Focus on FERC – Pipeline policies, ROE incentives kick off ambitious 2022 agenda RRA

Introduction

The agenda for the Federal Energy Regulatory Commission's Feb. 17 open meeting indicates the commission is expected to vote on two of Chairman Richard Glick's major policy priorities in the natural gas sector, including a long-anticipated update to the commission's 1999 gas pipeline certificate policy statement.

In the electric power sector, the commission appears poised to act Feb. 17 on rehearing of an order denying the request of AES Corp. subsidiary Dayton Power & Light, or DP&L, for a 50-basis-point incentive ROE adder for the company's membership in a regional transmission organization or independent system operator, or RTO/ISO, that could have implications for other utilities in Ohio and beyond. DP&L does business as AES Ohio.

The commission also granted authorization for a transmission subsidiary of NextEra Energy Inc. to recover the costs of a planned transmission project if the project is canceled or abandoned for reasons beyond the company's control. FERC has granted similar authorizations to other project developers in the past, and NextEra's request to the commission illustrates the many challenges companies can face in permitting and constructing a transmission project.

Finally, FERC approved a settlement that sharply reduced the ROE originally requested by Morongo Transmission LLC by 150 basis points when it approved a 9.8% all-in ROE for the company's interest in a transmission project developed by Edison International subsidiary Southern California Edison Co., or SCE.

A more detailed discussion of these developments that Regulatory Research Associates is following is provided below. RRA is a group within S&P Global Market Intelligence.

* FERC's Feb. 17 meeting agenda indicates the commission is prepared to move forward on key policies related to certification and climate impacts of new gas pipeline facilities.

* Another key item on the Feb. 17 agenda could have negative consequences for utilities that have been authorized a 50-basis-point incentive ROE adder for participation in a regional transmission organization or independent system operator.

* Other key developments and decisions loom in critical proceedings at the commission in the electric power sector, including transmission planning and wholesale market reforms.

The commission

FERC's ambitious agenda in the coming months will feature major policy issues in the electric power and natural gas sectors. See FERC enters 2022 weighing major policy decisions in electric, gas sectors and FERC sets sights on gas infrastructure policy in 2022.

In addition to the two seminal policy matters on the commission's Feb. 17 meeting agenda in the natural gas sector, key developments and decisions are also looming in the electric power sector. Glick has emphasized a series of policy priorities he would like to see the commission move forward on this year, including an expansive rulemaking on transmission planning and cost allocation. See FERC chair sees agency acting on transmission "relatively early" in 2022.

In addition, the commission is focused on wholesale market reforms, including the controversial capacity market in the PJM Interconnection LLC and integrating distributed energy resources into markets operated by RTOs/ISOs. See PJM asks FERC for 4.5-month extension to already-delayed capacity auction and PJM, ISO-NE file compliance plans for FERC's landmark distributed energy rule.

Glick, a Democrat, is serving a term that expires June 30, 2022. The other FERC commissioners and the dates their terms expire include James Danly, a Republican, June 2023; Mark Christie, a Republican, June 2025; Allison Clements, a Democrat, June 2024; and Willie Phillips, a Democrat, June 2026.

Gas pipeline policies — Feb. 17 commission meeting

The first significant gas item on FERC's Feb. 17 meeting agenda comes almost exactly a year after Glick's first open meeting as chairman on Feb. 18, 2021, when the commission relaunched a comprehensive inquiry into its 1999 pipeline certificate policy and expanded the scope of the inquiry to examine additional questions involving climate impacts and environmental justice issues associated with proposed natural gas projects.

FERC originally opened the inquiry in 2018 and sought public comments on whether it should revise — and if so, how to revise — the commission's existing policies in the 1999 policy statement, including whether and how the commission should evaluate indirect greenhouse gas emissions associated with new projects. Stakeholders filed thousands of comments in the commission's docket during the summer of 2018, but the inquiry eventually stalled due in part to partisan tensions and a series of changes in the makeup of the commission.

In relaunching the inquiry a year ago, FERC invited a new round of stakeholder comments on a series of questions in five broad categories: potential adjustments to the commission's determination of need for a project, the exercise of eminent domain and landowner interests, the commission's consideration of environmental impacts, improvements to the efficiency of the commission's review process and the commission's consideration of effects on environmental justice communities.

The second significant gas item on the Feb. 17 meeting agenda follows a technical conference the commission held Nov. 19, 2021, to examine "methods natural gas companies may use to mitigate the effects of direct and indirect greenhouse gas emissions" from gas projects approved by FERC. In comments filed Jan. 7, stakeholders questioned the scope of the commission's authority to require the mitigation of emissions from proposed gas projects. See Gas groups, state attorneys question FERC reach into greenhouse gas mitigation.

Transmission RTO incentive ROE adder — Dayton Power & Light

FERC's Feb. 17 agenda indicates the commission is prepared to take action on DP&L's Aug. 13, 2021, request for rehearing of a commission order that rejected DP&L's request for a 50-basis-point incentive RTO adder for the company's membership in PJM. FERC's order denying DP&L's request, if it survives rehearing and almost certain appellate review, could threaten the RTO adder the commission has authorized for other utilities in Ohio, and possibly RTO adders in other states, too.

FERC's order determined that DP&L does not qualify for the RTO adder because the commission's transmission incentive policies, as interpreted by a 2018 decision issued by the U.S. Court of Appeals for the 9th Circuit, requires a showing of voluntary membership in a transmission organization. The commission found that DP&L's membership is not voluntary because Ohio law requires it.

In the 9th Circuit decision, the court held that the commission acted arbitrarily and capriciously in awarding PG&E Corp. subsidiary Pacific Gas and Electric Co., or PG&E, the RTO adder without determining whether PG&E's membership in the California ISO, or CAISO, was mandatory under state law.

The 9th Circuit remanded the case and required the commission to "inquire into PG&E's specific circumstances, i.e., whether it could unilaterally leave [CAISO] and thus whether an incentive adder could induce it to remain in [CAISO]." On remand, the commission concluded that California law does not mandate PG&E's participation in the CAISO and that the RTO adder induces PG&E to continue its membership in the transmission organization.

The DP&L proceeding was initiated in 2020, when the company submitted a request for approval of certain transmission rate incentives for investment in transmission projects DP&L asserted are needed for reliability.

DP&L asked FERC to grant three transmission rate incentives: the RTO adder to the company's authorized ROE to reflect DP&L's membership in PJM, inclusion of 100% of construction work in progress in rate base for certain specified projects, and 100% recovery of all prudently incurred transmission-related development and construction costs if one or more of the specified projects are abandoned due to circumstances beyond DP&L's control.

Regarding its request for the RTO adder, DP&L noted that, although it has been a member of PJM since 2004, it has not had a rate case since then to seek the incentive. DP&L noted that its stated transmission rates pre-date DP&L's membership in PJM and that the company was now requesting the RTO adder to be included in its related transmission formula rate filing.

The Public Utilities Commission of Ohio, or PUCO, and the Ohio Consumers' Counsel protested DP&L's request for the RTO adder, arguing that, under Ohio state law, all transmission owners with facilities in the state are required to be members of a FERC-approved transmission organization. The Consumers' Counsel argued that, if DP&L were not a member of PJM or another transmission entity, the company would not be permitted to own, or control transmission facilities located in Ohio.

FERC subsequently granted DP&L's requests for the construction work in progress and abandoned plant incentives, and granted but suspended the company's request for the RTO adder subject to refund and the outcome of a paper hearing to explore whether DP&L had shown that its participation in PJM is voluntary or is required by Ohio law.

The paper hearing elicited comments from the service companies of FirstEnergy Corp. and American Electric Power Co. Inc., or AEP, Duke Energy Ohio Inc., the Edison Electric Institute, the PUCO and Ohio Consumers' Counsel, the Industrial Energy Users of Ohio and trade group WIRES.

FirstEnergy subsidiary American Transmission Systems Inc. in Ohio, Duke Energy Ohio and AEP subsidiaries Ohio Power Co. and AEP Ohio Transmission Co. Inc. have previously been authorized the 50-basis point RTO adder by FERC and could be among the companies impacted by the outcome of the DP&L case.

In DP&L's formula rate proceeding, on April 15, 2021, FERC approved a settlement filed by the company to transition from a stated transmission rate to a formula rate. The approved settlement incorporates a base ROE of 9.85% for DP&L, a reduction from the company's initial request for a 10.39% base ROE.

The formula rate settlement also provides that if FERC ultimately approves DP&L's request for the 50-basis-point RTO adder, the company's authorized ROE would be adjusted upward to no higher than 9.99% for the remainder of a four-year moratorium on changes to the company's ROE.

Transmission abandoned plant incentive — NextEra Energy

On Feb. 7, FERC granted a request filed by NextEra Energy Transmission Southwest LLC, or NEET Southwest, authorizing the company to recover costs associated with the Wolf Creek-Blackberry 345-kV Competitive Transmission Project, a 94-mile, $85.2 million transmission project in the Southwest Power Pool Inc., if the project is abandoned or canceled for reasons beyond NEET Southwest's control.

While FERC has granted many similar requests from transmission project developers in the past in accordance with the commission's transmission incentives policy, the NEET Southwest request associated with the project illustrates the many challenges developers face in building new transmission lines.

In 2017, FERC accepted a NEET Southwest filing that included a transmission formula rate design and granted the company's request for the following transmission incentives: the 50-basis-point RTO adder for participating in an RTO/ISO; a regulatory asset for prudently incurred pre-commercial and formation costs for later recovery, with a carrying charge; and a hypothetical capital structure of 60% equity and 40% debt, to remain in effect until the company's first transmission project is placed in service.

NEET Southwest asserted that the company's separate request for the abandoned plant incentive differs from those incentives by addressing specific risks associated with permitting and developing the project.

In support of its request, NEET Southwest stated that the project is subject to multiple reviews and permits involving federal, state and local agencies, including federal permits from the U.S. Army Corps of Engineers, Federal Aviation Administration, Environmental Protection Agency, State Historic Preservation Office, Tribal Historic Preservation Office, and U.S. Fish and Wildlife Service; state permits from various agencies in Kansas and Missouri; and local permits from seven different counties in Kansas and Missouri. NEET Southwest noted that the project could be terminated if it fails to obtain any of these approvals or permits.

NEET Southwest also stated that the project requires certain approvals from the Missouri Public Service Commission and the Kansas Corporation Commission, and the company "faces the risk that incumbent utilities in Missouri or Kansas will lobby their state legislatures to pass state laws creating a right of first refusal or that impose other limitations on the ability of nonincumbent transmission developers, such as NEET Southwest, to obtain necessary permits or to otherwise develop or own transmission assets in those states."

Such state laws have been enacted in Minnesota and Texas. See 8th Circuit affirms Minn. law favoring incumbent transmission owners and Judge dismisses NextEra challenge to Texas right-of-first-refusal law.

Transmission ROE — Morongo Transmission/SCE

On Feb. 7, FERC approved a settlement and compliance filing submitted by Morongo Transmission resolving all issues associated with a transmission owner tariff and transmission revenue requirement for the company's interest in the West of Devers Upgrade Project developed by SCE.

The settlement establishes an all-in ROE of 9.8% to be used as an input to the Morongo Transmission tariff, 150 basis points below the ROE requested by the company.

Morongo Transmission, a participating transmission owner in CAISO, is majority-owned by the Morongo Band of Mission Indians. In 2012, the Morongo Band granted a new 50-year, six-mile right-of-way through its reservation to SCE in return for an option to lease a portion of the transfer capability on the project to be built on the new right-of-way. The arrangement gave Morongo Transmission an option to provide project financing to SCE for up to $400 million in exchange for a 30-year leasehold interest in a portion of the project.

Morongo Transmission submitted a proposed transmission owner tariff in 2020 to establish the company's transmission revenue requirement, which included an annual capital cost revenue requirement to be fixed and levelized for the 30-year lease term. Morongo Transmission's proposed tariff requested an ROE of 11.3%, using SCE's current authorized ROE of 10.3% as a proxy base ROE, and a 100-basis-point adder for RTO membership after the project is placed in service and under the operational control of CAISO.

^{Regulatory Research Associates is a group within S&P Global Market Intelligence.}

^{This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.}