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FERC Proposes Sharp Limits on Incentives for RTO Participation

In a Supplemental Notice of Proposed Rulemaking issued April 15, 2021, FERC proposed a change to its current and long-standing practice of permitting a continuing 50 basis point ROE incentive for transmission-owning utilities that join and remain in an ISO or RTO. Under the new proposal, put forward on a 3-2 vote of the FERC commissioners, the ROE incentive would be available for only three years after joining the RTO. Existing RTO members that received the incentive more than three years ago would be required to make a compliance filing eliminating the incentive. The Commission also asked if the incentive should be limited further still, so that it would only be available to utilities that “voluntarily” joined an RTO, rather than joining pursuant to a legal mandate.

The FERC proposal to convert the incentive from a permanent boost for RTO membership to a short-term signing bonus raises several issues that will likely be hotly contested. Among them:

(1) The meaning of Section 219(c) of the Federal Power Act, a product of the Energy Policy Act of 2005, which provides:

(c) INCENTIVES. In the rule issued under this section, the Commission shall, to the extent within its jurisdiction, provide for incentives to each transmitting utility or electric utility that joins a Transmission Organization. The Commission shall ensure that any costs recoverable pursuant to this subsection may be recovered by such utility through the transmission rates charged by such utility or through the transmission rates charged by the Transmission Organization that provides transmission service to such utility. (Emphasis added.)

In the Supplemental Notice, FERC suggests that the key concept in the paragraph is “join[ing]” and that a continuing incentive after joining is thus not mandated by the statute. In contrast, the dissents argue that the sole focus on “join[ing]” ignores the actual words of the statute which mandate incentives for any utility “that joins” an RTO. The dissents argue, and utility commenters will likely agree, that the statutory focus on a utility “that joins” transforms the statutory mandate from one that focuses on the momentary act of joining and instead focuses on a utility’s continuing status as one that has joined an RTO.

(2) A second issue is that the proposed rule suggests that transmitting utilities obtain significant benefits from joining RTOs, and thus need no incentive to remain as RTO members. The purported benefits to the utility include: “optimization of the transmission system, and regional transmission planning as well as access to numerous types of markets.” There is little doubt that utility commenters will argue that these benefits of RTOs, while real, accrue to the customers of the transmitting utilities and not to the transmitting utilities themselves. That distinction makes a difference – because if the benefits accrue to the customers of the utility, but not the utility itself, the arguments against a continuing incentive for RTO membership are weakened.

(3) A third issue concerns “voluntariness”. In asking whether incentives should be available where RTO participation is “mandated by the state”, the rulemaking seems to accept that such state mandates are legally binding. Many would disagree that the state could legally issue such a mandate – arguing that the Federal Power Act generally preempts states from requiring RTO participation. Several appellate court cases directly address this issue. For example, in Atlantic City Electric Co. v FERC, 295 F.3d 1 (D.C. Cir. 2002), the court held that utility participation in an RTO is governed by Section 205 of the Federal Power Act, and that FERC cannot generally prohibit a utility from filing a Section 205 application to withdraw from an RTO. The fact that RTO participation and withdrawal is governed by FPA Section 205 is significant, because states generally have no authority to compel a utility to make a Section 205 filing. See Western Massachusetts Electric Co., 23 FERC ¶ 61,025 (1983), aff’d sub nom, Commonwealth of Massachusetts v. FERC, 729 F.2d 886 (1st Cir. 1984) (“Mass DPU”). As Judge Breyer (then on the First Circuit) explained in his opinion in Mass DPU, allowing a state to require utilities to file Section 205 actions would impermissibly “allow a state to do what FERC itself cannot, namely, to change an interstate rate practice that FERC has not found unreasonable.”

Notably, the “voluntariness” issue, like the “benefits” issue, goes to the logic of the change in rules. If utilities are free to leave an RTO and get little benefit to themselves and their shareholders from remaining, the argument for retaining an incentive to keep the utilities in RTOs is far stronger.

The dissents note other issues that will likely be the subject of comments. This includes the issue of how the three-year incentive period was chosen (as there is no explanation why it is three years and not some other period) and the issue of whether the change of rules will hurt customers by inhibiting necessary regional transmission expansion.

The Supplemental Notice is just a proposed rule for now. Comments addressing the issues above or other issues relating to the proposal will be due 30 days after publication of the proposal in the Federal Register, with reply comments due 45 days after publication of the proposal.

Stan Berman

Eric Todderud

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