FERC's U-Turn on Transmission Rate Incentives

15 February 2013
Kurt Strunk with Julia Sullivan, Partner at Akin Gump Strauss Hauer & Feld LLP

In this paper, NERA Vice President Kurt Strunk and Akin Gump Strauss Hauer & Feld LLP Partner Julia Sullivan analyze a recent Policy Statement from the Federal Energy Regulatory Commission (FERC) on transmission incentives, which retreats from FERC's prior approach broadly applying the incentive returns on equity (ROE) across the transmission sector. Such a policy change has sweeping implications for investors in the midstream electric utilities business. In the Policy Statement, FERC revised its incentive policies by concluding that risk-reducing regulatory provisions, such as recovery of 100% of construction work in progress and abandoned plant costs, may lessen the need for incentive ROE adders. In addition, FERC stated that it expects applicants for an incentive ROE to commit to limiting the application of that ROE to a certain estimated cost. Expenditures on the project exceeding that cost would not receive the incentive ROE. The authors note that, although FERC stated that it is open to differing approaches regarding this commitment, it seems to favor the estimated cost used for the project in the regional planning process.