LS Power has requested an abandonment incentive for the AC Transmission Upgrades in New York (the Project). The AC Transmission Upgrades are in the final stage of consideration by the NYISO under NYISO’s Order No. 1000 competitive process for Public Policy Transmission Planning and LS Power expects to be awarded at least one of the two segments of the Project. NYISO estimates that both segments of the Project will have a total capital cost of $1.1 to $1.2 billion (including a 30% contingency, but not including the cost of certain required upgrades). The Project has an anticipated in-service date of December 2023. The NYISO Board is expected to award the Project in March 2019, at which time construction expenditures will increase substantially. LS Power expects to request other transmission incentives, for example a hypothetical capital structure during construction, later. The Project meets the rebuttable presumption of Order 679 in that the Project was considered through the Public Policy Planning process of the NYISO and needs siting approval from the New York Public Service Commission (NYPSC). As described below, the Project faces significant regulatory, permitting, and other requirements that may result in the Project being terminated at no fault of LSPG-NY and New York Power Authority (NYPA). As a result, approval of Abandonment Recovery is warranted.
A NYISO Draft Report in mid-2018 recommended selection of a joint proposal from Joint LS Power and the NYPA for both Segment A and Segment B. The NYISO Board considered and reviewed the Draft Report over several meetings from July to December. On December 27, 2018, NYISO posted the AC Transmission Public Policy Transmission Planning Report Addendum (“Report Addendum”). The Report Addendum will be the subject of additional stakeholder review and comment, and the Board is expected to consider the Draft Report and Report Addendum as its March board meeting, with final approval of the AC Transmission Upgrades. The Report Addendum continues to recommend selection of a joint proposal from LS Power and NYPA for Segment A, but recommends a New York Transco proposal for Segment B.
There are substantial risks associated with the Project. Construction of the Project will require numerous permits and approvals at each of the federal, state, and local government levels. The Project is expected to pass through portions of eight different counties and over two dozen townships. There already has been thousands of public comments in the multi-year NYPSC process that proceeded the NYISO process. Significant additional public consultation will be required in the permitting process for
the Project, in order to obtain a Certificate of Environmental Capability and Public Need (CECPN) from the NYPSC under Article VII of the Public Service Law. This permitting process will provide an opportunity for many constituencies to raise issues and concerns regarding the impacts of the transmission line construction and operation within their communities. This includes participation from the New York Department of Agriculture and Markets, which protects the interests of agricultural resources, a party by statute to transmission line permitting in New York. The New York Department of Conservation will participate, and many provisions will be required to minimize impacts on sensitive species, such as the endangered Indiana bat, which will require seasonal limitations on construction activities. The CECPN requires a showing to be made for Project need. Since the Project is not strictly needed for reliability, there could be challenges to the need for the Project. There has already been significant public comment related to the AC Transmission Public Policy Needs, with over 3,000 public comments received to date, largely in opposition to aspects of the AC Transmission process including the need for new or upgraded transmission lines. Local regulations and the compatibility of the Project with local plans is another area that is required to be described in the Article VII application and considered in the Article VII process. There has already been significant participation in the NYPSC process by many local towns in the project area.
LS Power: Through various subsidiaries, LS Power develops, owns, and operates electric transmission and independent power projects throughout the United States. LS Power subsidiaries have the following transmission projects in operations, under construction or in advanced development: (1) the ON Line transmission project, a 231-mile, 500 kV transmission project in service in Nevada (co-owned with Nevada Power Company); (2) the Harry Allen to Eldorado 500 kV Transmission Project (selected through a competitive process by the California Independent System Operator), which will connect with the southern terminus of the ON Line transmission project; (3) an approximately 300 mile high-voltage transmission system in service in Texas; (4) the new Silver Run 230 kV substation in Delaware and a new 230 kV line connecting the Silver Run substation to an existing substation in New Jersey (selected through a competitive process by PJM Interconnection, L.L.C.); and (5) Duff to Coleman 345 kV transmission line, located primarily in Indiana with a portion in Kentucky (selected through a
competitive process by the Midcontinent Independent System Operator, Inc.).
This summary covers the abandoned plant costs for the Potomac-Appalachian Transmission Highline, LLC (PATH) transmission project which was cancelled by PJM in 2011. It is an example of the process at FERC to receive recovery of abandoned plant costs after a project is cancelled even with the abandonment incentive.
PATH is a subsidiary of American Electric Power and FirstEnergy (the Parent Companies). PATH has two revenue requirements that are the subject of compliance at FERC - one for PATH West Virginia Transmission Company, L.L.C. (jointly-owned by the Parent Companies), and one for PATH Allegheny Transmission Company, LLC (owned solely FirstEnergy). FERC granted PATH an abandonment incentive. After authorizing the Project, PJM later determined that it no longer required the Project and cancelled it. In September 2012, PATH filed to recover the net amount of approximately $121.5 million in abandonment costs it incurred between January 1, 2008 and August 31, 2012, proposing to subtract revenues from the closing out of future transactions (such as land sales) through PATH’s formula rates. FERC set the proceeding for hearing, which was ultimately consolidated with two other Formal Challenge Proceedings concerning PATH.
In January 2017, FERC issued Opinion No. 554 where it ordered compliance on several matters, including: (1) PATH’s civic and political costs at issue in the Formal Challenge Proceedings; (2) advertising costs also at issue in the Formal Challenge Proceedings; (3) losses on the sale of real estate purchased for the Project; (5) the allowed return; and (6) the appropriate amortization period for the abandoned plant costs. In Opinion No. 554, FERC disallowed some of the expenses at issue in the Formal Challenge Proceedings. PATH had flowed a portion of these amounts into the abandonment costs for which PATH sought recovery. Opinion No. 554 disallowed that portion of abandonment costs related to the costs at issue in the Formal Challenge. Opinion No. 554 also reduced PATH’s return on equity from 10.4% 8.11%.
In Opinion 554, FERC found that PATH had improperly accounted for numerous costs related to civic and political activities by including the amounts in FERC Accounts that were in PATH’s Formula Rate. FERC found that PATH should have recorded these costs in below the line accounts which PATH’s Formula Rate excludes: Account 426.4 (Expenditures for certain civic, political and related activities) or Account 426.5 (Other Deductions). FERC also found that PATH’s Formula Rate limits PATH’s recovery of Account 930.1 (General Advertising) costs to only those that are Safety Related Advertising, Education and Outreach Cost Support. FERC disallowed costs from rates where PATH had failed its burden of proving that these amounts should neither have been recorded to Account 426.4, nor should they have been considered an includable Safety Related Advertising, Education and Outreach Cost Support expense in PATH’s Formula Rates. FERC found that PATH had joined and supported approximately 80 community and professional organizations, recorded the related expenses to Account 930.2 (Miscellaneous General Expenses), which should have instead been recorded to Account 426.5 (Other Deductions) and excluded from its rates.
In its recent Order dated January 17, 2019 in ER09-1256 and ER12-2708, FERC found that PATH has complied with Opinion No. 554 with respect to some amounts capitalized to plant accounts and reclassified to Account 426.4, but not with respect to advertising expenses. For Account 930.1, General Advertising, FERC directed PATH either to Account 426.4, or to the portion of Account 930.1 that PATH’s formula rate excludes. FERC found discrepancies between the General Advertising amounts reclassified by PATH in its Compliance Filings compared to the General Advertising amounts FERC required PATH to reclassify in Opinion No. 554. FERC ordered that PATH must eliminate all General Advertising costs from its recoverable amounts, or else specifically justify each item considering Opinion No. 554. In making the compliance filing, PATH must provide the journal entries to reflect the adjustments, and workpapers necessary to explain the accounting corrections for that FERC Form No. 1 input that references back to the journal entries; and the revised/corrected draft Form No. 1 inputs.
As to land transactions, FERC found that, for the land sales that PATH made prior to the issuance of Opinion No. 554, PATH complied with the land transaction directives by providing a property-by-property breakdown of the losses that it passed through rates for its past real estate purchases and sales, with separate line items for associated taxes, labor, and other costs, noting a loss of $4,149,091, including various costs associated with the sales, such as taxes and title charges. However, FERC found that PATH has not complied with the directives regarding land transactions for the eight properties it sold after the issuance of Opinion No. 554. For these properties, PATH failed to provide documentation to support its claim and failed to provide any supporting documentation regarding affiliate transactions in any of its filings. As required by Opinion No. 554, PATH failed to provide a property-by-property breakdown of the losses that it has passed through and failed to provide evidence that properties were sold on the open market, or to otherwise establish the asset’s fair market value.
For the eight properties at issue, PATH must demonstrate and provide on compliance: 1) date of sale/transfer; 2) the names of the buyers and sellers and their relationship to PATH affiliates and their parent companies; 3) sale/transfer price for each property; 4) a breakdown of associated expenses (such as taxes or labor); 5) either (i) proof that the property was advertised and sold on the open market with arm’s length bargaining, or (ii) for any transaction not at arm’s length, a detailed narrative showing whether the transaction nevertheless meets the standards laid out in Opinion No. 554; and 6) calculation of the real estate losses that it has passed through and/or proposes to pass through to customers. To the extent that PATH cannot provide evidence that it has disposed of the properties listed in the order, PATH must return to customers the original purchase price of the property plus the associated return on equity that it has received since December 2012. FERC directed PATH to submit the required compliance filing within 30 days and the required refund report within 60 days of the order.
Additionally, FERC order PATH to submit a compliance filing with the Commission describing either: (1) its plan for ending its operations and a timeline for when it intends to file a notice of cancellation of its transmission formula rates, or (2) the type of “transmission or sale of electric energy” that requires its rates to stay in effect (the cancelled project is PATH’s only project).
 For affiliate transfers which were not at arm’s length, the Commission directed PATH to demonstrate that: (1) a competitive solicitation process was designed and implemented without undue preference for an affiliate; (2) the analysis of bids did not favor affiliates, particularly with respect to non-price factors; and (3) the affiliate was selected based on some reasonable combination of price and non-price factors.
Dr. Paul Dumais
CEO of Dumais Consulting with expertise in FERC regulatory matters, including transmission formula rates.