On December 30, 2010, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) issued two separate but related orders (the “December 30, 2010 Orders”) on transmission rate incentives under sections 205 and 219 of the Federal Power Act (“FPA”) and Order No. 679.  In the first order the Commission denied Public Service Electric and Gas Company’s (“PSE&G”) proposed transmission rate incentives for its four separate projects (the “Projects”), and further explained the need to change Commission policy regarding the application of the “nexus test” under Order No. 679 to “groups” of projects.  In a subsequent order the Commission applied this new policy to Oklahoma Gas and Electric Company’s (“OG&E”) proposed recovery of incentive rate treatments for a group of projects and denied requested incentives for six projects. 

Order No. 679 set forth criteria that a public utility must satisfy to gain transmission rate incentives under section 219 of the FPA.  Under section 219 of the FPA, an applicant must show that the facility for which it seeks incentive treatment reduces the cost of delivered power by reducing transmission congestion or ensures reliability.  The applicant must also demonstrate a “nexus” between the incentives sought and the investment made.  The section 219 requirement and the “nexus” requirement must both be satisfied.  The “nexus” test is considered met when incentives are “tailored to address demonstrable risks or challenges faced by the applicant.”  The Commission will consider if the project in question is “routine” and look at: (1) the scope of the project; (2) the effect of the project; and (3) the challenges or risks faced by the project. 

Prior to the December 30, 2010 Orders, the Commission dealt with groups of transmission projects and incentive rate treatment in various ways.  In previous cases, the Commission recognized that individual projects, when considered together with other projects, may not be “routine” for purposes of incentive treatment.  The Commission has also applied the nexus test to a group of projects collectively when the applicant submitted an incentive rate application with respect to a batch of projects.

In the PSE&G Order, the Commission found that in the case of PSE&G and going forward, the Commission will require each applicant to “demonstrate that there is a nexus between the incentive sought and the specific investment made.”  The applicant can show that individual projects are accurately a single project, with a combined purpose, or file for in incentives for more than one unconnected project in one filing.  For PSE&G, the Commission found that the Projects did meet the first requirement under section 219: the projects qualify for a rebuttable presumption that those projects will ensure reliability or reduce the cost of delivered power because they were approved under a Regional Transmission Organization’s (“RTO”) regional planning process.  

However, as to the Order No. 679 nexus requirement, the Commission found that PSE&G provided insufficient information to determine if each project meets the nexus requirement.  PSE&G included aggregate information regarding the costs and construction of the Projects.  The Commission also found that PSE&G did provide individual financial information about the Projects.  The Commission denied the requested incentives without prejudice, allowing PSE&G the opportunity to file again.  Commissioner John Norris dissented in part from the Commission’s Order in the PSE&G case to state that the Construction Work in Progress (“CWIP”) incentive is “an appropriate regulatory tool to address particular challenges” and disagreed with the Commission’s decision to deny PSE&G this incentive for its Projects.

On December 30, 2010, the Commission applied the policy set forth in the PSE&G Order and denied OG&E’s request for transmission rate incentives for six of its eight transmission projects in the Southwest Power Pool region.  Again, the Commission denied the requested incentives without prejudice, allowing OG&E the opportunity to file again.  The Commission did, however, grant OG&E CWIP and Abandoned Plant Recovery with respect to two of their eight projects.  The Commission held that though OG&E could submit a request for incentives for its eight projects in one order, it had to provide “sufficient information” for how each fulfilled the nexus requirement.  Like the PSE&G Order, the Commission found that the projects did meet the first requirement under section 219 of the FPA, as part of an RTO’s regional planning process; however, the Commission found that OG&E failed to provide sufficient information regarding the risks and challenges specific to each of the six projects in order to satisfy the nexus requirement.  Commissioner Norris again dissented from the Commission’s decision to deny OG&E’s request to include 100 percent CWIP for its six remaining projects on the grounds that this CWIP will “work to benefit consumers.”

A full copy of the Commission’s December 30, 2010 Orders are available at www.ferc.gov and at PSE&G and at OG&E.