On October 9, 2012, the Commission denied PPL Electric Utilities Corporation’s (“PPL”) request for an incentive Return on Equity (“ROE”) adder for its Northeast/Pocono Reliability (“NPR”) project, marking the first time since the Energy Policy Act of 2005 that FERC denied a request for an ROE adder for a transmission project it determined to  be “non-routine.”  While the Commission granted PPL’s requested Construction-Work-In-Progress (“CWIP”) incentive, the denial of the ROE adder led Commissioner Philip Moeller to partially dissent from the Commission’s order, stating that the denial “only serves to increase regulatory uncertainty and may result in a reduction of needed investment in our nation’s transmission infrastructure.”

In December 2011, PPL filed a request for a 100 basis point incentive adder to PPL’s ROE for the project and recovery of CWIP in rate base.  PPL stated in its application that the NPR Project is designed to resolve reliability violations of the transmission system in the Pocono Mountains area of northeast Pennsylvania.  PPL also stated that the NPR Project will make several enhancements to the existing transmission system.  The first portion of the NPR Project is expected to be operational in 2014, and the entire project is expected to be completed by November 2017. 

The NPR Project has been approved by the Board of PJM Interconnection, LLC (“PJM”) as a baseline reliability project in PJM’s Regional Transmission Expansion Plan (“RTEP”).  The Commission used this approval to find that there was a rebuttable presumption that NPR Project: 1) will ensure reliability, or 2) will reduce the cost of delivered power by reducing transmission congestion. 

However, the Commission also evaluated the nexus between the particular incentives requested and the demonstrable risks and challenges faced by PPL.  In evaluating this particular nexus requirement, the Commission has historically looked at whether a project is “routine.”  In the past, FERC has held “when an applicant has adequately demonstrated that the project for which it requests an incentive is not routine, that applicant has, for purposes of the nexus test, shown that the project faces risks and challenges that merit an incentive.”

In determining that PPL’s NPR Project was not routine, the Commission noted that the NPR Project will cost $182 million.  The Commission also noted that PPL will invest $1.2 billion in new and upgraded transmission infrastructure while the NPR Project is being built.  The Commission highlighted that these projects will triple PPL’s net transmission plant in service over the next five years, and thus, “presents financial risks and challenges to PPL.”  

Although the Commission determined that the NPR Project was non-routine, the Commission ruled that “PPL has not identified risks and challenges of the NPR Project sufficient to support its request for an ROE adder.”  Specifically, the Commission noted that the CWIP incentive granted by the Commission “sufficiently mitigated” the risks and challenges for PPL.  The Commission also stated that the NPR Project is being constructed in a single state and entirely within PPL’s service territory.  Thus, the NPR Project does not require coordination with other utility commissions and other public utilities.

In his partial dissent, Commissioner Moeller argued that FERC departed from precedent by not awarding any incentive ROE adder for a non-routine transmission project.  Commission Moeller said the Commission “inadvertently signaled yet another shift in the manner by which it will award transmission incentives.”  Further, Moeller questioned whether this “hopscotch approach” could amount to reasoned decision making, and that this precedent may stifle transmission growth.  Moeller concluded that “PPL should have received at least some amount of its requested ROE adder in recognition of the special risks and challenges that its [NPR] Project will face.”

A copy of the full Commission order is available here.