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.