[Federal Register Volume 77, Number 225 (Wednesday, November 21, 2012)]
[Rules and Regulations]
[Pages 69754-69759]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-28231]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 2 and 35

[Docket No. RM11-26-000]


Promoting Transmission Investment Through Pricing Reform

AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Policy statement.

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SUMMARY: The Commission issues this policy statement to provide 
guidance regarding its evaluation of applications for electric 
transmission incentives under section 219 of the Federal Power Act. In 
the six years since the Commission implemented section 219 by issuing 
Order No. 679, the Commission has acted on numerous applications for 
transmission incentives. The Commission has now determined it would be 
beneficial to provide additional guidance and clarity with respect to 
certain aspects of its transmission incentives policies under section 
219 of the Federal Power Act and Order No. 679. In particular, the 
Commission: reframes its nexus test to focus more directly on the 
requirements of Order No. 679; expects applicants to take all 
reasonable steps to mitigate the risks of a project, including 
requesting those incentives designed to reduce the risk of a project, 
before seeking an incentive return on equity (ROE) based on a project's 
risks and challenges; provides general guidance that may inform 
applications for an incentive ROE based on a project's risks and 
challenges; and promotes additional transparency with respect to the 
impacts of the Commission's incentives policies. The Commission finds 
that the additional guidance provided through this policy statement is 
necessary to encourage transmission infrastructure investment while 
maintaining just and reasonable rates, consistent with section 219 of 
the Federal Power Act. The Commission will apply this policy statement 
on a prospective basis to incentive applications received after the 
date of its issuance.

DATES: Effective November 15, 2012.

FOR FURTHER INFORMATION CONTACT:
David Borden, Office of Energy Policy and Innovation, 888 First Street 
NE., Washington, DC 20426, (202) 502-8734, david.borden@ferc.gov.

Andrew Weinstein, Office of General Counsel, 888 First Street NE., 
Washington, DC 20426, (202) 502-6230, andrew.weinstein@ferc.gov.

Before Commissioners: Jon Wellinghoff, Chairman; Philip D. Moeller, 
John R. Norris, and Cheryl A. LaFleur.

Policy Statement

(Issued November 15, 2012)

    1. The Commission issues this policy statement to provide guidance 
regarding its evaluation of applications for electric transmission 
incentives under section 219 of the Federal Power Act (FPA).\1\ In the 
six years since the Commission implemented section 219 by issuing Order 
No. 679,\2\ the Commission has acted on numerous applications for 
transmission incentives. The Commission has now determined it would be 
beneficial to provide additional guidance and clarity with respect to 
certain aspects of its transmission incentives policies under section 
219 of the Federal Power Act and Order No. 679. In particular, the 
Commission: reframes the nexus test to focus more directly on the 
requirements of Order No. 679; expects applicants to take all 
reasonable steps to mitigate the risks of a project, including 
requesting those incentives designed to reduce the risk of a project, 
before seeking an incentive return on equity (ROE) based on a project's 
risks and challenges; provides general guidance that may inform 
applications for an incentive ROE based on a project's risks and 
challenges; and promotes additional transparency with respect to the 
impacts of the Commission's incentives policies. The Commission finds 
that the additional guidance provided through this policy statement is 
necessary to encourage transmission infrastructure investment while 
maintaining just and reasonable rates, consistent with section 219 of 
the FPA. The Commission will apply this policy statement on a 
prospective basis to incentive applications received after the date of 
its issuance.
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    \1\ 16 U.S.C. 824s (2006).
    \2\ Promoting Transmission Investment through Pricing Reform, 
Order No. 679, 71 FR 43294 (Jul. 31, 2006), FERC Stats. & Regs. ] 
31,222 (2006), order on reh'g, Order No. 679-A, 72 FR 1152 (Jan. 10, 
2007), FERC Stats. & Regs. ] 31,236, order on reh'g, 119 FERC ] 
61,062 (2007).
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I. Background

    2. Section 1241 of the Energy Policy Act of 2005 added a new 
section 219 to the FPA. The Commission implemented section 219 by 
issuing Order No. 679, which established by rule incentive-based rate 
treatments for investment in electric transmission infrastructure for 
the purpose of benefiting consumers by ensuring reliability and 
reducing the cost of delivered power by reducing transmission 
congestion. Since the issuance of Order No. 679, the Commission has 
evaluated more than 85 applications representing over $60 billion in 
potential transmission investment.
    3. On May 19, 2011, the Commission issued a notice of inquiry (NOI) 
seeking public comment regarding the scope and implementation of the 
Commission's incentives policies. The Commission received over 1,500 
pages of comments reflecting a wide range of perspectives on the 
Commission's incentives policies. The Commission appreciates the robust 
participation by the diverse group of commenters, and has carefully 
considered the comments received in formulating this policy statement. 
The Commission's issuance of this policy statement is driven by its 
experience applying its incentives policies to individual incentive

[[Page 69755]]

applications and comments received in response to the NOI.

II. Policy Statement

    4. As noted above, the Commission through this policy statement 
provides additional guidance with respect to certain aspects of its 
incentives policies. Specifically, the Commission: reframes the nexus 
test to focus more directly on the requirements of Order No. 679; 
expects applicants to take all reasonable steps to mitigate the risks 
of a project, including requesting those incentives designed to reduce 
the risk of a project, before seeking an incentive ROE based on a 
project's risks and challenges; provides general guidance that may 
inform applications for an incentive ROE based on a project's risks and 
challenges; and promotes additional transparency with respect to the 
impacts of the Commission's incentives policies. Each of these issues 
and the Commission's corresponding clarifications are discussed further 
below.
    5. We note that many aspects of the Commission's incentives 
policies are not addressed in this policy statement. For example, in 
Order No. 679, the Commission stated that applicants could seek 
incentives thereunder regardless of their ownership structure,\3\ and 
that the Commission would evaluate incentive applications on a case-by-
case basis.\4\ The Commission also established rebuttable presumptions 
to assist in determining whether proposed facilities satisfy the 
statutory threshold of section 219.\5\ In Order No. 679 and subsequent 
cases applying incentives policies, the Commission has addressed the 
granting of incentive ROEs that are not based on the risks and 
challenges of a project, such as incentive ROEs for RTO membership or 
Transco formation. With respect to aspects of the Commission's 
incentives policies not addressed in this policy statement, we decline 
to provide additional guidance at this time.
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    \3\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 4. Section 
219(b)(1) requires that the Commission establish rules for 
incentives, ``* * * regardless of the ownership of the facilities.'' 
16 U.S.C. 824s(b)(1).
    \4\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 43.
    \5\ Id. P 58.
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A. Application of the Nexus Test

    6. Order No. 679 established the ``nexus test,'' which requires 
applicants to demonstrate a connection between the incentive(s) 
requested under Order No. 679 and the proposed investment, and that the 
incentive(s) requested address the risks and challenges that a project 
faces. In Order No. 679, the Commission stated that each incentive:

    ``* * * will be rationally tailored to the risks and challenges 
faced in constructing new transmission. Not every incentive will be 
available for every new investment.
    Rather, each applicant must demonstrate that there is a nexus 
between the incentive sought and the investment being made. Our 
reforms therefore continue to meet the just and reasonable standard 
by achieving the proper balance between consumer and investor 
interests on the facts of a particular case and considering the fact 
that our traditional policies have not adequately encouraged the 
construction of new transmission.'' \6\
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    \6\ Id. P 26.

    7. The Commission refined the nexus test in Order No. 679-A, 
finding that, in applying the nexus test, the Commission should look at 
whether the total package of incentives is rationally tailored to the 
risks and challenges of constructing new transmission.\7\ The 
Commission stated that this approach would protect consumers by 
recognizing that requested incentives that reduce risk might obviate 
the need for an incentive ROE based on a project's risks and 
challenges, or otherwise justify a lower incentive ROE based on a 
project's risks and challenges.
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    \7\ Order No. 679-A, FERC Stats. & Regs. ] 31,236 at P 27. See 
also 18 CFR 35.35(d) (2006) (``Incentive-based rate treatments for 
transmission infrastructure investment. * * * The applicant must 
demonstrate that the facilities for which it seeks incentives either 
ensure reliability or reduce the cost of delivered power by reducing 
transmission congestion consistent with the requirements of section 
219, that the total package of incentives is tailored to address the 
demonstrable risks or challenges faced by the applicant in 
undertaking the project, and that resulting rates are just and 
reasonable.* * *'')
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    8. Subsequent to Order No. 679 and Order No. 679-A, the Commission 
further refined its application of the nexus test by clarifying that 
the determination of whether a project is ``routine'' or ``non-
routine'' is particularly probative in evaluating whether the nexus 
test was satisfied. In Baltimore Gas and Electric Company, the 
Commission concluded that, once an applicant demonstrates that a 
project is not routine, the nexus test is satisfied and the project is 
deemed to face risks and challenges that merit incentive(s).\8\
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    \8\ 120 FERC ] 61,084, at PP 52-54 (2007) (BG&E).
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    9. The Commission recognizes that there are a wide range of views 
on its application of the nexus test and, in particular, the 
Commission's use of the routine/non-routine analysis as a proxy for the 
nexus test. Most commenters in the NOI are supportive of the nexus 
test's focus on evaluating risks and challenges to determine whether a 
project merits incentives. Some commenters offer additional criteria 
for assessing risks and challenges, while others are more critical of 
the nexus test and assert that it is insufficient and requires change. 
With respect to the Commission's use of the routine/non-routine 
analysis in reviewing incentive applications since BG&E, some 
commenters support the continued use of the routine/non-routine 
analysis, while others seek more clarity from the Commission.
    10. Based on experience to date with the application of Order No. 
679, the Commission now believes it is essential to re-frame its 
application of the nexus test to focus more directly on the 
requirements adopted in Order Nos. 679 and 679-A.\9\ The Commission 
will no longer rely on the routine/non-routine analysis adopted in BG&E 
as a proxy for the nexus test. While prior orders found that analysis 
probative, based on our experience to date applying our incentives 
policies and the comments received in response to the NOI, we believe 
it is necessary to analyze the need for each individual incentive, and 
the total package of incentives, instead of relying on a proxy. 
Consistent with Order No. 679-A, the Commission will continue to 
require applicants seeking incentives to demonstrate how the total 
package of incentives requested is tailored to address demonstrable 
risks and challenges. Applicants ``must provide sufficient explanation 
and support to allow the Commission to evaluate each element of the 
package and the interrelationship of all elements of the package. If 
some of the incentives would reduce the risks of the project, that fact 
will be taken into account in any request for an enhanced ROE.'' \10\
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    \9\ 18 CFR 35.35(d).
    \10\ Order No. 679-A, FERC Stats. & Regs. ] 31,236 at P 27.
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B. Risk-Reducing Incentives

    11. The Commission authorizes a company's base ROE utilizing a 
range of reasonableness resulting from a discounted cash flow (DCF) 
analysis that is applied to a selected proxy group representing firms 
of comparable risk. The resulting base ROE authorized by the Commission 
is designed to account for many of the risks associated with 
transmission investment and to support that investment. Nonetheless, 
the Commission recognizes that there may be risks associated with 
investment in particular transmission projects that are not accounted 
for in the base ROE. In Order No. 679, the Commission recognized that 
some transmission incentives--such as recovery of 100 percent of 
Construction Work in

[[Page 69756]]

Progress (CWIP), recovery of 100 percent of pre-commercial costs as an 
expense or as a regulatory asset, and recovery of 100 percent of 
prudently incurred costs of transmission facilities that are abandoned 
for reasons beyond the applicant's control--reduce the financial and 
regulatory risks associated with transmission investment.\11\ The 
Commission reaffirms in this policy statement that these risk-reducing 
incentives may mitigate risk not accounted for in the base ROE, and we 
therefore expect incentives applicants to first examine the use of 
risk-reducing incentives before seeking an incentive ROE based on a 
project's risks and challenges.\12\
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    \11\ See Order No. 679, FERC Stats. & Regs. ] 31,222 at PP 115, 
117, and 163.
    \12\ The Commission clarifies that placing a priority on risk-
reducing incentives does not require separate applications for risk-
reducing incentives and an incentive ROE based on a project's risks 
and challenges. Rather, in a single application an applicant could 
first demonstrate how risk-reducing incentives are utilized and then 
seek to demonstrate, as discussed further below, that remaining 
risks and challenges merit an incentive ROE based on the project's 
risks and challenges.
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    12. The CWIP and pre-commercial cost incentives both serve as 
useful tools to ease the financial pressures associated with 
transmission development by providing up-front regulatory certainty, 
rate stability and improved cash flow, which in turn can result in 
higher credit ratings and lower capital costs.\13\ Specifically, the 
CWIP incentive addresses timing issues associated with the recovery of 
financing costs for large transmission investments and allows recovery 
of a return on construction costs during the construction period rather 
than delaying cost recovery until the plant is placed into service. The 
Commission has also found that allowing companies to include 100 
percent of CWIP in rate base would result in greater rate stability for 
customers by reducing the ``rate shock'' when certain large-scale 
transmission projects come on line.\14\
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    \13\ See Order No. 679, FERC Stats. & Regs. ] 31,222 at PP 115, 
117, and 163.
    \14\ See, e.g., PJM Interconnection, L.L.C. and Pub. Serv. Elec. 
and Gas Co., 135 FERC ] 61,229 (2011). See also PPL Elec. Utils. 
Corp., 123 FERC ] 61,068, at P 43 (2008), reh'g denied 124 FERC ] 
61,229.
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    13. Regarding 100 percent recovery of pre-commercial cost as an 
incentive, the Commission has permitted recipients of this incentive to 
expense and recover pre-commercial costs that would otherwise be 
capitalized in CWIP, thus providing for earlier cost recovery and 
improving early stage project cash flows. The Commission has also made 
deferred cost recovery available to applicants to address cost recovery 
restrictions at the state level and to provide greater flexibility for 
applicants to recover costs, recognizing that deferred cost recovery is 
intended to ``* * * increase the certainty of cost recovery to 
encourage more transmission investment.'' \15\ The Commission also 
recognizes the usefulness of deferred cost recovery of pre-commercial 
costs for applicants who do not have a formula rate in effect prior to 
incurring pre-commercial costs, by allowing the applicant to defer all 
such costs not included in CWIP as a regulatory asset until the 
applicant has a formula rate in effect for cost recovery.\16\ The 
Commission has previously found that this incentive provides up-front 
regulatory certainty and can reduce interest expense, improve coverage 
ratios, and assist in the construction of transmission projects.\17\
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    \15\ Order No. 679, FERC Stats. & Regs. ] 31,222 at PP 175, 178.
    \16\ See, e.g., Atlantic Grid, 135 FERC ] 61,144 (2011). Like 
the pre-commercial cost incentive, all transmission incentives are 
intended to be available to all existing utilities and non-incumbent 
utilities.
    \17\ See, e.g., DATC Midwest Holdings, L.L.C., 139 FERC ] 61,224 
(2012).
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    14. Regarding the incentive that allows for 100 percent recovery of 
prudently incurred costs of transmission facilities that are abandoned 
for reasons beyond the control of the transmission owner, the 
Commission has found this incentive reduces the regulatory risk of non-
recovery of prudently incurred costs.\18\ The Commission has previously 
stated that, in addition to the challenges presented by the scope and 
size of a project, factors like various federal and state siting 
approvals introduce a significant element of risk. Granting this 
incentive ameliorates such risk by providing companies with more 
certainty during the pre-construction and construction periods.\19\
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    \18\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 163.
    \19\ See, e.g., PJM Interconnection, L.L.C. and Pub. Serv. Elec. 
and Gas Co., 135 FERC ] 61,229 (2011).
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    15. In the NOI, numerous commenters discuss the interplay of risk-
reducing incentives on the need for and appropriate level of an 
incentive ROE. For example, Certain State and Consumer-Owned Entities 
state that if a project's risks exceed the risk that is accounted for 
in the base ROE, incentives may be appropriate.\20\ Other commenters 
state that the Commission should strike an appropriate balance between 
consumer and investor interests, and that if incentives are compounded 
without consideration of the reduced risk effect of some of the 
incentives, this approach tips the risk in favor of the investor and to 
the detriment of the transmission customer. Numerous commenters also 
argue that risk-reducing incentives mitigate the need for an incentive 
ROE based on a project's risks and challenges to attract investment. 
For example, Joint Commenters \21\ note that the biggest risks for 
transmission projects relate to siting and permitting delays, cash flow 
shortage, or abandonment concerns, but argue that, even where the level 
of these risks is unusually high, they can be mitigated by granting 
risk-reducing incentives. Joint Commenters further contend that, when 
incentives are appropriate, risk-reducing incentives should be the 
first (and often the only) incentives considered.\22\ Other commenters 
point out that risk also is mitigated through the assurance of cost 
recovery at the state level.
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    \20\ Certain State and Consumer-Owned Entities September 12, 
2011 Comments at 39. Certain State and Consumer-Owned Entities 
include Connecticut Public Utilities Regulatory Authority, Attorney 
General for the State of Connecticut, Connecticut Office of Consumer 
Counsel, Attorney General for the State of Delaware, Delaware Public 
Service Commission, Public Advocate of Delaware, Attorney General 
for the State of Illinois, Maine Public Utilities Commission, 
Attorney General for the Commonwealth of Massachusetts, 
Massachusetts Department of Public Utilities, Massachusetts 
Municipal Wholesale Electric Company, New England Conference of 
Public Utilities Commissioners, Attorney General for the State of 
New Hampshire, New Hampshire Electric Cooperative, Inc., New 
Hampshire Office of Consumer Advocate, New Hampshire Public 
Utilities Commission, Rhode Island Public Utilities Commission and 
Division of Public Utilities and Carriers, Attorney General for the 
State of Rhode Island, Vermont Department of Public Service, and 
Vermont Public Service Board.
    \21\ Joint Commenters include Joint Comments of American Forest 
& Paper Association, American Public Power Association, California 
Municipal Utilities Association, California Public Utilities 
Commission, City and County of San Francisco, Connecticut Office of 
Consumer Counsel, Electricity Consumers Resource Council, Indiana 
Utility Regulatory Commission, Maryland Office of People's Counsel, 
Modesto Irrigation District, Montana Public Service Commission, 
National Association of State Utility Consumer Advocates, New 
England Conference of Public Utilities Commissioners, New Hampshire 
Public Utilities Commission, New Jersey Board of Public Utilities, 
New Jersey Division of Rate Counsel, Northern California Power 
Agency, Office of the Nevada Attorney General, Bureau of Consumer 
Protection, Office of the Ohio Consumers' Counsel, Old Dominion 
Electric Cooperative, Organization of MISO States, Pennsylvania 
Office of Consumer Advocate, Public Power Council, Public Service 
Commission of the State of New York, Public Service Commission of 
Wisconsin, Sacramento Municipal Utility District, South Dakota 
Public Utilities Commission, State of Maine, Office of the Public 
Advocate, Transmission Agency of Northern California, the Vermont 
Department of Public Service, and the Vermont Public Service Board.
    \22\ Joint Commenters September 12, 2011 Comments at 80.
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    16. In Order No. 679-A, the Commission stated that a project that 
receives risk-reducing transmission incentives, like those discussed 
above,

[[Page 69757]]

would likely face lower risks. Therefore, that project may not warrant 
an incentive ROE, or may warrant a lower incentive ROE, based on the 
project's risks and challenges.\23\ Based on the Commission's 
experience under Order No. 679, and after careful consideration of 
comments on the NOI as to the benefits of risk-reducing incentives, the 
Commission clarifies that many risks not accounted for in the base ROE 
can be alleviated through risk-reducing incentives such as those 
discussed earlier in this section. In cases where an incentive ROE 
based on risks and challenges is requested in combination with risk-
reducing incentives, the Commission must carefully apply its total 
package analysis to ensure that the effect of the risk-reducing 
incentives is appropriately accounted for in determining whether an 
incentive ROE based on risks and challenges is warranted, and if 
warranted, what level is appropriate. For this reason, the Commission 
expects incentives applicants to seek to reduce the risk of 
transmission investment not otherwise accounted for in its base ROE by 
using risk-reducing incentives before seeking an incentive ROE based on 
a project's risks and challenges.\24\
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    \23\ Order No. 679-A, FERC Stats. & Regs. ] 31,236 at P 27.
    \24\ The Commission appreciates that non-incumbents seeking 
incentives may face challenges implementing some risk-reducing 
incentives because they may not have the appropriate rate structures 
in place under which to effectuate these transmission incentives. In 
such instances, the Commission anticipates subsequent section 205 
filings by non-incumbent incentive applicants for cost recovery. As 
noted above, all transmission incentives are intended to be 
available to all existing utilities and non-incumbent utilities.
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C. Incentive ROEs Based on Project Risks and Challenges

    17. Some commenters in the NOI suggest that the Commission 
specifically identify project characteristics or risks and challenges 
that would merit an incentive ROE. We decline to do so. Instead, we 
will continue to allow applicants the flexibility necessary to 
demonstrate why their projects may merit an incentive ROE, and at what 
level, based on those project's risks and challenges, but we provide 
general guidance below that may inform applications for this type of 
transmission incentive.
1. Showings and Commitments for Remaining Risks and Challenges
    18. As discussed above, many of the risks not captured by 
traditional ratemaking policies can be addressed through risk-reducing 
incentives. While the record in the NOI proceeding does not show that 
incentive ROEs have resulted in significant rate increases for 
consumers,\25\ incentive ROEs likely put more upward pressure on 
transmission rates than risk-reducing incentives. Therefore incentive 
applicants should first examine risk-reducing incentives.
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    \25\ See, ITC Holdings Corp. September 12, 2011 Comments at 16: 
``The incentives granted to transmission projects have had generally 
positive, not negative, effects on consumer rates and service, 
especially when improved reliability, reduced congestion and access 
to a more diverse supply of generation, including renewable 
resources, are taken into account. One reason for this is that the 
cost of transmission incentives is small compared to the cost of 
energy, distribution and congestion.''
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    19. However, a project may face certain risks and challenges that 
may not be addressed through either the traditional ratemaking policies 
or risk-reducing incentives. In such instances, an incentive ROE based 
on a project's risks and challenges may be appropriate.\26\ Based on 
the Commission's experience under Order No. 679 and the comments 
received on the NOI, the Commission expects applicants seeking an 
incentive ROE based on a project's risks and challenges to make the 
following four showings as part of their application for that 
incentive.
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    \26\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 94.
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a. Identification of Risks and Challenges
    20. When applying for an incentive ROE based on the project's risks 
and challenges, applicants will first be expected to demonstrate that 
the proposed project faces risks and challenges that are not either 
already accounted for in the applicant's base ROE or addressed through 
risk-reducing incentives. To make this demonstration, the Commission 
suggests that applicants identify risks and challenges specific to the 
project for which an incentive ROE is being requested.
    21. Investments in the following types of transmission projects 
\27\ may face the types of risks and challenges that may warrant an 
incentive ROE based on the project's risks and challenges that are not 
either already accounted for in the applicant's base ROE or could be 
addressed through risk-reducing incentives:
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    \27\ These investments could include both investment in new 
transmission facilities, as well as investment in transmission 
upgrades, retrofits, and projects that modernize the existing 
transmission grid.
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    1. Projects to relieve chronic or severe grid congestion that has 
had demonstrated cost impacts to consumers;
    2. Projects that unlock location constrained generation resources 
that previously had limited or no access to the wholesale electricity 
markets;
    3. Projects that apply new technologies to facilitate more 
efficient and reliable usage and operation of existing or new 
facilities.\28\
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    \28\ Examples of projects that meet this description include 
those that create additional incremental capacity without 
significant construction (e.g., through the use of dynamic line 
rating), that allow for more efficient balancing of variable energy 
resources, and/or that provide increased grid stability. In 
addition, the Commission is concerned that its current practice of 
granting incentive ROEs and risk-reducing incentives may not be 
effectively encouraging the deployment of new technologies or the 
employment of practices that provide demonstrated benefits to 
consumers. Accordingly, the Commission remains open to alternative 
incentive proposals aimed at supporting projects that achieve these 
ends.
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    22. This list is not exhaustive, but rather indicative of the types 
of projects that the Commission believes, based on its experience and 
expertise with respect to industry trends and system investment needs, 
may warrant an incentive ROE based on the project's risks and 
challenges. More generally, the Commission anticipates that applicants 
will seek an incentive ROE based on a project's risks and challenges 
for projects that provide demonstrable consumer benefits by making the 
transmission grid more efficient, reliable, and cost-effective. Thus, 
consistent with our statements in Order No. 679, we note that 
reliability-driven projects may be considered for an incentive ROE 
based on a project's risks and challenges, but only if they present 
specific risks and challenges not otherwise mitigated by available 
risk-reducing incentives.\29\
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    \29\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 94.
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    23. Under our current incentive policies, the Commission considers 
an applicant's proposed use of an advanced transmission technology 
both: (1) as part of the overall nexus analysis, accounting for the 
risks and challenges associated with utilizing such advanced technology 
into that overall nexus analysis; \30\ and (2) where an applicant seeks 
a stand-alone incentive ROE based on its utilization of an advanced 
technology.\31\ The Commission

[[Page 69758]]

continues to encourage the deployment of advanced technologies that 
``increase the capacity, efficiency, or reliability of an existing or 
new transmission facility.'' \32\ However, the Commission is concerned 
that its current approach may contribute to confusion, including with 
respect to the distinct standards that the Commission applies in these 
two contexts. To address this concern, the Commission will no longer 
consider requests under Order No. 679 for a stand-alone incentive ROE 
based on an applicant's utilization of an advanced technology. Instead, 
as noted above, the Commission will consider transmission projects that 
apply advanced technologies as indicative of the types of projects 
facing risks and challenges that may warrant an incentive ROE. As a 
result, we will consider deployment of advanced technologies as part of 
the overall nexus analysis when an incentive ROE is sought.
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    \30\ See Tallgrass Transmission, LLC, 125 FERC ] 61,248, at P 59 
(2008) (``[t]he associated challenges can be incorporated into the 
overall nexus analysis, but the technology does not, in and of 
itself, appear to justify a separate advanced technology adder.''); 
RITELine Indiana & Illinois LLC, 137 FERC ] 61,039 at P 62 (2011).
    \31\ See The United Illuminating Co., 126 FERC ] 61,043, at P 14 
(2009) (``In reviewing requests for separate adders for advanced 
technology, the Commission reviews record evidence to decide if the 
proposed technology warrants a separate adder because it reflects a 
new or innovative domestic use of the technology that will improve 
reliability, reduce congestion, or improve technology.''). See also 
NSTAR Elec. Co., 127 FERC ] 61,052 at P 27 (2009).
    \32\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 298.
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b. Minimization of Risks
    24. The Commission expects an applicant that requests an incentive 
ROE based on a project's risks and challenges to demonstrate that it is 
taking appropriate steps and using appropriate mechanisms to minimize 
its risks during project development. For example, risks may be reduced 
through the risk-reducing incentives described in section II.B, or 
through mitigating costs by implementing best practices in their 
project management and procurement procedures. Applicants should 
consider taking measures tailored to mitigate the various risks 
associated with their transmission projects and to identify such 
measures in their applications. For example, applicants may take 
measures to mitigate risks associated with siting and environmental 
impacts by pursuing joint ownership arrangements. The Commission 
encourages incentives applicants to participate in joint ownership 
arrangements and agrees with commenters to the NOI that such 
arrangements can be beneficial by diversifying financial risk across 
multiple owners and minimizing siting risks.\33\
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    \33\ Order No. 679, FERC Stats. & Regs. ] 31,222 at PP 354, 357; 
Order No. 679-A FERC Stats. & Regs. ] 31,236, at P 102. See also 
Central Maine Power Company, 125 FERC ] 61,182, at P 61 (2008); Xcel 
Energy, 121 FERC ] 61,284 at P 55 (2007). Evidence regarding whether 
an applicant for incentives considered joint ownership arrangements 
may be relevant in assessing whether the applicant took appropriate 
steps to minimize its risks during project development.
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c. Consideration of Alternatives
    25. The Commission expects applicants for an incentive ROE based on 
a project's risks and challenges to demonstrate that alternatives to 
the project have been, or will be, considered in either a relevant 
transmission planning process or another appropriate forum. Such a 
showing should help identify the demonstrable consumer benefits of the 
proposed project and its role in promoting a more efficient, reliable 
and cost-effective transmission system.\34\
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    \34\ This showing draws on recommendations made by commenters in 
the NOI, who suggested that the Commission require an assessment of 
lower cost alternatives to any proposed transmission project as part 
of a filing requesting transmission incentives.
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    26. The Commission appreciates that there may be timing challenges 
for applicants making this showing, and thus the Commission will be 
flexible in the approaches it allows for applicants to make this 
showing. In particular, this showing could be satisfied through 
participation in open processes that are already in existence. For 
example:
    1. The applicant could show that its project was, or will be, 
considered in an Order No. 890 or Order No. 1000-compliant transmission 
planning process that provides the opportunity for projects to be 
compared against transmission or non-transmission alternatives.\35\
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    \35\ In making this showing, the applicant need not show that 
its project was selected in a regional transmission plan for 
purposes of cost allocation. Instead, the focus would be on whether 
the project was or will be considered in a process where it could be 
compared to other projects and shown to be preferable to any 
alternatives that were evaluated.
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    2. The applicant could show that its project was considered by a 
local regulatory body, such as a state utility commission, that 
evaluated alternatives to its proposed project (transmission or non-
transmission alternatives) and determined that the proposed 
transmission project is preferable to the alternatives evaluated.
    27. The above approaches should not be seen as exclusive, however, 
and the Commission will remain open to alternative methods to making 
this showing.\36\
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    \36\ For example, projects that are required to complete an 
environmental impact statement (EIS) may submit the analysis on the 
consideration of alternatives, per the requirements of the EIS, as 
making such a showing.
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d. Commitment to Cost Estimates
    28. Finally, the Commission expects applicants for an incentive ROE 
based on a project's risks and challenges to commit to limiting the 
application of the incentive ROE based on a project's risks and 
challenges to a cost estimate. For example, the Commission has approved 
an applicant's proposal to limit the incentive ROE based on a project's 
risks and challenges to the cost estimate utilized at the time of RTO 
approval.\37\ Our intent is not to be prescriptive as to how applicants 
might structure this commitment; instead, the Commission is open to 
approaches that control transmission development costs and provide more 
transparency regarding how incentives will be applied to costs beyond 
initial estimates.\38\
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    \37\ RITELine Illinois & Indiana LLC, 137 FERC ] 61,039, at P 5 
(2011).
    \38\ Concern about the effects of allowing transmission 
incentives to be applied to costs over those estimated was expressed 
by a number of commenters in the NOI proceeding.
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    29. The Commission recognizes the challenges of determining the 
appropriate cost estimate for a project. For example, most applicants 
seek incentives from the Commission at a relatively early stage in the 
project development process, often before state siting or other 
processes raise challenges that can impact the design and ultimate cost 
of a project. One option may be for applicants to commit to limiting 
the application of an incentive ROE based on a project's risks and 
challenges to the last cost estimate relied upon to include or retain 
the project in a regional transmission planning process.\39\
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    \39\ If factors outside applicant's control cause significant 
deviation from the cost estimate upon which the ROE incentive was 
initially granted, the Commission can revisit that cost estimate 
(e.g., a regional planner requires significant acceleration of a 
project construction timeline).
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    30. The Southwest Power Pool Regional State Committee (SPP RSC) in 
its comments on the NOI identifies a definitive cost estimate that 
would serve as the initial threshold limit for an incentive ROE, a 10% 
dead-band above or below the definitive cost estimate around which 
changes in costs are shared equally between shareholders and customers, 
and a provision for addressing cost increases that are outside the 
control of the transmission owner.\40\ The Commission believes that 
aspects of the SPP RSC proposal highlighted here may provide useful 
guidance to applicants when seeking incentive ROEs based on a project's 
risks and challenges.
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    \40\ SPP RSC September 12 Comments at 5, 12-13.
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III. Conclusion

    31. As noted above, the Commission is relying on its experience and 
expertise with respect to industry trends and system investment needs 
to provide additional guidance and clarity through this policy 
statement. Six years after

[[Page 69759]]

issuing Order No. 679, the Commission believes that it is appropriate 
and in the public interest to evaluate the impacts of its incentives 
policy and give guidance as to how the Commission will implement that 
incentives policy going forward. In order to further the mandate of FPA 
section 219 and encourage transmission investment in the future, the 
Commission will continue to monitor its incentives policy and may 
identify new policy issues, trends, and developments in transmission 
investment that may warrant modifications to the Commission's 
incentives policy. As part of this effort, the Commission will 
continually assess measures to further transparency in its incentives 
policy and the impacts of that policy on consumers.

IV. Document Availability

    32. 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 FERC's Home Page (http://www.ferc.gov) and in FERC's 
Public Reference Room during normal business hours (8:30 a.m. to 5:00 
p.m. Eastern time) at 888 First Street NE., Room 2A, Washington, DC 
20426.
    33. From FERC'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.
    34. User assistance is available for eLibrary and the FERC's Web 
site during normal business hours from FERC 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.

    By the Commission. Commissioner Clark is not participating.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2012-28231 Filed 11-20-12; 8:45 am]
BILLING CODE 6717-01-P