In an Order issued by FERC on January 29, 2019 in ER18-2342, FERC accepted GridLiance Heartland’s proposed formula rate and protocols, including the MISO 10.32% base ROE, a 50 basis point RTO Participation Adder, and the Regulatory Asset and Hypothetical Capital Structure incentives, and granted GridLiance Heartland’s request for authorization to replicate its Formula Rate and incentives granted in this docket for future affiliates formed to operate in MISO. Prior to GridLiance using the formula rate (currently it does not own any transmission assets in MISO), it must submit a filing pursuant to section 205 to include the Formula Rate in the MISO OATT. FERC allowed GridLiance to include an income tax allowance in the proposed Formula Rate, but suspended the issue, subject to refund, and set the matter for hearing and settlement judge procedures. In fact, FERC initiated a Section 206 investigation (EL19-29) on the appropriateness of GridLiance’ s inclusion of an income tax allowance in two other formula rates - GridLiance High Plains and GridLiance West. FERC is concerned that including an income tax allowance in these Formula Rates may cause the same double recovery of income taxes described in United Airlines (DC Court of Appeals) and in FERC’s Revised Policy Statement on income taxes.
Below are items discussed by FERC in the Order that are worthy of individual summary:
1. FERC stated concern over the cost of debt included in the Formula Rate during the period when GridLiance Heartland may acquire construction financing but prior to acquiring any long-term debt. FERC found GridLiance Heartland’s proposal to use a proxy debt rate for the period in which GridLiance Heartland does not hold any debt just and reasonable, but also found that GridLiance Heartland’s Formula Rate should track actual costs to the extent possible. Accordingly, FERC required that GridLiance Heartland revise its Formula Rate to provide for recovery of actual short-term debt from construction financing, as necessary, during the period that GridLiance Heartland acquires construction financing but prior to issuing long-term debt.
2. FERC found GridLiance Heartland’s affiliate cost allocation description acceptable for informational purposes with the understanding that GridLiance Heartland must provide in its annual update and informational filings details describing the affiliate cost allocation used for the applicable rate year and any changes from the previous year, as well as the magnitude of such costs, and that any interested party will have the chance to review the affiliate cost allocation methodology and associated costs during the information exchange and challenge periods. GridLiance Heartland will bear the burden of proof to demonstrate that its affiliate cost allocation methodology and associated costs are just and reasonable.
3. FERC granted GridLiance Heartland’s request for authorization to use a hypothetical capital structure of 60% equity and 40% debt, as well as GridLiance Heartland’s proposal to adopt its actual capital structure, capped at 60% equity, once it has any assets in service. FERC understands that nonincumbent transmission developers have a particular need for the Hypothetical Capital Structure Incentive because it establishes certain financial principles that incumbent transmission owners currently have in place but that remain undetermined for nonincumbent transmission developers and that granting this request furthers the policy goal of facilitating the participation of nonincumbent transmission developers in the Order No. 1000 transmission planning processes, thereby encouraging competition.
4. FERC granted GridLiance Heartland the Regulatory Asset Incentive as nonincumbent transmission developers bidding on regional transmission projects in MISO’s competitive solicitation process must incur early pre-commercial and formation costs, but do not have a mechanism to recover these costs as they are incurred, as do incumbent transmission owners. FERC granted carrying costs, provided they would not result in a higher amount of interest than is allowed for construction expenditures that accrue in Allowance for Funds Used During Construction. FERC stated that GridLiance Heartland must make a section 205 filing to demonstrate that the pre-commercial and formation costs are just and reasonable before it includes them in rates and that GridLiance Heartland must establish that the costs included in the regulatory asset are costs that otherwise would have been chargeable to expense in the period incurred but were deferred consistent with the authorization granted herein.
 In the Policy Statement, FERC found that an impermissible double recovery results from granting a Master Limited Partnership (MLP) natural gas pipeline both an income tax allowance and a return on equity pursuant to the discounted cash flow methodology. FERC stated in the Policy Statement that it would address this issue for non-MLP partnership forms as those issues arise in subsequent proceedings. That is what they are doing here with GridLiance.
Dr. Paul Dumais
CEO of Dumais Consulting with expertise in FERC regulatory matters, including transmission formula rates.