In ER19-303, FERC awarded Duquesne the Abandonment Incentive and CWIP in rate base for a PJM project named the Beaver Valley Deactivation Transmission Project. The Project is part of a suite of projects needed to address reliability violations resulting from FirstEnergy’s intent to deactivate about 4,000 MW of nuclear generation between May 31, 2020 and October 31, 2021 (four generation facilities are expected to be deactivated, including Davis-Besse Unit 1, Beaver Valley Unit 1, Beaver Valley Unit 2, and the Perry Unit). The Beaver Valley Units 1 and 2 are located within Duquesne’s service territory in southwestern Pennsylvania. The Project consists of constructing a new Elrama 135 kV substation, connecting seven 138 kV transmission lines to the new substation, reconductoring several transmission lines, establishing a new circuit, and constructing transmission tie lines from the new Elrama substation to a FirstEnergy substation. Duquesne estimates that the Project will cost $38.4 million and has a projected in-service date of June 1, 2021.
In ER19-297, FERC awarded Mid-Atlantic Interstate Transmission, LLC (MAIT) and West Penn Power Company (West Penn) the Abandonment Incentive for transmission upgrades, which comprise the Generator Deactivation Project, a PJM project needed to address reliability violations resulting from the same nuclear retirements described above. The Generator Deactivation Project is estimated to cost $144.4 million and will include three transformer replacements, construction of a new substation and transmission lines, and reconductoring of existing transmission lines and terminal equipment enhancements. The Generator Deactivation Project has a projected in-service date of June 1, 2021.
FERC also confirmed that both Duquesne and MAIT and West Penn are eligible to seek recovery of 50 percent of their portion of prudently-incurred abandonment costs, net of the closing out of the transaction and sale of associated assets, for both projects expended prior to the date of issuance of this order. However, such recovery, along with any recovery pursuant to the Abandonment Incentive, is subject to a future filing establishing the justness and reasonableness of including such costs in rates.
Duquesne did not propose accounting procedures to ensure that customers will not be charged for both capitalized AFUDC and corresponding amounts of CWIP proposed to be included in rate base and must do so on compliance.
On November 27, 2018 in Docket No. ER18-2510, FERC approved an Abandonment Incentive requested by First Energy for an electric transmission project in PJM for which they are partially responsible to build and won. The Abandonment Incentive provides for 100% recovery of prudently-incurred abandonment costs if the project is abandoned or cancelled for reasons beyond the transmission developer’s control. FERC also confirmed that First Energy is eligible to seek recovery of 50 percent of prudently incurred project costs expended prior to a Commission order granting the Abandonment Incentive.
First Energy sought the same Abandonment Incentive previously approved for Transource, BGE, and PECO for the project – other entities responsible to build and own portions of the project. Specifically, First Energy requested the Abandonment Incentive to recover 100 percent of their prudently incurred costs, including plant costs, real estate procurement costs (including any losses incurred on the future sale of real estate), pre-commercial development costs, and all related costs, if the project is abandoned or cancelled for reasons beyond their control. First Energy stated that that it faces several risks in developing and constructing the project that are beyond its control, including permitting risks in two jurisdictions (Pennsylvania and Maryland), the risk that PJM may cancel the project due to changed system needs or economics, and completion risks arising from other transmission owners having development and construction responsibility for different parts of the project.
FERC has found that transmission projects approved as baseline upgrades and included in PJM’s Regional Transmission Expansion Plan (RTEP) are entitled to the rebuttable presumption, as established under Order No. 679, if the facilities will either ensure reliability or reduce the cost of delivered power by reducing transmission congestion. The project under consideration here received approval as a baseline project through the RTEP process. In this case, FERC found that there was a nexus between the incentive sought and the investment made and that the total package of incentives requested is “tailored to address the demonstrable risks or challenges faced by the applicant….” as First Energy demonstrated that the project faces substantial risks and challenges because it will cross several jurisdictions, require multiple layers of governmental approvals, is an interdependent part of a single integrated project, and that the larger project previously was found to face substantial risks and challenges. Prudence determinations would be made based upon a separate filing pursuant to FPA section 205 if First Energy seeks to recover any abandoned plant costs at which time First Energy would be required to demonstrate that the abandonment or cancellation of the project was beyond its control.
On February 13, 2018, in Docket ER18-463, FERC denied a request by Ameren to implement a 100-basis point ROE adder/transmission rate incentive for the Illinois Rivers and Mark Twain components of the Grand Rivers Project in MISO. In March, Ameren requested rehearing of the FERC order. Previously, Ameren had received risk reducing incentives for the two projects, including 100% construction work in progress, abandoned plant, a hypothetical capital structure, and the authority to assign those incentives to affiliated entities. Ameren further requested the 100 basis point ROE adder, stating that the risk-reducing incentives already granted by the Commission did not fully address the risks and challenges of the two projects. FERC denied the ROE adder, finding that, due to the late stage of development, including the substantial completion of the Illinois Rivers Project, Ameren had failed to demonstrate that the remaining risks and challenges associated with the projects warranted the requested ROE adder.
In its request for rehearing, Ameren argues that the Commission erred by: (1) denying the ROE adder for the Illinois Rivers Project on the basis of its construction progress; (2) failing to follow the 2012 Policy Statement on eligibility for the ROE adder; (3) denying the ROE adder for the Mark Twain Project on grounds that applied only to the Illinois Rivers Project; (4) failing to address the application in its entirety when the record supported granting the ROE adder for the Mark Twain Project standing alone; (5) giving weight to resolution of certain risks faced by the Mark Twain Project during the pendency of the application, and ignoring other remaining risks; (6) concluding the Mark Twain Project’s risks were addressed by the abandonment incentive; and (7) not awarding, in the alternative, a 50 basis point ROE adder for either or both of the projects. On rehearing, FERC denied the ROE adder for the Illinois River Project but granted a 50 basis point adder for the risks and challenges of the Mark Twain Project.
Denying the ROE adder for the Illinois Rivers Project based on its construction progressIn the February 2018 Order, FERC explicitly stated that a project being nearly complete does not preclude it from receiving incentives. However, FERC went on to explain that a project that is further along in construction and thus closer to completion faces fewer remaining risks and challenges, and FERC found that to be the case for the Illinois River Project. FERC’s position is that an applicant may not seek incentives for a project that is already complete, while a project that is not yet complete is eligible for incentives. In a case involving Pepco, FERC granted a ROE adder based on the risks and challenges for a project that was nearly complete. FERC stated in the Ameren Order that they no longer will grant a ROE incentive based on the risks and challenges of a nearly complete project. FERC plans to consider how close a project is to completion when evaluating the risks and challenges of the project – with less risk typically attendant to projects that are further along in the construction process. With the Illinois River Project, FERC said that Ameren failed to meet the nexus test given the limited remaining risks and challenges it faced. Specifically, even at the time of its December 2017 application, the Illinois Rivers Project was approximately 90 percent complete, with four of its nine line segments energized, including two of three river crossings, and with all 10 substations in service. In addition, four of the five remaining line segments were in the advanced stages of construction at the time of application and are now complete. While Ameren argued that the Illinois Rivers Project still faced legal uncertainty and landowner opposition, FERC did not view these risks as enough to warrant the ROE adder.
Failing to follow the 2012 Policy Statement on eligibility for the ROE adder:In the 2012 Policy Statement, FERC stated that it expects an applicant seeking to obtain an ROE incentive based on a project’s risks and challenges to (1) identify the specific risks and challenges to the project that are not either already accounted for in the applicant’s base ROE or addressed through risk-reducing incentives; (2) demonstrate that the applicant is taking appropriate steps and using appropriate mechanisms to minimize its risk during project development; (3) demonstrate that alternatives to the project have been, or will be, considered in either a relevant transmission planning process or another appropriate forum; and (4) explain whether the applicant is committed to limiting the application of the ROE adder based on risks and challenges to a cost estimate. As to the Illinois Rivers Project, FERC said Ameren failed to identify specific risks and challenges warranting the ROE adder, given that the Project is substantially complete. While construction progress is not explicitly mentioned in the 2012 Policy Statement, FERC stated that it is not precluded from considering that factor as part of its analysis. In Order No. 679-A, FERC clarified that the nexus test is met when an applicant demonstrates that the total package of incentives requested is “tailored to address the demonstrable risks or challenges faced by the applicant.” FERC therefore
Denying the ROE adder for the Mark Twain Project on grounds that applied only to the Illinois Rivers Project; failing to address the application in its entirety when the record supported granting the ROE adder for the Mark Twain Project standing alone; giving weight to resolution of certain risks faced by the Mark Twain Project during the pendency of the application, and ignoring other remaining risks; and concluding the Mark Twain Project’s risks were addressed by the abandonment incentive: On rehearing, Ameren argued that substantial completion of the Illinois Rivers Project does not justify denying the ROE adder for the Mark Twain Project and that the record supports granting a ROE adder for the Mark Twain Project standing alone. Specifically, Ameren states that the Mark Twain Project’s permitting risks are significant, and that the identified risks are not addressed by the abandonment incentive. FERC agreed with Ameren that the Mark Twain Project should be evaluated on its own merits and that it is not substantially complete – at the time of the application, construction had not begun. FERC acknowledged that the Project 1) will relieve chronic and severe congestion that has had demonstrated cost impacts to customers, 2) is expected to produce production cost savings, net of the capital and operating costs of the projects, in the amount of $495.5 million in Missouri alone and approximately $2 billion MISO-wide, and 3) will unlock location constrained generation resources that previously had limited or no access to the markets. FERC agreed that Ameren satisfied the first showing set forth in the 2012 Policy Statement. FERC also found that Ameren satisfied the other three showings set forth in the 2012 Policy Statement - 1) Ameren is taking appropriate steps and using appropriate mechanisms to minimize risk during development of the Mark Twain Project (seeking and obtaining risk-reducing incentives and committing to use best practices in project management and procurement); 2) the Mark Twain Project was reviewed and approved as part of the MISO Transmission Expansion Plan 2011 portfolio of MVPs, such that alternatives to the project have been considered in a relevant transmission planning process; and 3) Ameren committed to limiting the application of the ROE Incentive to a cost estimate.
Not awarding a 50 basis point ROE adder for either or both projects:FERC found that a 50 basis point adder, rather than a 100 basis point adder, is appropriate for the Mark Twain Project. To support this finding, FERC relied upon two decisions related to Next Era NY: 1) a settlement that FERC approved which provided a 50 basis point ROE incentive for the AC Project (FERC approved a similar settlement for New York Transco for this project which also provided a 50 basis points risk and challenge ROE adder) and 2) the NY Empire Project in which FERC granted a 50 basis point ROE incentive. FERC found that Mark Twain Project unlocks location constrained generation and provides congestion relief in a range comparable to that of these projects. FERC ended its order by stating that the Ameren case is only the third instance in which the Commission has granted a ROE incentive based on a project’s risks and challenges since the 2012 Policy Statement and that it will continue to scrutinize each incentives application filed in the future.
Dr. Paul Dumais
CEO of Dumais Consulting with expertise in FERC regulatory matters, including transmission formula rates.