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Uncertainty on transmission rate policy seen as cloud over US infrastructure investment

Washington (Platts)--7 May 2018 655 pm EDT/2255 GMT


Transmission owners and customers continue to play a wait-and-see game as questions over transmission rates linger at the US Federal Energy Regulatory Commission that could have a chilling effect on investment at a time when state and local climate change goals are adding to the need for new infrastructure.

The regulatory process for settling disputes over the appropriate base rate of return on equity for transmission was thrown into question by a federal appeals court decision last year, and has yet to be addressed by the commission on remand.

A more recent court decision has also raised concerns over transmission rate incentives, particularly an ROE adder tied to participation in an independent system operator or regional transmission organization.

"Uncertainty isn't good for anyone," be it customers who need to project their going-forward costs, utilities that need to know what their refund liabilities may be or regulators whose time and resources are eaten up by these issues, Nina Plaushin, ITC Holdings' vice president of regulatory, federal affairs and communications, said Monday at the Energy Bar Association's annual meeting.

All eyes are on FERC to bring some clarity to how transmission rates will shake out and to do so soon, Plaushin and others on a panel analyzing recent developments in transmission ROE agreed.

Robert Kenney, vice president of regulatory affairs at Pacific Gas & Electric, said these issues are particularly pressing "in the current environment, where we continue to see significant policy prescriptions to deploy increasing amounts of renewable energy and investments in physical and cyber security and distributed energy resources."

INVESTORS 'EXPECTING ... ENHANCED ROES'

"In particular, California finds itself, as we address climate change and climate change-caused natural disasters, in an investment environment in which our investors are expecting to see enhanced ROEs."

PG&E has come under fire of late for a 50 basis-point ROE adder for its participation in California Independent System Operator. FERC accepted the incentive over objections from the California Public Utilities Commission, which argued that the ISO adder was not appropriate because state law required the three major California utilities to participate in Cal-ISO.

The 9th US Circuit Court of Appeals in January decided that FERC's decision on the matter was arbitrary and capricious, finding that the commission should have given CPUC a better explanation for why the adder was warranted.

"Importantly and significantly, what the 9th Circuit did not rule was that FERC must disallow the ROE membership incentive to PG&E," Kenney said.

From a policy perspective, he contended that the issue is larger than just PG&E and California. "This is an issue of ongoing national significance, and it's something significant that investors are going to continue to want, see and need in order to be able to deploy capital where we need it to be deployed," he said.

Asked whether the new lineup at FERC and the unexpected policy shift on tax allowances for master limited partnerships -- another issue that was before the commission on remand -- were of concern, Kenney said he was "confident that the commission will continue to do a thorough and reasoned analysis, taking into account current market conditions."

Ultimately, he said, "It continues to be our perspective that market conditions justify the continuation of adders, and we've got particular circumstances in California that continue to justify this adder."

The other cloud threatening much-needed investment in transmission projects deals with a cycle of successive complaints and litigation seeking to reduce transmission rates. Industry groups and transmission developers have objected to parties filing overlapping challenges to ROE rates and in effect "pancaking" their complaints. But even more problematic, they have said, is that FERC continues to set these matters for trial-type hearings, opening new cases before closing preceding ones.

SWIFTER RESOLUTION OF ROE COMPLAINTS SOUGHT

David Pomper, a partner at the law firm Spiegel & McDiarmid, has argued several of these cases for the customers bringing the complaints. He said he didn't have another ROE complaint in the cannon but not to be surprised to see more. "The fact of the matter is there are a lot of ROEs out there that are still way above the cost of equity," he argued.

Further, he contended that the Federal Power Act Section 205 and 206 statutes that govern rate filings made by utilities and challenges filed by customers, respectively, were supposed to provide "some sort of rough symmetry."

"Utilities file 205s far more often than customers file 206s, and they have filed pancaked ROE rate increase filings in the past when the cost of capital was going up," Pomper said. "So if we're going to have that on the way up, you should have it on the way down as well."

Pomper also noted that if FERC acted on ROE disputes set for hearing more quickly and dispensed with drawn-out settlement procedures not going anywhere sooner, "we could get to the end of a case a little closer to the beginning, and not have such a need for additional rate requests."

Plaushin agreed that certain transmission ROE cases have taken "an unusually long" time to reach resolution, and she could understand why customers would want to preserve their refunds.

"But we need to understand why something gets set for hearing, and if it's solely because we want to keep the refund period open, then we probably need to just expedite how we handle these cases," she said.

She acknowledged that policy changes at FERC, the lack of a quorum for much of 2017, and court rulings have complicated the matter. But reforms may be in order to prevent "a never-ending cycle" of complaints looking for a cheaper rate. Similarly, the ability of utilities to game the system by waiting for the analyses that go into ratemaking to be favorable to them for a week and submitting Section 205 filings should also be looked at. --Jasmin Melvin, jasmin.melvin@spglobal.com

--Edited by Gail Roberts, newsdesk@spglobal.com




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