ROE Adders for Transmission Only Companies: This incentive adds 50 points to a transmission company's return on equity. In people-speak, that equates to an additional half a percent of interest on a company's rate base. Rate base is the cost of projects that have not yet been repaid by consumers. When a project is completed, its total cost goes into the rate base and it is repaid to the transmission owner over the useful life of the asset (approximately 40 years for transmission). With transmission projects costing multiple billions, that extra half a percent interest on a balance that slowly depreciates over 40 years can add up to big bucks. So, the Commission wanted to give an incentive to independent transmission owners, who perhaps it felt needed a leg up to compete with incumbent utilities. Independent transcos also should not have any interest in generation or distribution companies that may cloud their thinking about what to build, nor compete for parent company investment dollars. Sounds good on the surface, but guess what happened when FERC put this into practice? Suddenly all the incumbents created spin-off companies that were supposedly "independent" in order to win that extra interest. These spin-offs enjoy parent company benefits, such as being able to borrow money at a low rate to finance the project, then collect extra interest on their borrowed "equity." If a parent can borrow at 3%, then use that money to inject "equity" into their transmission-only spin-off, they can earn maybe 10% (or more) on that money, while only having to re-pay the loan at 3%. That extra 7% is gravy for the parent company.
Q 57) Does the Transco business model continue to provide sufficient benefits to merit transmission incentives? What information should an entity seeking a Transco incentive provide to demonstrate sufficient benefits?
Q 58) Should the Transco incentive remain available to Transcos that are affiliated with a market participant? If so, how should the Commission evaluate whether a Transco is sufficiently independent to merit an incentive?
Q 59) Should a Transco incentive be awarded on a project-by-project basis?
Q 60) Should the Transco incentive exclude assets that a Transco buys, rather than develops?
Q 61) Should the Commission revise the RTO-participation incentive?
Q 62) Should the Commission consider providing incentives other than ROE adders for utilities that join RTO/ISOs, such as the automatic provision of CWIP in rate base or the abandoned plant incentive for all transmission-owning members of an RTO/ISO? If so, what other types of incentives would be appropriate?
Q 63) If the Commission continues to provide ROE adders for RTO/ISO participation, what is an appropriate level for an ROE adder?
Q 64) Should the RTO-participation incentive be awarded for a fixed period of time after a transmission owner joins an RTO or ISO?
Q 65) Should the RTO-participation adder be awarded on a project-specific basis?
Q 66) In Order No. 679, the Commission found that “the basis for the incentive is a recognition that benefits flow from membership in such organizations and the fact that continuing membership is generally voluntary.” Should voluntary participation remain a requirement for receiving RTO/ISO incentives?
Q 67) Why have few transmission developers sought transmission incentives for the adoption of advanced technology?
Q 68) Do NERC reliability standards affect the willingness of transmission developers to enhance existing transmission facilities by deploying new technologies because of concerns these technologies may increase the risk of standards violations?
Q 69) Are there any types of transmission incentives that could better encourage deployment of new technologies? If so, please describe them.
FERC's jammed several things into a topic called "Regulatory Asset/Deferred Recovery of Pre-Commercial Costs and CWIP". Pre-Commercial costs consist of a company's expenses that happen before FERC grants incentives and recovery of a transmission project's costs. So, that could include everything from the moment some transmission genius rolls out of bed with an idea for a new transmission proposal, and FERC rate approval (including all costs to seek that approval in the first place). This incentive allows the company to recover all these costs, plus interest, from consumers, generally over the first 5 years of rate recovery.
CWIP stands for "Construction Work In Progress," which is basically a holding account for the capital costs of building a transmission project. FERC's CWIP in Rate Base incentive allows the company to include its CWIP account in the Rate Base number upon which it earns a yearly return. Even though a transmission project has not yet been built, or completed, a company can earn a return on its investment. CWIP doesn't depreciate because the project has not yet gone in service, so this balance continually builds until the project's in service date, then it begins depreciating.
It's helpful to think of transmission finance sort of like a home mortgage you're familiar with. ROE is interest, and depreciation is principal. You pay interest for 30 years while your principal is slowly paid off during the term of the loan.
FERC doesn't ask many questions about these combined incentives... perhaps because they don't intend to change them at all, just expand them?
Q 70) Should the Commission continue to provide regulatory asset treatment and CWIP as incentives? Should these incentives be granted automatically to certain types of transmission projects? If so, how would the Commission determine what types of transmission projects?
Q 71) Should the costs of unsuccessful Order No. 1000 proposals be recoverable through regulatory asset and deferred pre-commercial cost recovery incentives? If so, what costs are appropriate for recovery?
Q 72) Should the Commission continue to utilize hypothetical capital structures as a transmission incentive? If so, what entities should be eligible to apply for a hypothetical capital structure?
Q 73) Have hypothetical capital structures been effective in reducing the overall cost of debt by rendering the capital structure more predictable? Q 74) In what circumstances, if any, should hypothetical capital structure incentives granted to an entity also be authorized for that entity’s yet-to-be formed affiliates?
Q 75) Under what circumstances, if any, should hypothetical capital structures extend beyond the construction period?
Q 76) Should the Commission provide a consistent hypothetical structure (e.g., 50 percent debt and 50 percent equity)? Alternatively, should the Commission cap the equity percentage at some upper limit (e.g., 50 percent)?
Q 77) Should the Commission grant the abandoned plant incentive automatically, rather than on a case-by-case basis? Under what circumstances might an automatic award of the abandoned plant incentive be appropriate?
Q 78) How, if at all, could the Commission grant the abandoned plant incentive without encouraging transmission developers to pursue unnecessarily risky transmission projects or take unnecessary risks in transmission development? Could such behavior be reduced if the developer shared some risk associated with the abandonment, e.g., 10 percent of abandonment costs? If so, what level of developer risk is appropriate?
Q 79) How should the Commission evaluate whether the costs of an abandoned facility were prudently incurred?
Q 80) Should the Commission continue to consider accelerated depreciation as an incentive?
Q 81) Does the accelerated deprecation incentive provide meaningful benefits to transmission developers?
Q 82) Should the Commission grant an accelerated depreciation incentive with a generic depreciation period or continue to determine such a period on a case-by-case basis?