posted on Wednesday, July 26, 2006 5:42 PM by David Nosse

FERC Finalizes Rule Promoting Transmission Investments; Grants Incentive Rates to AEP and Allegheny

On July 20, FERC issued its Final Rule implementing new transmission pricing provisions, aimed at creating new incentives for transmission investment and signaling an increasingly flexible transmission pricing policy.  After lamenting a sustained lack of investment in an aging transmission grid, in last year's Energy Policy Act of 2005 Congress directed FERC to develop transmission rates sufficient to induce investment.  FERC proposed incentive rates in a Notice of Proposed Rulemaking (NOPR) issued last November.  [See Rule Would Encourage Transmission Investment & Membership in Transcos & Transmission Organizations].  The Final Rule issued last week mostly adopts the NOPR.

Key provisions of the Final Rule include: 

  • Incentive rates of return on equity for new transmission investment by public utilities (including both traditional utilities and stand-alone transmission companies, or transcos);
  • Full recovery of prudently incurred construction work in progress;
  • Full recovery of prudently incurred pre-operations costs;
  • Full recovery of prudently incurred costs of transmission facilities that become abandoned or canceled;
  • Use of hypothetical capital structures;
  • Accumulated deferred income taxes for transcos;
  • Adjustments to book value for transco sales/purchases;
  • Accelerated depreciation;
  • Deferred cost recovery for utilities precluded by retail rate freezes from passing through the costs of new transmission investments; and
  • A continuation of the sometimes controversial approach of approving higher rates of return on equity for utilities that join and/or continue to be members of transmission organizations, including (but not limited to) RTOs and ISOs.

Public utilities must still obtain FERC approval to reap the benefit of any of these incentives.  The Final Rule also adopted a reporting requirement requiring public utilities that have received incentive rate treatment for specific projects to submit information regarding the level of actual transmission investment.   

In addition to the new rule, FERC applied it in granting investment incentives to American Electric Power Co. ("AEP") and Allegheny Energy, Inc., for their proposed projects in the Mid-Atlantic region.  AEP's proposed 765-kV transmission line would stretch 550 miles between New Jersey and West Virginia, while Allegheny's proposed 500-kV line would link southwestern Pennsylvania and Virginia.  For both projects, FERC approved rates of return on equity at the "high end of the zone of reasonableness."