The Nickel Report

On March 21, 2019, the Federal Energy Regulatory Commission (Commission or FERC) held its monthly open meeting. Highlights of the meeting included the following:

• Electric Transmission Incentives Policy (Docket No. PL19-4-000)
  • The Commission issued a Notice of Inquiry (NOI) seeking comments on the scope and implementation of its electric transmission incentives regulation and policy.
  • Section 219 of the Federal Power Act directs the Commission to use transmission incentives to help ensure reliability and reduce the cost of delivered power by reducing transmission congestion. The Commission issued Order No. 679 in 2006 to establish its approach to transmission incentives and set forth a series of potential incentives that it would consider. The Commission subsequently refined its approach in a 2012 policy statement.
  • The NOI seeks comments in response to questions addressing many matters, including several that have not previously been addressed by the Commission’s transmission incentive policy, including:

• • • Whether incentives should continue to be granted based on a project’s risks and challenges or should be based on the benefits that a project provides.
    • Whether incentives should be used to incentivize projects that promote reliability, economic efficiency, address persistent geographic needs, make transmission system operation more flexible, enhance physical and cyber security, increase grid resilience, improve existing transmission facilities, encourage interregional transmission projects, unlock locationally constrained resources, place non-incumbent transmission developers on a level playing field with incumbents, and encourage development of transmission in non-RTO/ISO regions.
    • Whether the types of incentives the Commission currently awards remain relevant and appropriate and whether the goals of the incentives could be incentivized more efficiently. This includes the ROE adder incentives for transmission-only companies, for joining an RTO/ISO, and for the use of advanced technology. This also includes non-ROE incentives, such as regulatory asset/deferred recovery of pre-commercial costs/CWIP, hypothetical capital structure, recovery of costs of abandoned plant, and accelerated depreciation.
    • The mechanics, implementation, and evaluation of the effectiveness of incentives (including the potential development of metrics to evaluate their impacts).
  • Commissioner LaFleur highlighted a number of matters in which she looked forward to comments. This included the Transco adder and the RTO participation adder, which she stated had been controversial in recent Commission or court orders. In addition, she referenced the interplay between Order No. 1000 and the Commission’s incentives policy. She noted that there was a clear need to construct new transmission to ease the interconnection of location-constrained renewables. She also noted that interregional transmission has proven tremendously difficult to site and construct and looked forward to comments regarding whether anything in the incentive policies could help this transmission built. Finally, she indicated that she looked forward to comments on changes to support competitive transmission processes.
  • Commissioner Glick continued to express concern that the Commission has been too generous in rewarding incentives.
  • Comments are due 90 days after the notice is published in the Federal Register, and reply comments are due 30 days later.

• Return on Equity Policies (Docket No. PL19-4-000)

• • The Commission also issued a Notice of Inquiry (NOI) seeking comments to assist it in examining whether, and how, it should modify its policies concerning the determination of the return on equity (ROE) to be used in designing jurisdictional rates charged by public utilities and also whether any changes to its policies concerning public utilities should be applied to interstate natural gas and oil pipelines.
  • The NOI follows the DC Circuit decision in Emera Maine v. FERC (854 F.3d 9 (D.C. Cir. 2017)), which had questioned the Commission’s ROE methodology. The Commission subsequently issued two orders proposing an alternative ROE methodology and establishing a paper hearing on whether and how the alternative methodology should apply to ROE complaint proceedings in New England and the Midwest. (For additional background, see FERC October 2018 Open Meeting Highlights; FERC November 2018 Open Meeting Highlights.
  • The NOI seeks comments on eight general topics as well as in response to specific questions posed under each of those eight topics:

• • • The role of the Commission’s base ROE in investment decision-making and what objectives should guide the Commission’s approach;
    • Whether uniform application of the Commission’s base ROE policy across the electric, natural gas pipeline, and oil pipeline industries is appropriate and advisable;
    • Performance of the Discounted Cash Flow (DCF) model;
    • Proxy groups;
    • The choice of financial model(s) used;
    • The mismatch between market-based ROE determinations and book-value rate base;
    • How the Commission determines whether an existing ROE is unjust and unreasonable under the first prong of Federal Power Action section 206; and
    • The mechanics and implementation of the models.

• • Commissioner LaFleur encouraged commentators to be focused and concise in their comments and to specify what questions they are answering.
  • Comments are due 90 days after the notice is published in the Federal Register, and reply comments are due 30 days later.

• Review of Interstate Pipeline Companies’ Rates — Chairman Chatterjee provided an update on the Commission’s ongoing efforts to review natural gas pipeline rates to address the impact of recent tax changes. Specifically, interstate natural gas companies were required to submit a FERC Form 501-G in response to the Commission’s Order No. 849 concerning the companies’ return on equity before and after the passage of the Tax Cuts & Jobs Act of 2017 and changes to the Commission’s tax allowance policies in response to the DC Circuit’s United Airlines decision. Chairman Chatterjee indicated that the Commission had received 129 Form 501-G filings and has taken action in 102 of these proceedings to date. Most recently, on the day before the meeting, the Commission initiated an investigation pursuant to Section 5 of the Natural Gas Act to examine the rates of one natural gas pipeline and storage company, while separately terminating 38 pipeline rate proceedings.
• LG&E Proceeding — Chairman Chatterjee also highlighted the Commission's order removing a market power mitigation measure concerning rate de-pancaking that the Commission had imposed to resolve horizontal market power concerns originating from the 1998 merger of Louisville Gas and Electric (LG&E) and Kentucky Utilities Company (KU) and their 2006 withdrawal from the Midcontinent Independent System Operator. The Chairman asserted that that there was now sufficient competition to protect the public interest, while allowing LG&E/KU to discontinue the mitigation. Commissioner LaFleur dissented, arguing that the de-pancaking mitigation was still needed to protect customers and that the matter should have been set for hearing for further record development.
• Continued Debate Regarding the Commission’s Consideration of Greenhouse Gas Emissions Under the Natural Gas Act
  • In late February, Chairman Chatterjee’s announced a potential “breakthrough” in the Commission’s consideration of greenhouse gas emissions associated with liquefied natural gas (LNG) export terminals. He made this announcement in connection with the Commission’s approval of the Venture Global Calcasieu Pass project.
  • At the open meeting, Commissioners LaFleur and Glick referenced the Chairman’s announcement but reiterated their prior criticism of the Commission’s current approach to assessing potential greenhouse gas impacts in certification proceedings under the Natural Gas Act. It seemed clear that there continue to be substantial differences of opinion among the Commissioners on this issue. Similarly, the Commission appears to still be divided along party lines on high profile electricity policy issues, including grid resilience and the treatment of state subsidies in Commission-jurisdictional electric capacity markets.
• Energy Grid of the Future — Finally, Chairman Chatterjee provided some highlights from a keynote speech he had given at CERAWeek in Houston. The theme of his remarks was the energy grid of the future. Chairman Chatterjee stated that “my colleagues and I are focused on our responsibility to facilitate a smooth energy transition. One that allows for the integration of new technologies, like renewables, energy storage, and distributed energy resources, while also ensuring the grid remains reliable and resilient in the face of existing and evolving threats. In my view, the Commission currently has a once in a generation opportunity to create the type of regulatory ecosystem that will enable this transformation to flourish. I’m excited for what the future holds, but I’m also cognizant of the challenges that lay ahead of us.”