FERC’s ROE incentive adder policy sends the wrong signals.
Scott H. Strauss is a partner and Jeffrey A. Schwarz is of counsel at Spiegel & McDiarmid in Washington, D.C.
Since mid-2006, the Federal Energy Regulatory Commission (FERC) has responded to a Congressional directive by considering—and, generally, approving—scores of public utility requests for “incentive” rate treatment of new transmission investment. Recently, FERC has been ruling on incentive rate applications on an almost assembly-line basis. Between September 1 and December 4, 2008, FERC issued nearly a dozen separate incentive rate orders approving requests for hundreds of millions of dollars in incentives. But FERC must confront, directly and consistently, serious flaws in its emerging policy regarding one category of incentive: return on equity (ROE) incentive adders.
The need to delineate when and to what extent ROE adders are appropriate is more urgent than ever. Current transmission plans include billions of dollars in proposed new projects. The Obama Administration has promised to “moderniz[e] the grid,”1 while interest groups have called for new facilities to interconnect renewable generation resources.2 Unless FERC applies more focused guidelines, the ROE incentive regimen will function largely as a windfall for transmission owners and, worse, won’t encourage cost-efficient construction and maintenance of transmission systems.