Reed Smith Client Alerts

On March 20, 2020, the Federal Energy Regulatory Commission (FERC or Commission) issued a Notice of Proposed Rulemaking (Transmission Incentive NOPR)1 in Docket No. RM20-10-000 recommending an overhaul of the Commission’s policy on electric transmission incentives. The Transmission Incentive NOPR posits that the Commission’s present transmission incentive policy is struggling to keep pace with evolving load patterns, innovative generation technologies, and ever-increasing threats to reliability.  Accordingly, the Transmission Incentive NOPR offers a comprehensive proposal to modernize the policy and incentive structure for encouraging the development, operation, and maintenance of new interstate transmission projects.  Comments on the Transmission Incentive NOPR are due 90 days after publication in the Federal Register.

Section 219(a) of the Federal Power Act (FPA) directed the Commission to “establish, by rule, incentive-based (including performance-based) rate treatments for the transmission of electric energy in interstate commerce by public utilities for the purpose of benefitting consumers by ensuring reliability and reducing the cost of delivered power by reducing transmission congestion.”2 Consistent with that mandate, in 2006, the Commission set forth processes by which a public utility could seek transmission rate incentives in Order No. 679 and Order No. 679-A.3 The Commission’s transmission incentive policy was further shaped by Order No. 1000, which established regional transmission planning and cost allocation processes for public utility transmission providers.4 In November 2012, the Commission issued a policy statement providing additional guidance regarding its evaluation of applications for transmission rate incentives under section 219 and Order No. 679.5 The Transmission Incentive NOPR intends to better align the Commission’s regulations and transmission incentive policy with the statutory objectives of section 219 of the FPA.

The overarching change proposed in the Transmission Incentive NOPR is shifting from a system that rewards the risks and challenges borne by transmission developers to one that prioritizes the economic benefits afforded to transmission consumers. Under its existing policy, the Commission grants transmission incentives based on the “nexus test,” which requires transmission developers to demonstrate a nexus between the incentives they request and the proposed infrastructure investment, relative to the risks and challenges facing a transmission project. The Transmission Incentive NOPR replaces the nexus test with an economic benefits construct that awards return on equity (ROE) incentives as follows: