSES:

Comments, identified by docket number, may be filed in the following ways. Electronic filing through http://www.ferc.gov,, is preferred.

• Electronic Filing: Documents must be filed in acceptable native applications and print-to-PDF, but not in scanned or picture format.
• For those unable to file electronically, comments may be filed by USPS mail or by hand (including courier) delivery.

○ Mail via U.S. Postal Service Only: Addressed to: Federal Energy Regulatory Commission, Secretary of the Commission, 888 First Street NE, Washington, DC 20426.

○ Hand (including courier) Delivery: Deliver to: Federal Energy Regulatory Commission, 12225 Wilkins Avenue, Rockville, MD 20852.

The Comment Procedures Section of this document contains more detailed filing procedures.

FOR FURTHER INFORMATION CONTACT:

David Tobenkin (Technical Information), Office of Energy Policy and Innovation, Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, (202) 502-6445, david.tobenkin@ferc.gov

Adam Batenhorst (Legal Information), Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, (202) 502-6150, adam.batenhorst@ferc.gov

Adam Pollock (Technical Information), Office of Energy Market Regulation, Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, (202) 502-8458, adam.pollock@ferc.gov

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

1. In a Notice of Proposed Rulemaking (NOPR) issued pursuant to section 219 of the Federal Power Act (FPA) in this proceeding on March 20, 2020 (March NOPR), the Federal Energy Regulatory Commission (Commission) proposed reforms to revise its existing transmission incentives policy and corresponding regulations (Transmission Incentives Regulations) in light of changes in transmission development and planning in the last few years. In light of the responsive comments in this proceeding, pursuant to our authority under FPA section 219, we issue this Supplemental NOPR to propose and seek comment on a revised proposed incentive for transmitting and electric utilities that join Transmission Organizations (Transmission Organization Incentive). In addition, pursuant to our authority under FPA section 206, we propose to require each utility that has received an incentive for joining and remaining in a Transmission Organization for three or more years to submit a compliance filing revising its tariff to remove the incentive from its transmission tariff. We note that the draft Supplemental NOPR only refines the Transmission Organization Incentive and does not address the other proposals contained in the March NOPR.

II. Background

2. In relevant part, section 219 of the FPA states that the Commission shall, to the extent within its jurisdiction, provide for incentives to each transmitting utility or electric utility that joins a Transmission Organization. As described in more detail in the March NOPR, Order Nos. 679 and 679-A adopted an incentive for utilities that “join and/or continue to be a member of an ISO, RTO, or other Commission-approved Transmission Organization.” While the Commission declined to make a finding on the appropriate size or duration of the incentive in Order No. 679, applicants have subsequently requested a 50-basis-point level for demonstrating they have joined an RTO or ISO, which the Commission has granted without modification.

3. On March 21, 2019, in Docket No. PL19-3-000, the Commission issued a Notice of Inquiry seeking comment on the scope and implementation of its transmission incentives policy under FPA section 219. The Commission posed several questions concerning an incentive for transmitting and electric utilities to join and remain in Transmission Organizations. In the March NOPR, the Commission proposed to revise its Transmission Incentives Regulations to more closely align the policy with the statutory language of FPA section 219 and to reflect changes in the electric industry that have taken place since the issuances of Order Nos. 679 and 679-A. The Commission stated that an increased return on equity (ROE) remained an effective incentive to recognize the benefits, risks, and associated obligations of RTO membership and meet the requirements of FPA section 219(c). The Commission proposed, among other things, to continue to permit transmitting utilities and electric utilities that join an RTO/ISO to recover prudently incurred costs associated with joining the RTO/ISO in their jurisdictional rates.

4. Additionally, the Commission proposed to standardize the RTO-Participation Incentive by doubling the level of the ROE adder that the Commission has commonly awarded as an incentive for electric and transmitting utilities that join and remain in Transmission Organizations, specifying that the level would be 100 basis points. The Commission also proposed to remove the existing requirement for this incentive that recipients participate in Transmission Organizations on a voluntary basis. The Commission proposed to apply the RTO-Participation Incentive prospectively to new applicants and to allow existing Transmission Organization Incentive recipients to increase the ROE level at which they receive this incentive to 100 basis points.

III. Discussion

5. We propose to modify the March NOPR proposal and revise proposed § 35.35(f) of the Commission's regulations to codify the Commission's current practice of granting a standardized 50-basis-point increase in ROE as an incentive-based rate treatment for a transmitting utility that joins and remains in a Transmission Organization and turns over operational control of the applicant's wholesale transmission facilities to the Transmission Organization. Additionally, we propose that this 50-basis-point increase in ROE be available for only the first three years after the transmitting utility transfers operational control of its facilities to the Transmission Organization. Additionally, we propose to adopt the clarification in the March NOPR that, in order to qualify for the Transmission Organization Incentive, the transmitting utility must turn over operational control of its transmission facilities to the Transmission Organization. Finally, we request comment on whether the Transmission Organization Incentive should be available only to transmitting utilities that join a Transmission Organization voluntarily. If so, we seek further comment on how the Commission should apply that standard and, in particular, how the Commission should determine whether a transmitting utility's decision to join a Transmission Organization is voluntary.

A. Incentive for Joining Rather Than Remaining in Transmission Organizations

6. FPA section 219(c) requires that the Commission provide incentives to each transmitting utility or electric utility that joins a Transmission Organization. After review of the comments received in response to the March NOPR, we believe that it is reasonable to read FPA section 219(c) to direct the Commission to provide an incentive for “join[ing]” a Transmission Organization and not for remaining in a Transmission Organization in perpetuity.

7. In response to the 2019 NOI and March NOPR, several commenters suggested that the Commission limit the duration of or phase out the incentive for membership in a Transmission Organization. For example, Alliant states that, if the purpose of the incentive is to incent joining a Transmission Organization, a transmission incentive in perpetuity does not provide benefits commensurate with the intended goal. Joint Commenters question whether continued receipt of the incentive still serves the purpose of inducing a public utility to join, or retain its membership in, a Transmission Organization. Joint Commenters assert that, if the Commission retains the incentive, it should consider phasing out the incentive after a certain number of years of a public utility's membership in a Transmission Organization. New Jersey Agencies state that a sunset period would allow transmission owners to receive an incentive for joining Transmission Organizations, while not overly burdening ratepayers. According to the Connecticut Commission, FPA section 219(c) requires only that the Commission provide for incentives to each transmitting utility or electric utility that joins a Transmission Organization, and does not foreclose a time-limited inducement, or require that any such incentive be perpetual. TAPS similarly argues that FPA section 219(c) narrowly authorizes an incentive for joining a Transmission Organization, and that this incentive should also be limited in duration.

8. Given that the statute only directs an incentive for entities that “join” a Transmission Organization, we believe that the Commission has latitude under the statute to tailor this incentive more narrowly to encourage joining, rather than remaining in, a Transmission Organization. We believe that providing the Transmission Organization incentive indefinitely may not be necessary to incentivize a transmitting utility to join a Transmission Organization and, given the large impact that such an incentive has on ratepayers, may not appropriately balance utility and ratepayer interests, particularly given the substantial benefits of Transmission Organization membership to participating utilities.

9. Accordingly, we propose to modify § 35.35(f) of the Commission's regulations to authorize an ROE adder for a period of three years after a transmitting utility newly joins a Transmission Organization. This three-year period would begin on the date the transmitting utility turns over operational control of its transmission facilities to the Transmission Organization. We propose that this incentive would not be available if the transmitting utility has previously been a member of a Transmission Organization. We further propose that, when a transmitting utility files tariff revisions to its formula or stated rate to implement this incentive, it must include language terminating the incentive three years after the date the transmitting utility turns over operational control of its transmission facilities to the Transmission Organization.

10. We believe that providing the Transmission Organization Incentive to transmitting utilities for a three-year period after they join a Transmission Organization and transfer operational control of their facilities to that organization will appropriately balance the different provisions of FPA section 219. In particular, we believe that providing an additional ROE for a time-limited period will further the purpose of section 219(c) by encouraging Transmission Organization membership and the formation of new Transmission Organizations where they do not currently exist, while ensuring that the resulting rates remain just and reasonable and not unduly discriminatory and preferential as required by section 219(d). This approach appropriately focuses the incentive on the transmitting utility's decision to “join” the Transmission Organization by providing a substantial incentive in the years after a transmitting utility joins a Transmission Organization, while protecting ratepayers by ensuring that the transmitting utility does not continue to collect that incentive long after it has joined the Transmission Organization. However, we seek comment on whether three years or another period is the appropriate duration for this incentive.

11. For similar reasons, we believe that continuing to allow transmitting utilities to retain the existing additional 50-basis-point incentive for joining a Transmission Organization for a period of more than three years may no longer be just and reasonable and may be unduly discriminatory or preferential. Accordingly, pursuant to section 206 of the FPA, we propose that each utility that has previously received an ROE incentive for joining and remaining in a Transmission Organization for three or more years must, within 30 days of the effective date of the final rule, submit a compliance filing removing the incentive from its transmission tariff or, if the transmitting utility joined an Transmission Organization in the previous three years, adding language to its transmission tariff to terminate its incentive three years from the date it turned over operational control of its transmission facilities.

B. Transmission Organization Incentive Level

12. We propose to modify § 35.35(f) of the Commission's regulations to adopt a 50-basis-point ROE adder consistent with Commission precedent, for the three years after the transmitting utility has turned over operational control of its transmission facilities to a Transmission Organization, it will be eligible for an increase in ROE of 50 basis points. We believe that a 50-basis-point Transmission Organization Incentive for three years provides a material incentive to join Transmission Organizations without unduly burdening ratepayers.

13. In the March NOPR, the Commission highlighted the additional duties, responsibilities, and/or risks of Transmission Organization membership as support for the Commission's proposal to increase the incentive from 50 to 100 basis points. While some commenters support this proposal, other commenters suggest that the additional duties, risks, and responsibilities do not justify doubling the amount of the incentive. Other commenters submit that the incentive should be eliminated altogether. We agree with commenters who advise that the benefits of Transmission Organization membership support leaving the incentive offered for joining a Transmission Organization at 50 basis points rather than increasing it.

14. We note that there are many benefits of Transmission Organization membership, and that many of these benefits accrue to transmitting utilities. These benefits include optimization of the transmission system, and regional transmission planning as well as access to numerous types of markets. With respect to the magnitude of the incentive for new members, we propose to find that, although ratepayer benefits and utility risks and responsibilities from Transmission Organization participation have increased since the issuance of Order No. 679, benefits to transmission owners, including access to more developed organized markets, have increased as well, such that 50 basis points, and not 100 basis points, as proposed in the March NOPR, continues to appropriately correspond to the benefits of utilities joining Transmission Organizations. Additionally, as commenters point out, the actual amount of this incentive has increased, as the rate base for most transmitting utilities have risen considerably during this period. Correspondingly, the value of the incentive for potential new members has and will continue to increase. Given the transmission investments made since Order No. 679, we believe that the dollar impact of the Transmission Organization Incentive will continue to increase correspondingly, as will the other benefits accruing to transmission owners joining Transmission Organizations that we describe above. Thus, upon reconsideration, we do not believe it is necessary to increase the Transmission Organization Incentive to 100 basis points.

15. In Order No. 679, the Commission declined to make a finding on the appropriate size or duration of the incentive for joining a Transmission Organization. Nevertheless, entities seeking to join a Transmission Organization have subsequently requested a uniform, 50-basis-point level ROE adder for demonstrating they have joined a Transmission Organization, which the Commission has granted without modification. We have found in practice no reason to vary the size of this incentive and believe that there is no compelling reason to potentially vary on a case-by-case basis the level of the Transmission Organization Incentive. Codifying that 50-basis-point level ROE adder for the Transmission Organization Incentive will provide financial certainty for developers and potential third-party sources of capital funding for transmission projects, increase transparency regarding the size and duration of this incentive, and reduce the administrative burden of the application process for applicants and commenters. We believe that this proposed incentive level appropriately balances encouraging transmission owners to join Transmission Organizations with ratepayer considerations. We seek comment on whether 50 basis points is the appropriate level for this incentive.

16. Finally, FPA section 219(c) does not specify the form of the incentive for utilities that join a Transmission Organization. As such, we request comment as to whether there are alternative, non-ROE incentives that are more appropriate for the Transmission Organization Incentive.

C. Voluntariness

17. The Commission proposed in the March NOPR that transmitting or electric utilities that join and remain enrolled in a Transmission Organization are eligible for the Transmission Organization Incentive regardless of the voluntariness of their participation in the Transmission Organization. As stated in the March NOPR, FPA section 219(c) obligates the Commission to provide for incentives to each transmitting utility or electric utility that joins a Transmission Organization and is silent about the obligation to do so. Furthermore, the Commission noted that the issue of whether Transmission Organization membership is voluntary for certain transmitting utilities within Transmission Organizations has become subject to challenges at the Commission and litigation in federal courts.

18. We note that multiple commenters suggest that the Commission offer an incentive only for utilities that join a Transmission Organization voluntarily and not for ones that are required to join or remain in an Transmission Organization by state law or other obligations. Commenters argue that state laws, or other obligations, advance the Commission's goals of Transmission Organization membership and the purpose of FPA section 219(c). Commenters also argue that awarding incentives for voluntary conduct is consistent with the Commission's policy of not rewarding past behavior. Moreover, certain commenters state that courts favor or require that incentives be voluntary, and assert that the Commission should therefore not adopt a policy to grant the incentive for conduct that is already required. Furthermore, many commenters state that the RTO-Participation Incentive proposal in the March NOPR directly contravenes CPUC v. FERC, which stated “[a]n incentive cannot `induce' behavior that is already legally mandated.”

19. Removing the voluntariness requirement, as proposed in the March NOPR, is not the only way that the Commission could reduce uncertainty regarding the application of a voluntariness requirement to individual transmitting or electric utilities. Rather, the Commission could retain Order No. 679's voluntariness requirement, add it to the Transmission Incentives Regulations, and clarify this requirement by providing guidance on the circumstances that would make participation voluntary. Accordingly, we request comment on whether the Transmission Organization Incentive should be available only to transmitting utilities that join a Transmission Organization voluntarily. If so, we seek further comment on how the Commission should apply that standard and, in particular, how the Commission should determine whether a transmitting utility's decision to join a Transmission Organization is voluntary. We also seek comment on whether the Transmission Organization Incentive should include an exception or exceptions to a voluntariness requirement and the demonstration necessary to qualify for the exception by an applicant. For example, should the Commission allow an applicant to seek the Transmission Organization Incentive where states and/or other relevant electric retail regulatory authorities support receipt of such an incentive by the transmitting utility even though participation in the Transmission Organization is mandated by the state and/or other relevant electric retail regulatory authority? If the Commission adopts an exception or exceptions to a voluntariness requirement, how would an applicant show that it meets the exception or exceptions?

D. Miscellaneous

20. We propose to revise § 35.35(f) of our regulations to provide that the transmitting utility is only eligible for the Transmission Organization Incentive if it has not previously been a member of a Transmission Organization. We intend for the Transmission Organization Incentive to encourage transmitting and electric utilities to join Transmission Organizations, not to incent such utilities to change membership between Transmission Organizations or to alter their ownership structures. Allowing a utility that changes Transmission Organizations to extend the Transmission Organization Incentive or receive a new Transmission Organization Incentive would impose costs to ratepayers from integration and exit costs of leaving and joining Transmission Organizations without providing material benefits.

21. Further, to implement the proposed three year period for the Transmission Organization Incentive in § 35.35(f) of the Commission's regulations, we also propose that a transmitting or electric utility may not receive a Transmission Organization Incentive for transmission plant if the asset was already under the operational control of a Transmission Organization, whether as part of an affiliate or a separate owner. Allowing a transmitting or electric utility to receive an incentive for such assets would unduly extend the duration of the incentive and would encourage sales or corporate restructuring of transmission assets for the sake of the incentive, which would not benefit ratepayers. Accordingly, we seek comment on whether, and, if so, what restrictions the Commission should impose on incentive eligibility based on sales/affiliate corporate restructurings or for transmission plant constructed by new affiliates. In particular, we request comment on whether new utility affiliates that build transmission, either within or outside of the service territory of existing operating companies, should be eligible for the Transmission Organization Incentive.

IV. Information Collection Statement

22. The information collection requirements contained in this Supplemental NOPR are subject to review by the Office of Management and Budget (OMB) under section 3507(d) of the Paperwork Reduction Act of 1995. OMB's regulations require approval of certain information collection requirements imposed by agency rules (including reporting, record keeping, and public disclosure requirements). Upon approval of a collection of information, OMB will assign an OMB control number and expiration date. Respondents subject to the filing requirements of this rule will not be penalized for failing to respond to the collection of information unless the collection of information displays a valid OMB control number. The following discussion describes and analyzes the collection of information proposed to be modified by this Supplemental NOPR.

23. The Commission solicits comments on the Commission's need for the proposed information collection in this Supplemental NOPR which would revise the Commission's regulations and policy with respect to the mechanics and implementation of the Commission's transmission incentives policy; and with respect to the metrics for evaluating the effectiveness of incentives. All burden estimates for the proposed information collection is discussed in this Supplemental NOPR. These provisions would affect the following information: FERC-516, Electric Rate Schedules and Tariff Filings (OMB Control No. 1902-0096).

24. Interested persons may obtain information on the reporting requirements by contacting Ellen Brown, Office of the Executive Director, Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426 (via email DataClearance@ferc.gov or telephone (202) 502-8663).

25. The Commission solicits comments on the Commission's need for this information, whether the information will have practical utility, the accuracy of the burden estimates, ways to enhance the quality, utility, and clarity of the information to be collected or retained, and any suggested methods for minimizing respondents' burden, including the use of automated information techniques.

26. Send written comments on FERC-516 to the Office of Management and Budget (OMB) through www.reginfo.gov/public/do/PRAMain,, Attention: Federal Energy Regulatory Commission Desk Officer. Please identify the OMB control number (1902-0096) in the subject line. Your comments should be sent within 30 days of publication of this notice in the Federal Register. OMB submissions must be formatted and filed in accordance with submission guidelines at www.reginfo.gov/public/do/PRAMain;; Using the search function under the “Currently Under Review field,” select Federal Energy Regulatory Commission; click “submit” and select “comment” to the right of the subject collection.

27. Title: FERC-516, Electric Rate Schedules and Tariff Filings.

28. Action: Proposed revision of collection of information in accordance with RM20-10-000.

29. OMB Control No.: 1902-0096 (FERC-516).

30. Respondents for this Rulemaking: Transmitting utilities for which the Commission has granted incentive-based rate treatment for joining Transmission Organizations.

31. Frequency of Information Collection: One time for transmitting utilities for which the Commission has granted incentive-based rate treatment for joining Transmission Organizations.

32. Necessity of Information: Required to determine whether the transmitting utilities who have received the Transmission Organization Incentive for three years have updated their rates to remove the benefit, as described in this NOPR.

33. Internal Review: The Commission has reviewed the changes and has determined that such changes are necessary. These requirements conform to the Commission's need for efficient information collection, communication, and management within the energy industry. The Commission has specific, objective support for the burden estimates associated with the information collection requirements.

34. The Commission estimates that no more than 190 transmitting utilities currently receive a 50-basis-point ROE incentive for membership in a Transmission Organization.⁴¹ The Commission estimates that the NOPR would affect the burden ⁴² and cost ⁴³ of FERC-516 as follows:

35. We seek comments on the estimated burden and the number of transmission owners affected by the proposed changes.

V. Environmental Analysis

36. The Commission is required to prepare an Environmental Assessment or an Environmental Impact Statement for any action that may have a significant adverse effect on the human environment. We conclude that neither an Environmental Assessment nor an Environmental Impact Statement is required for this Supplemental NOPR under § 380.4(a)(15) of the Commission's regulations, which provides a categorical exemption for approval of actions under sections 205 and 206 of the FPA relating to the filing of schedules containing all rates and charges for the transmission or sale of electric energy subject to the Commission's jurisdiction, plus the classification, practices, contracts, and regulations that affect rates, charges, classification, and services.

VI. Regulatory Flexibility Act

37. The Regulatory Flexibility Act of 1980 generally requires a description and analysis of proposed and final rules that will have significant economic impact on a substantial number of small entities. The RFA mandates consideration of regulatory alternatives that accomplish the stated objectives of a proposed rule and minimize any significant economic impact on a substantial number of small entities. The Small Business Administration (SBA) sets the threshold for what constitutes a small business. Under SBA's size standards, transmission owners fall under the category of Electric Bulk Power Transmission and Control (NAICS code 221121), with a size threshold of 500 employees (including the entity and its associates).

38. We estimate that 190 transmitting utilities are affected by the NOPR. We estimate that approximately 87.5% (or approximately 166 transmitting utilities) of those 190 entities are small entities, according to information collected from the websites of the six RTOs/ISOs. We estimate additional one-time costs associated with the NOPR (as shown in the table in paragraph 34) of: $6,640 each for the 190 filers (transmitting utilities in RTOs/ISOs) of FERC-516. According to SBA guidance, the determination of significance of impact “should be seen as relative to the size of the business, the size of the competitor's business, and the impact the regulation has on larger competitors.” We do not consider the estimated cost to be a significant economic impact. As a result, pursuant to section 605(b) of the RFA, the Commission certifies that the proposals in this Supplemental NOPR will not have a significant economic impact on a substantial number of small entities.

VII. Comment Procedures

39. The Commission invites interested persons to submit comments on the matters and issues proposed in this notice to be adopted, including any related matters or alternative proposals that commenters may wish to discuss. Comments are due May 26, 2021. Reply comments are due June 10, 2021. Comments must refer to Docket No. RM20-10-000, and must include the commenter's name, the organization it represents, if applicable, and its address in its comments. All comments will be placed in the Commission's public files and may be viewed, printed, or downloaded remotely as described in the Document Availability section below. Commenters on this proposal are not required to serve copies of their comments on other commenters.

40. The Commission encourages comments to be filed electronically via the eFiling link on the Commission's website at http://www.ferc.gov. The Commission accepts most standard word processing formats. Documents created electronically using word processing software should be filed in native applications or print-to-PDF format and not in a scanned format. Commenters filing electronically do not need to make a paper filing.

41. Commenters that are not able to file comments electronically must send an original of their comments to: Federal Energy Regulatory Commission, Secretary of the Commission, 888 First Street NE, Washington, DC 20426. Submission of filings other than by USPS should be delivered to: Federal Energy Regulatory Commission, 12225 Wilkins Avenue, Rockville, MD 20852.

VIII. Document Availability

42. In addition to publishing the full text of this document in the Federal Register, the Commission provides all interested persons an opportunity to view and/or print the contents of this document via the internet through the Commission's Home Page ( http://www.ferc.gov ). At this time, the Commission has suspended access to the Commission's Public Reference Room due to the President's March 13, 2020 proclamation declaring a National Emergency concerning the Novel Coronavirus Disease (COVID-19).

43. From the Commission's Home Page on the internet, this information is available on eLibrary. The full text of this document is available on eLibrary in PDF and Microsoft Word format for viewing, printing, and/or downloading. To access this document in eLibrary, type the docket number excluding the last three digits of this document in the docket number field.

44. User assistance is available for eLibrary and the Commission's website during normal business hours from the Commission's Online Support at (202) 502-6652 (toll free at 1-866-208-3676) or email at ferconlinesupport@ferc.gov, or the Public Reference Room at (202) 502-8371, TTY (202) 502-8659. Email the Public Reference Room at public.referenceroom@ferc.gov.

List of Subjects in 18 CFR Part 35

• Electric power rates
• Electric utilities
• Reporting and recordkeeping requirements

By direction of the Commission. Commissioner Chatterjee is dissenting with a separate statement attached.

Commissioner Danly is dissenting with a separate statement attached.

Commissioner Christie is concurring with a separate statement attached.

In consideration of the foregoing, the Commission proposes to amend part 35, chapter I, title 18, Code of Federal Regulations, as follows.

Subpart G—Transmission Infrastructure Investment Provisions

1. The authority citation for subpart G continues to read as follows:

Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 41 U.S.C. 7101-7352.

2. In § 35.35(f) is revised to read:

Neil Chatterjee,

Commissioner.

Department of Energy

Federal Energy Regulatory Commission

Electric Transmission Incentives Policy Under Section 219 of the Federal Power Act

DANLY, Commissioner, dissenting:

1. That “that” is a word that the English language overtasks and that leads to confusion cannot be disputed. But “that” does not mean “to,” and that is what the majority freights “that” with in this order. That is why I dissent.

2. Section 219(c) of the Federal Power Act provides that “the Commission shall . . . provide for incentives to each transmitting utility or electric utility that joins a Transmission Organization.” And this is what the Commission has done since this text was added to the Federal Power Act in 2005, providing a 50-basis-point adder to the return on equity of transmission utilities in Regional Transmission Organizations (RTO). These incentives do not expire unless the transmission utility leaves the RTO.

3. The majority, however, states that it now “believe[s] that it is reasonable to read FPA section 219(c) to direct the Commission to provide an incentive for `join[ing]' a Transmission Organization and not for remaining in a Transmission Organization in perpetuity.” The incentive, therefore, would be limited to “each transmitting utility or electric utility to join[ ] a Transmission Organization” and the incentive would expire after three years. I disagree because that is not what the statute says.

4. First, the Commission's new belief contradicts fourteen years of precedent interpreting unchanged statutory text.

5. Second, the Commission's consistent interpretation of the statute since its inception is correct. The Commission is to provide incentives to a utility “that joins” an RTO. The statute does not limit the incentive solely to encourage utilities “to join” an RTO; it does not address the issue of whether they “remain” in the RTO. If Congress intended the RTO adder to only apply as an incentive “to join” an RTO, it would have said so. It did not. The statute requires incentives to an entity “that joins” an RTO, full stop, no limitation.

6. It is not our role to second guess Congress. It is irrelevant whether the majority “believes” the RTO adder is no longer necessary as an incentive for a utility “that joins” an RTO to stay in the RTO. If the majority or anyone else has a problem with the statute, their sole recourse is through Congress.

7. Just as the statutory text is not limited to an incentive for a utility “to join” an RTO, it also is not limited to a utility that “voluntarily” joins a Transmission Organization. That word does not appear in the statute. I oppose inserting this further limitation into the statutory text.

8. The majority also fails to consider the effects of its proposed change on utilities that have not yet joined an RTO. There are large portions of the country that have no RTO. Recent events suggest that utilities in these regions are contemplating joining an existing RTO or forming a new one. The Commission should be taking actions to encourage such decisions. Instead, we are proposing to reduce the benefits to utilities that join RTOs based on a strained, erroneous interpretation of the statute. Utilities considering RTO participation are sure to take note not only of the reduction in benefits attendant to RTO participation that the Commission proposes today, but also of the Commission's willingness to take extraordinary steps to reduce those benefits. This is not the signal we should be sending to utilities that, to date, have resisted RTO participation.

9. For similar reasons, I support a 100-basis point adder to a utility “that joins” an RTO. RTOs provide enormous cost benefits to consumers. We should continue to provide strong incentives to utilities to join and to remain in RTOs so that consumers can reap the cost benefits of power markets. That is what the statute requires, and I would strengthen these incentives for any utility “that joins” an RTO.

For these reasons, I respectfully dissent.

James P. Danly,

Commissioner.

Department of Energy

Federal Energy Regulatory Commission

Electric Transmission Incentives Policy Under Section 219 of the Federal Power Act

CHRISTIE, Commissioner, concurring:

1. I concur with today's supplemental Notice of Proposed Rulemaking (NOPR) because it moves in the right direction. I write separately, however, to explain my reasons.

2. The Commission has previously enumerated the benefits of RTO/ISO participation to both public utilities and consumers, so the costs and benefits of such membership are not at issue here. At a time, however, when transmission costs are already a significant and rising part of consumers' retail bills, ROE adders needlessly burden consumers with substantial additional costs without demonstrable evidence that they actually incentivize the particular action they are aimed at incentivizing.

3. Given the state of play today, I agree with certain commenters that the RTO adder “provides an unnecessary windfall [with] no nexus to public utilities' decisions to join or remain in an RTO.” It may also be the case that such adders are duplicative of other Commission incentives already granted to public utilities by virtue of their participation in an RTO/ISO.

4. It bears repeating that while section 219 of the Federal Power Act (FPA) requires the Commission to provide certain incentives—such as an incentive for joining an RTO/ISO—it also requires that resulting rates continue to be just and reasonable. As noted by the Delaware Division of Public Advocate and the Office of the People's Counsel for of the District of Columbia, “Congress did not intend for [FPA section 219], or the rules promulgated pursuant to it, to unjustly enrich utilities and RTO members at the customers' expense.” I agree.

5. I also agree with the supplemental NOPR's conclusion that section 219 of the FPA does not require an incentive for RTO/ISO participation to take the form of an ROE adder and with its request for commenters to propose alternative, non-ROE incentives that would qualify under section 219. Since the FPA does not require the award of ROE adders in this instance, I believe their use should be the subject of reassessment. I also share the concern previously expressed by Chairman Glick regarding “gratuitous handouts at customers' expense. . . .”

6. In addition to the obvious impact on consumer costs, the broader reason for this need for reassessment goes to the very purpose of utility regulation. Utility regulation developed for one primary purpose: To protect captive customers of utility monopolies from the exercise of market power which monopolies, by definition, have and will exercise. Market power is, of course, the ability of a seller to charge and sustain a price above the price it could charge in a competitive market, resulting in an unfair and uneconomic transfer of wealth from captive customers to the monopoly (or near-monopoly).

7. So, utility regulation developed the cost-of-service model, which tries to duplicate the results of a competitive market where there is none. This is a challenge that one of my law students once described as trying to paint a rainbow. The painting will never be a rainbow, but you want to come as close as possible.

8. One of the most important costs that utilities are allowed to recover in cost-of-service regulation is the cost of capital, which consists of the cost of debt and the cost of equity. The cost of equity is ROE. The Supreme Court of the United States set forth the constitutional standard for determining ROE in its workhorse case of Bluefield Water Works v. Public Service Commission of West Virginia. The Court said, in a standard still in use today, that investors in a utility company had a right to a return that is:

equal to that generally being made at the same time and in the same region of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties, but [a public utility] has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures.

9. Utility regulators, in setting an ROE, attempt to set the ROE based on the actual market for equity capital, taking into account, under the Bluefield standard, the level of risk faced by investors in a company that has a monopoly on a vital public service versus the level of risk undertaken by investors in a company in a fiercely competitive market. In the latter case, investors have no guarantee of receiving a single dollar of profit on their invested capital. Further, for riskier ventures in the energy sector, such as certificated facilities that face significant costs during the development phase, those risks can be factored into the determination of the actual cost of equity capital. Not all utilities face the same risks in each case.

10. That is all to say, setting the ROE is a fact-intensive inquiry that requires the regulator's best effort at determining the actual market cost of equity capital for investments of similar risk. Once it's set, however, adding basis points to the ROE makes the regulator not the guardian against market power, but the facilitator of it. For by definition, an ROE adder raises the cost of capital above the market cost, inflicting on consumers exactly the harm that utility regulation is supposed to prevent. In sum, an ROE adder is a subsidy.

11. As a result, absent a clear declaration from Congress that a FERC-authorized incentive must take the form of an ROE adder—which it did not require for RTO participation incentives—awarding an ROE adder for any length of time as a “reward” for joining an RTO/ISO may be inconsistent with FPA section 219's concurrent mandate that rates must be just and reasonable and not unduly discriminatory or preferential.

12. Because this supplemental NOPR proposes to limit the use of ROE adders for RTO/ISO membership to three years after joining—a welcome first move—I respectfully concur. I look forward, however, to commenters' responses regarding non-ROE incentives.

For these reasons, I respectfully concur.

Mark C. Christie,

Commissioner.