On October 14, 2011, the Federal Energy Regulatory Commission ("FERC") issued an order approving in part and rejecting in part the rate incentives sought by RITELine Illinois, LLC and RITELine Indiana, LLC (jointly, the "RITELine Companies") for their Reliability Interregional Transmission Extension Project ("RITELine Project"), a proposed 420-mile, 765 kV electric transmission project designed to serve new wind generation resources that would extend from the Indiana/Ohio border, through Indiana, and into Illinois. In a strongly worded dissent, Commissioner Philip Moeler complained that "[n]ow is not the time for this Commission to begin retreating from its incentive policy on needed transmission lines." This Client Update summarizes the salient aspects of FERC's order that may be of concern to anyone developing an electric transmission project.
Eligibility for Incentive Rate Treatment
FERC noted that the RITELine Project is not entitled to FERC's rebuttal presumption that the project satisfies the incentive rate eligibility requirement under Section 219 of the Federal Power Act ("FPA") because the project has not been approved in PJM Interconnection's ("PJM") regional planning process and has not received siting approval from the state siting authorities. FERC further determined that RITELine failed to adequately demonstrate that it would ensure reliability or reduce delivered power costs by reducing congestion because:
Nonetheless, FERC approved incentive rate treatment for the project, but it was conditioned upon the RITELine Project being included in PJM's RTEP as a project that will ensure reliability or reduce the cost of delivered power by reducing congestion.
Order No. 679 Nexus Requirement
FERC found that the RITELine Companies met the Order No. 679 test for sufficiently demonstrating a nexus between the substantial risks and challenges that they are undertaking and the incentives requested. FERC highlighted the RITELine Project's size and $1.6 billion cost, the fact that it would permit the integration of approximately 5,000 MW of new wind generation, the risks attributable to the lack of a formal siting process in Indiana and the risks and challenges involved in using advanced technologies, including:
Return on Equity Adders
FERC granted the RITELine Companies their requested 50-basis-point adder for transferring functional control to PJM, subject to (i) the RITELine Project being included in PJM's RTEP; (ii) the RITELine Companies taking all necessary steps to grant operational control to PJM; and (iii) the RITELine Companies becoming Participating Transmission Owners in PJM.
FERC denied the RITELine Companies their requested 50-basis-point adder for the use of an advanced technology, i.e., their planned use of a six-conductor bundle in connection with trapezoidal stranded conducts. FERC noted that each of these technologies have been in use for some time and held that the RITELine Companies failed to show that using the two technologies in combination is sufficiently novel or innovative to warrant a separate return on equity adder.
Finally, FERC granted two-thirds of the 150-basis point adder that the RITELine Companies requested based on the risks and challenges associated with investing in the project. FERC recounted all the risks and challenges noted in the above-described nexus analysis but reduced this adder to 100 basis points, stating that "We find that granting 100 basis points is just and reasonable in light of the other incentives that the Commission is conditionally granting the RITELine Companies herein, some of which reduce certain financial and regulatory risks that the RITELine Companies cite as support for a 150-basis-point incentive ROE adder." FERC also accepted the RITELine Companies' proposal that this adder not apply to cost overruns that are unrelated to either siting or changes required by PJM.
Return on Equity ("ROE")
FERC reduced the RITELine Companies' proposed base ROE from 10.7 percent to 9.93 percent. FERC held that in applying a discounted cash flow ("DCF") methodology to the proxy group, the RITELine Companies failed to comply with FERC policy requiring that they eliminate both the low-end cost of equity for PPL Corporation and the corresponding high-end ROE for that company. FERC also summarily rejected the RITELine Companies' proposal to adopt an ROE that is between the midpoint and the median, stating that "The Commission has found that the median of the DCF analysis is appropriate for establishing the base ROE for an individual utility." The base ROE of 9.93 percent combined with the incentive ROE adders conditionally approved by FERC results in an overall ROE of 11.43 percent.
Construction Work in Progress ("CWIP")
FERC authorized the RITELine Companies to include 100 percent of CWIP in rate base, conditioned upon the RITELine Project being approved in PJM's RTEP. FERC found that the RITELine Companies' proposed accounting treatment using the PowerPlant System will prevent recovery of an allowance for funds used during construction ("AFUDC") to the extent that the RITELine Companies are allowed to include CWIP in rate base.
Abandoned Plant Recovery
FERC granted the RITELine Companies' request for recovery of 100 percent of prudently incurred costs associated with an abandonment of the property, provided that (i) the RITELine Project is included in PJM's RTEP, and (ii) the abandonment is shown in a Section 205 filing to have been the result of factors beyond the RITELine Companies' control. In such a Section 205 filing, the RITELine Companies would be required to, among other things, provide for rate authorization that is consistent with the PJM tariff allowing for the recovery of abandonment costs and propose a just and reasonable rate and cost allocation method to recover the costs.
Regulatory Asset Accounting Treatment
Subject to the RITELine Project being included in PJM's RTEP, FERC approved the RITELine Companies' proposal to record as a regulatory asset those pre-construction costs not included in CWIP, up to the effective date of its formula rate, and to then amortize the regulatory assets over the first five years that customers are under the formula rate. These costs would include attorney and consultant fees, entity formation costs, administrative expenses, travel expenses, development surveys and costs to support regional planning activities that are incurred by the RITELine Companies or the RITELine Project sponsors. FERC also authorized the accrual of a carrying charge on the regulatory assets up until they are included in rate base. FERC noted, however, that while it was allowing the RITELine Companies to record pre-construction costs as a regulatory asset, the RITELine Companies will need to make a Section 205 filing to demonstrate that those costs are just and reasonable and that they would have been otherwise chargeable to expense in the period incurred.
Formula Rate
FERC accepted the RITELine Companies' proposed formula rate, noting that the RITELine Companies cannot assess charges to customers until the RITELine Project is included in PJM's RTEP and PJM includes the formula rate and protocols in its tariff. FERC stated that the RITELine Companies' proposed formula rate structure is consistent with a number of other formula rates that FERC has approved for utilities in the PJM region in that (i) the rates are determined based on an estimated annual transmission revenue requirement, giving customers sufficient time and data to challenge the rates before FERC, if necessary, before they are implemented; and (ii) once the actual costs are known, a true-up is performed where any under-collections or over-collections are corrected with interest. FERC also summarily granted the RITELine Companies' requested waiver of the cost-of-service filing requirements under Section 35.13 of FERC's regulations in light of the fact that the formula rate will be based on actual costs.
Hypothetical Capital Structure
Subject to the RITELine Project being included in PJM's RTEP, FERC approved the RITELine Companies' request to use a hypothetical capital structure consisting of 45 percent debt and 55 percent equity until such time as any portion of the project achieves commercial operation. Once any portion of the RITELine Project begins commercial operation, the RITELine Companies must use their actual capital structure.
Income Tax Allowance
FERC approved the RITELine Companies' proposal to treat the RITELine Companies as pass-through entities eligible to receive an income tax allowance for the tax liability ultimately paid by the parents.
Conclusion
The climate for incentive rates to promote electric transmission development is still very favorable at FERC but may be tapering off somewhat. Developers should take note of the FERC's rulings in the RITELine case and formulate their rate proposals accordingly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
