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

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

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

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

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

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

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

INVESTORS 'EXPECTING ... ENHANCED ROES'

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

PG&E has come under fire of late for a 50 basis-point ROE adder for itsparticipation in California Independent System Operator. FERC acceptedthe incentive over objections from the California Public UtilitiesCommission, which argued that the ISO adder was not appropriate becausestate law required the three major California utilities to participate inCal-ISO.

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

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

From a policy perspective, he contended that the issue is larger thanjust PG&E and California. "This is an issue of ongoing nationalsignificance, and it's something significant that investors are going tocontinue to want, see and need in order to be able to deploy capitalwhere we need it to be deployed," he said.

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

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

The other cloud threatening much-needed investment in transmissionprojects deals with a cycle of successive complaints and litigationseeking to reduce transmission rates. Industry groups and transmission developers have objected to partiesfiling overlapping challenges to ROE rates and in effect "pancaking"their complaints. But even more problematic, they have said, is that FERCcontinues to set these matters for trial-type hearings, opening new casesbefore closing preceding ones.

SWIFTER RESOLUTION OF ROE COMPLAINTS SOUGHT

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

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

"Utilities file 205s far more often than customers file 206s, and theyhave filed pancaked ROE rate increase filings in the past when the costof capital was going up," Pomper said. "So if we're going to have that onthe 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 morequickly and dispensed with drawn-out settlement procedures not goinganywhere sooner, "we could get to the end of a case a little closer tothe beginning, and not have such a need for additional rate requests."

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

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

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

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