On January 23, 2023, FERC set New York Power Authority’s (“NYPA”) proposed revisions to its Formula Rate Template for hearing, including changing NYPA’s allocation methodology for administrative and general (“A&G”) costs to a multi-factor, modified Massachusetts method (“Massachusetts Method”). In doing so, FERC found that NYPA had not supported its claim that the Massachusetts Method is appropriate for its specific circumstances and organizational structure or how the change would affect rates. FERC also conditionally accepted proposed changes to NYPA’s Formula Rate Protocols implementing transmission rate incentives and cost containment mechanisms for the Smart Path Connect Project.
NYPA is a corporate municipal instrumentality and a political subdivision of the State of New York. In its filing, NYPA explained that, because of New York’s aggressive climate change initiatives, its business focus and investment profile have shifted toward transmission development, which also requires greater management-level attention. Accordingly, after a review of how it allocates A&G costs in its Formula Rate Template, NYPA determined that the multi-factor “Massachusetts Method”, which uses an equally weighted average of direct labor, net plant, and net revenue ratios, better reflects NYPA’s changing management focus rather than the single factor ratio allocator NYPA currently employs. In setting NYPA’s Formula Rate Template for hearing and settlement judge procedures, FERC took issue with several aspects of NYPA’s proposal. Noting that NYPA is a municipal instrumentality and subdivision of New York, FERC questioned whether the Massachusetts Method is just and reasonable for NYPA to use to allocate A&G costs between business functions given that the Massachusetts Method is typically used by corporate holding companies to allocate A&G costs between a non-revenue generating holding company and its operating/subsidiary companies. FERC also stated that NYPA failed to explain how changing its A&G cost allocation methodology would affect rates. FERC concluded that doing so is relevant to a determination of whether the instant Formula Rate Template revisions are just and reasonable and not, as NYPA suggested, part of an evaluation of the Formula Rate inputs during the Annual Update process.
Separately, FERC found that NYPA’s proposed revisions implementing the approved incentive rates and cost containment mechanism for the Smart Path Connect Project were inconsistent with NYPA’s representations in that proceeding, which FERC previously relied on. FERC noted that the proposed revisions do not reference FERC’s prior holding that the incentives are “bounded by the upper end of the zone of reasonableness.” FERC also noted that the proposed definition of Third-Party Costs could be interpreted to allow NYPA to exclude more costs from total Project Costs than initially contemplated by FERC. Accordingly, FERC conditionally accepted NYPA’s proposal but directed NYPA to submit a compliance filing correcting these inconsistencies.
FERC’s order, issued in Docket No. ER23-491 can be found here.