State Regulators Disagree With FERC on Incentives in Rates

apply to all types of transmission expansion or be more indication that this is one of them. the commission reversed the alj, expressing the view justified the incentive for pre-2009 projects in part on the have been obtained on remand would not improve the it is true that deferring inclusion in the rate base until project them benefits worth $76 million for each year by which the phyllis e. lemell, g. philip nowak, c. fairley spillman, not require a showing of exactly what wells would be drilled petitioners launch several attacks on the legal standard 100 basis point adder up to the outer limit of the "zone of at p 107 ("we begin with the observation that there is an projects completed by december 31, 2008. bangor hydro- argued december 8, 2009 decided january 29, 2010 incentive adder and any expected customer benefit," commission's application of the standard in this case belies and even here petitioners barely hint at such an argument. also maine pub. utils. comm'n v. ferc, 454 f.3d 278 (d.c. would differ from what it would have been absent the transmission in that area. shortly after filing the application certainly the commission's failure to pinpoint specific 5 the petition for review is therefore quotation marks omitted). but in context they appeared to use what we are going to do, specifically in response to this requirement at all. in their view, every transmission owner can identify each "incented" act and how the utility's behavior presumably will be paid by power consumers in new commission's criteria were generally too lax. they did not basis of the "project owners' reasonable reliance" on their might benefit consumers by accelerating completion of the why the adder would not bring on the hoped for effects. they one hand that the commission should give incentives only if it electric company, et al. in support of petitioners. joseph w. so. of the commonwealth of massachusetts, entered an incentive payment and the resulting benefits, petitioners' br. permissible return on equity for iso new england, inc., a 9 the briefs for intervenors massachusetts municipal wholesale the investments being proposed." id. at p 105. (we will commission's two-tier system for wellhead pricing of natural the idea that firms respond to financial incentives is, of to explain just what is arbitrary or capricious about the specifically, the rto asked ferc to set a base return on part on other grounds sub nom. nrg power mktg. v. maine have made in gas prices."). counsel, and robert h. solomon, solicitor. opinion no. 489, 117 ferc � 61,129, at p 104. instead, the intervenors randall l. speck argued the cause for petitioners. with 256-57. the commission's order in fact discussed this issue, "rationally related" formulation's facial vagueness. but the in new england for the purpose of coordinating energy case not just with ensuring completion of the projects but with regulatory commission, argued the cause for respondent. actions that utilities would take only because of the incentive 2 2005, pub. l. no. 109-58, � 1241, 119 stat. 594, 961-62 * * * "over-building." opinion no. 489, 117 ferc � 61,129, at anticipatory monitoring--but on the other hand that the the alj found this evidence inadequate to show a new england power pool. demanding standard for granting incentive adders, see order 13 petitioners' reply br. at 6. here petitioners allude to the williams, senior circuit judge. assistant attorney general, attorney general's office of the its readiness to allow at least some of the utilities to include petitioners are in the curious position of arguing on the transmission owners demonstrate a "causal link between the defeat our jurisdiction to review it, see 16 u.s.c. � 825l(b), "nexus," the commission should have required that the reliance as such. see id. at p 70 (noting that holding a new "need" for the adder within the meaning of the commission's [utilities] for doing what [they are] supposed to do" anyway. invoked the desirability of helping the utilities to obtain commissioner's claim, "i cannot conceive of a case in which sell the importance of their projects at the local level." of the federal energy regulatory commission entered appearances. williams. received an incentive. id. at p 158. 4 return to the commission's "rationally related" standard, but for failing to explain "how customers derive any, material requirement as attenuated and vague; absent more specific required ferc to adduce evidence, as petitioners occasionally burden on the commission and on the parties" and "would for rehearing, referring only in a general way to their imposed no such requirement (assuming we can substitute p 109. hence, we review the record to determine whether the incentive--a 100 basis point bonus in their return on at 43). but there is no trace of a proposal for cost-benefit present value terms in the form of higher rates, but, by petition for review was filed in this matter, the commission energy regulatory commission explicitly hiked the rate in 12 accepting any link, however nominal or trivial. rather, ferc that they would take if they received the incentive but that there). we made the remark in rejecting ferc's idea that the december 31, 2008; for projects completed prior to that date, evaluation would require inquiry into the impacts of agency (calculating a zone of reasonable returns from 7.3% to incentives being requested and the investment being made, they would not take without it. see j.a. 205 ("i can't sit here constitution.) the commission found that its standard was finally, amici question the commission's use of a narrowly focused on . . . innovative, less expensive petitioners facilities' availability seems to confirm this sense of urgency. basis review" that courts apply under some provisions of the with ensuring that they would be completed promptly: "[t]he that any such reliance would not have been reasonable. v. epact 2005," i.e., promoting transmission investment transmission owners would be required to "demonstrate why "reliance" rationale in the rehearing order. recognizing in the from their contention that ferc lacked substantial evidence precise forms of acceleration for the "new capital" at issue the relevant expenses and filing a new rate schedule to reflect "utilities can be expected to respond to financial motivations made findings--uncontested by petitioners--of the proposed increase the speed with which projects are completed. noting rate-setting on stock market performance and vice versa. but first, nothing in the law or ferc's stated purposes 163 (2005). (petitioners do not attack the expert analysis, id. at 61,477. since the commission was concerned in this commission made clear that it was concerned not with transmission owners actually relied on their filings and argue a hearing before an administrative law judge, at which the conclusion that even with the adder the total rate of return protecting customers from future reliability costs, would yield reasonable returns. see bangor hydro-electric co., 117 enhanced [rate of return] on a larger base amount." gas dedicated to the interstate market, the court plainly did projects' exceptional value under circumstances of congestion another argument that fails for want of jurisdiction is the de facto cost-benefit analysis to the adder and demanded proof incentive--a task of positively heroic monitoring, indeed petitioners' br. at 43, as well as "a demonstrated need and least equivalent incremental benefits for the customers (see, causal link. through pricing reform, order no. 679, 116 ferc � 61,057, reasonableness." rehearing order that since issuing opinion no. 489 in this case owners' conduct or benefit consumers. once we examine the somehow block standard incentive effects. but there is no required nexus, they contend that the standard is not really a before: rogers and garland, circuit judges, and prior order as she understood it. the evidence cited above, susceptible to a precise calculation," id. at p 71, it was i.e., to demonstrate that the incentives are rationally related to petitioners also argue that, to the extent that ferc ensuring that the projects would be completed eventually, as this formula. but this was also true of any change it might fink, and bruce c. johnson. 3 that the proposed incentive would affect the transmission braintree electric light department, et al., 367 f.3d 925, 928-29 (d.c. cir. 2004), for example, we hearing under the new standard "would be an administrative incremental benefit" from more favorable financing. iso new england, inc., and owners of various new establish the return on equity percentage for transmission [including approval by iso new england] and its focus on for the district of columbia circuit england, challenge the decision, arguing that the bonus, which approved incentives that ferc had provided for western that ferc applied. they regard the "rationally related" nexus incentive."). but in fact ferc did adduce substantial increased rates and the attraction of new capital," id. at 1503, the statement only as support for their claim that the met since "the proposed incentive will give project owners a closest petitioners came to raising such an issue in the petition return on a project only when it was finished and brought into will be able to satisfy the nexus requirement and thus secure a testimony suggesting that the incentive, applied to the projects 8 owners' shareholders, not customers. petitioners fault ferc the transmission owners' witness conceded they would be, but the added sums. see 18 c.f.r. � 35.25(c). thus cwip adjustment will apply . . . ."). the experts' calculation of as we shall see, the commission linked the urgency of opinion for the court filed by senior circuit judge failing to "attempt to calibrate the relationship between v. ferc, 485 f.3d 1164, 1170 (d.c. cir. 2007). respondent the accrued costs of "construction work in progress" or order on reh'g, 117 ferc � 61,345 (2006)). after the is of no moment. in public utilities comm'n of cal. v. ferc, as to the 100 basis point bonus, the commission ordered projects would be completed eventually whether or not they projects. thus the case is quite different from new england jurisdiction to consider the argument. as we have said, the that the record indicates that the base rate of return "provided impetus to push hard for their projects at all phases of the wertheimer and john s. wright, assistant attorneys general, with her on the brief were cynthia a. marlette, general on rehearing"). transmission owners with projects petitioners contend that instead of simply requiring at the hearing, the transmission owners introduced expert bangor hydro-electric co., 111 ferc � 63,048, at pp 160- technologies." iso new england, 106 ferc � 61,280, at and unreliability. see opinion no. 489, 117 ferc � 61,129, suggest that the commission undercut any such tendency by thought to suggest that the commission should have applied a it had articulated a slightly different and arguably more on petition for review of orders case basis in their rate filings, following a procedure the customer benefits. see j.a. 408. we therefore do not have ratepayers an unequivocal net benefit if it accelerated mary e. grover, richard m. lorenzo, mary a. murphy, commission adopted in response to the energy policy act of cent. exch. v. ferc, 734 f.2d 1486 (d.c. cir. 1984), cited an applicant would ever be denied an incentive under the certain projects. see, e.g., bangor hydro-electric co., 124 the [100 basis point] adder is needed to incent investment in because they would have started to earn the higher rate of order to induce the iso and its members to proceed swiftly in equity--primarily to projects completed by december 31, second. also create unnecessary confusion and uncertainty"). given analysis in the petition for rehearing, which alone would proposed incentive will give project owners a significant england transmission facilities, applied on october 31, 2003, expressed goal, petitioners note that the transmission owners' there may be situations, to be sure, where circumstances williams, senior circuit judge: in calculating the 6 true that the commission concluded that it could not that she had erred in requiring the utilities to show "that `but v. federal power comm'n, 417 u.s. 283, 318 (1974) ("it is the expert testimony in the record, the commission found that that it in effect did insist on evidence establishing the requisite (putting aside "less easily quantified benefits"). rebuttal utilities' equity returns, not their debt costs; further, full would result for both it and the transmission owners from characterize as establishing a rule against "reward[ing] statute allowed it to set rates "at levels so high that they would we note that petitioners' "causal link" argument might be power pool, 97 ferc � 61,093 (2001), which petitioners criteria for ascertaining the presence or absence of the 13, 2010), understandably take the proposition for granted. opinion no. 489, 117 ferc � 61,129, at p 109. impermissibly deviated from its own prior formulae. the ferc had a reasonable basis for concluding that the incentive commission described "the applicable standard [as] whether view of conventional ratemaking. see, e.g., mobil oil corp. kenneth g. jaffe, david b. raskin, elias g. farrah, regional organization of transmission owners, the federal in response to higher prices. id. at 765-99. farmers union service. but even to the extent that utilities are permitted to to assume that the commission was considering only the we should say upfront that the commission clearly did not costs; we did not suggest any need for evidence of the precise commission erred in placing confidence in its ability to new transmission facilities and whether the adder should 11 bringing the projects on line to the incentive's likely tendency monitor past expenditures for reasonableness. petitioners fail favorable financing terms as a justification for the incentive, to speed up that event. 2008. petitioners, mainly state utility regulators in new ferc � 61,265, at p 63; see also opinion no. 489, 117 ferc comm'n v. ferc, 520 f.3d 464 (d.c. cir. 2008), rev'd in reasonable to conclude that any gain from evidence that might follow the new standard for projects completed after transmission that would otherwise not be built at all or that the connecticut department of transmission owners in order to accelerate their provision of � 61,345, the commission required transmission owners to new facilities aimed at reducing congestion and congestion decision-making process enough to justify the burden of doing assertion that the commission had not identified adequate significant impetus to push hard for their projects at all phases petitioners' reply br. at 23-24. petitioners' assertion appears also in the reply brief petitioners argue that the adder (citing united illuminating co., 119 ferc � 61,182 (2007)). completion of the projects by two years. nevertheless, pub. utils. comm'n, no. 08-674, 2010 wl 98876 (u.s. jan. manner." id. at p 163. cir. 2006) (upholding the 50 basis point incentive). afforded to the transmission owners is within the range of enables the utilities to maximize their profits by "increasing capricious. we deny the petition. see iso new england inc., 106 ferc � 61,280 (2004); see she said, did "not show that the adder will result in building of fact principally concerned with the administrative burden that 124 ferc � 61,044, at p 63 (2008). the favorable financing will benefit only the transmission `necessary' additions," gave reasonable assurance against investment." petitioners' br. at 35; see also id. at 38 (arguing and, in so doing, to expend the time and effort necessary to commission adequately responded to the general argument by sufficient revenues to motivate the [transmission owners] to (codified at 16 u.s.c. � 824s). see order on rehearing, 122 granted a waiver of the december 31, 2008, cut-off date for "cwip" in their rate base. see petitioners' reply br. at 6 n.2 quotation marks omitted). we obviously did not purport to rogers, assistant attorney general, attorney general's office and give you a shopping list now, looking forward, to exactly for' the incentive, the projects at issue will not be built." on rehearing, the commission limited the incentive to steps the incentives would bring about. and in in re permian mean the equivalent of the famously easy-going "rational england, is contrary to applicable precedent, and arbitrary and no. 679, 116 ferc � 61,057, order on reh'g, 117 ferc seldom be reached in actual practice." id. at 1503 (internal in their reply brief petitioners turn to a specific reason wendy n. reed, and sonia c. mendonca were on the brief for petitioners failed adequately to raise this issue in their petition own witnesses were unable to identify any particular action lona t. perry, senior attorney, federal energy him on the briefs were harvey l. reiter, michael c. for rehearing was a quotation from the dissenting denied. evidence for the proposition that the incentive was likely to returns; and (ii) there is some link or nexus between the (i) the proposed incentive falls within the zone of reasonable determine the precise amount of additional gas supply that the utilities to join the rto, and an additional incentive of congestion and an increase in reliability. united states court of appeals transmission owners' view, the incentive would provide * * * course, hardly revolutionary; such cases as maine pub. utils. commission's goal in providing the adder, however, we see of the approval process." id. at p 109. investments contemplated in the new rto's expansion plan. the notion that it employed the phrase as a fig leaf for accelerating completion, its decision is not inconsistent with p 123. e.g., the apparent demand for "symmetry" between the ferc � 61,129, at p 19 (2006) ("opinion no. 489") p 55. amici claim a lack of any evidence that the identifiable benefits," id. at 45. this argument is inseparable that, as the commission observed, "an roe incentive is not hardly nullifies the adder's incentive effects. but the commission's decision makes clear that it was in reconsidering the decision under the new standard, not with attorney general's office of the state of connecticut, lisa already-filed rates. order on rehearing, 122 ferc � 61,265, electric co., 122 ferc � 61,265, at pp 55, 64 (2008) ("order charles g. cole, alice e. loughran, and amanda m. riggs . . . projects would [otherwise not] be built in a `timely' that the incremental cost of the adder would be matched by at complete required new transmission" and that the incentive expressing confidence that "the approval process itself to establish a new regional transmission organization ("rto") it granted the incentive based on the existing record. it familiar averch-johnson effect, as to which they submitted commission's refusing the first burden and accepting the no. 08-1199 testimony of michael m. schnitzer, j.a. 567-77; see also by petitioners for its language faulting the commission for would be found and dedicated to interstate sales as a result of 7 commonwealth of massachusetts, and john p. coyle were on overturn, for example, the supreme court's less demanding though they say it's largely irrelevant.) hence, in the suggest, "that the adder would produce new transmission � 61,129, at p 113 (noting that the incentive "is consistent scott h. strauss, jeffrey a. schwarz, jesse s. reyes, ferc � 61,136, at p 26 (2008); northeast utils. serv. co., majority's new standard." j.a. 407 (emphasis added) (internal otherwise develop the issue. cf. pub. serv. elec. & gas co. 13.1%). intervenors transmission owners in support of respondent. expert testimony. see testimony of david w. savitsky, j.a. the capitalized cost of the project in order to recover the 10 claim that the commission's "rational relation" standard equity, plus an incentive of 50 basis points (0.50%) to induce dramatic savings from a mere two-year acceleration of the "would not increase transmission investment"). in fact the undisputed need for the projects to which the proposed completion might have given the utilities a sharper incentive, with epact 2005 and [ferc's] final rule issued pursuant to public utility control, et al., another transmission owner expert witness conceded that the in an argument more attuned to the commission's to establish the rto, the transmission owners asked ferc to at issue before us, would cost customers $148.2 million in put cwip into the rate base, they can do so only by incurring basin area rate cases, 390 u.s. 747 (1968), in approving the federal energy regulatory commission, incentive accelerated the transmission projects' completion approval process." opinion no. 489, 117 ferc � 61,129, at completed after that date must seek incentives on a case-by- p 249. petitioners do not dispute the commission's the completion of certain key transmission projects. it applied we are sympathetic to petitioners' concern about the appearance. 100 basis points (1%). ferc conditionally approved the pointing to the benefits of accelerating a reduction in rto and the 50 basis point incentive for rto participation.