D.C. Circuit Upholds Cutting of Transmission Incentives by FERC
On February 19, 2021, the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) upheld a decision by the Federal Energy Regulatory Commission (“FERC” or the “Commission”) cutting transmission incentives previously granted to three electric transmission companies.
The Energy Policy Act of 2005 amended the Federal Power Act to require FERC to promulgate a rule creating incentive-based rate treatment for electric transmission. The rule was intended to “promote reliable and economically efficient transmission and generation of electricity by promoting capital investment in the enlargement, improvement, maintenance, and operation of all [transmission] facilities, . . . provide a return on equity that attracts new investment in transmission facilities, . . . [and] encourage deployment of transmission technologies and other measures to increase the capacity and efficiency of existing transmission facilities and improve the operation of the facilities . . . .” FERC promulgated such a rule, which is codified in the Commission’s regulations. One incentive available to a stand-alone transmission company (a “Transco”) is “[a] return on equity [“ROE”] that both encourages Transco formation and is sufficient to attract investment.”
Because FERC has traditionally viewed independence as a hallmark of a Transco, it considers the ownership and business structure of the Transco to ensure that the Transco operates independently of other market participants when deciding whether to grant such incentives. FERC has declined to establish a particular methodology for reflecting the degree of a Transco’s independence or specific incentive levels. However, the Commission has made clear that it “will consider the level of independence of a Transco as part of our analysis when we determine the proper ROE for the Transco, and evaluate the specific attributes of a particular proposal, including the level of independence, to determine appropriate incentives.”
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