The Federal Energy Regulatory Commission on Oct. 18 took the unusual step of reducing the return on equity incentive adder that previously was awarded to several companies based on their independent nature.
FERC's decision to lower to 25 basis points the stand-alone transmission company, or transco, adder for three ITC Holdings Corp. subsidiaries reflects a "reasonable compromise" for addressing any independence those companies lost when Fortis Inc. acquired a majority stake in ITC Holdings in October 2016, according to FERC Commissioner Cheryl LaFleur, who concurred with the majority's decision.
But FERC Commissioner Richard Glick dissented from the order, asserting that rewarding a company for its previous independence is not what Congress had in mind when it authorized incentives for the development of transmission infrastructure.
"Today's order provides no discussion of why the ITC companies' residuum of independence merits an elevated ROE," Glick wrote. "A reader of today's opinion is left with the impression that, had the ITC companies not previously received an even larger ROE adder, there would be no basis for awarding the 25-basis-point ROE adder that the commission hands out today."
LaFleur and Glick both agreed, however, that FERC needs to revisit its transmission incentives program by establishing a generic proceeding to make certain the agency's policies continue to foster the dual goals of promoting transmission infrastructure investment and ensuring just and reasonable rates.
FERC in 2003 and 2005 granted 100-basis-point independence adders to ITC Holdings' subsidiaries International Transmission Co. and Michigan Electric Transmission Co. LLC, respectively. In July 2006, the agency issued Order 679 — a final rule aimed at encouraging transmission investment in accordance with the Energy Policy Act of 2005 — revising its incentive policies and determining that the transco business model should be eligible for the adder.
While ITC Midwest LLC subsequently sought the same transco adder approved for the two other ITC Holdings subsidiaries, a divided FERC in April 2015 for the first time granted the company a reduced incentive of 50 basis points after "taking into account the interests of consumers and applicants, as well as market conditions."
But following Fortis' acquisition of a majority interest in ITC Holdings, Consumers Energy Co. and several other utilities filed a complaint at FERC seeking to have the transco adders for all three of the ITC companies revoked. Among other things, the complainants asserted that the transco adders were conditioned on the ITC companies' remaining independent of Eastern Interconnection market participants and both Fortis and GIC Pte. Ltd., which has a minority stake in ITC Holdings, participating in Eastern Interconnection markets.
In partially granting the complaint, the FERC majority found that the merger transaction "has reduced, but not eliminated, the ITC companies' independence from market participants."
For instance, the order noted that while the ITC companies still develop their own capital expansion plans, Fortis "evaluates capital expenditures on a consolidated basis for its entire corporate family." They also can issue their own debt independently from Fortis and GIC, but ITC Holdings "can no longer issue its own common stock, and, to some degree, the ITC companies rely on Fortis for financing," the order explained.
Another consideration, according to FERC, is that although most of ITC Holdings' board of directors is unaffiliated with either Fortis or GIC, both "have representatives on" that board.
FERC therefore determined that the level for the ITC companies' independence adders at this point should be set at 25 basis points, given that the agency previously found that 50 basis point was the appropriate level for ITC Midwest even when it was a fully independent transco.
In his dissent, Glick said the record contains "powerful evidence" that the ITC companies are not truly independent. He noted that they must now compete for capital with Fortis and GIC subsidiaries that own generation and distribution assets and may "face an incentive — even a subtle one — not to undermine the value of [their sister] companies' assets through [their] transmission investments."
"Although the ITC companies may have once been sufficiently independent to justify an extra return on equity, the record in this proceeding shows that is no longer the case," Glick said. (FERC docket EL18-140)