On November 15, 2012, FERC issued a Policy Statement to provide new guidance to applicants seeking electric transmission incentives pursuant to section 219 of the Federal Power Act (“FPA”).  The Commission stated that the guidance is necessary to encourage investment in transmission infrastructure while maintaining just and reasonable rates.  Notably, the Commission “reframes” the nexus test applied to transmission projects and will no longer depend on its prior routine/non-routine analysis.  Additionally, the Policy Statement clarifies that applicants must take certain steps to mitigate risks for their projects and make certain showings in order to obtain incentive Return on Equity (“ROE”) treatment.  The Policy Statement will apply to all electric transmission incentive applications filed at the Commission after November 15, 2012.

The Commission implemented section 219 of the FPA by issuing Order Nos. 679 and 679-A concerning incentive-based rate treatment for investment in electric transmission infrastructure. Since then, the Commission has considered over 85 applications for electric transmission incentives.  On May 19, 2011, the Commission issued a Notice of Inquiry (“NOI”) seeking comments on the “scope and implementation” of FERC’s incentives policies.  The Policy Statement is the result of the NOI and related comments filed with the Commission.

The Policy Statement provides guidance concerning several parts of the Commission’s electric transmission incentives policies.  First, the Policy Statement clarifies that the Commission will no longer rely on an analysis of whether a project is routine or non-routine in order to satisfy the nexus test, as adopted in Baltimore Gas and Electric Company, 120 FERC ¶ 61,084 (2007) and instead, will require that applicants demonstrate how the package of incentives sought is “tailored to address demonstrable risks and challenges” of the proposed transmission project.  Next, the Commission requires that applicants seeking electric transmission incentives look first to risk-reducing incentives such as recovery of 100 percent Construction Work in Progress before seeking an incentive ROE.  The Commission also states in the Policy Statement that it must ensure that the effect of the risk-reducing incentives is “appropriately accounted for” in determining whether an incentive ROE based on risks and challenges is warranted.  The Commission will also no longer consider a request for a stand-alone ROE based on utilization of an advanced technology.

Finally, the Commission requires applicants to make four showings to qualify for an incentive ROE based on a project’s risks and challenges: (1) that the proposed project faces risks and challenges not already accounted for in the base ROE or in risk-reducing incentives; (2) that the applicant is taking appropriate steps and using appropriate mechanisms to minimize risks during project development; (3) that the alternatives to the project have been or will be considered in a transmission planning process or other appropriate forum; and (4) that the applicants commit to limit application of the incentive ROE to a cost estimate for the project.

A copy of the Policy Statement is available here.