Consumers Energy Co., et al. filed a complaint in April 2018 in Docket EL18-140 against International Transmission Co. (ITC) alleging that the return on equity adders for independence (Transco Adder) of 50 or 100 basis points previously awarded to ITC companies have been rendered unjust and unreasonable by a recent Commission-authorized merger (ITC and Fortis). By Order dated October 18, 2018, FERC reduced the Transco Adder for each of the ITC Companies to 25 basis points. Commissioner Glick dissented as he believes the adder should be eliminated. Both Commissioner LaFleur and Commissioner Glick stated that FERC should undertake a review of transmission incentives to ensure they are meeting the intention of the Energy Policy Act of 2005.
In Order No. 679 (a result of the Energy Policy Act of 2005) – Section 219 of the Federal Power Act, the Commission established criteria for use in determining whether an entity with active ownership by a market participant is sufficiently independent to qualify for a Transco Adder to its return on equity. Those criteria include the entity’s “integrity of investment planning, capital formation, and investment processes, as well as how its business structure provides support for transmission investments.” In Order No. 679, FERC also indicated that such entities could have varied levels of independence, and that it would “consider the level of independence of a Transco as part of our analysis when we determine the proper ROE for the Transco, and evaluate the specific attributes of a particular proposal, including the level of independence, to determine appropriate incentives.” FERC found in this proceeding that the merger of ITC and Fortis has reduced, but not eliminated, the ITC Companies’ independence from market participants.
- With respect to investment planning, the first criterion that the Commission set forth in Order No. 679, FERC found that the ITC Companies demonstrate some level of independence by developing their own capital expansion plans. However, Fortis’ 2017 Annual Report evaluates capital expenditures on a consolidated basis for its entire corporate family. This fact indicates that some level of coordination and control may occur on a consolidated basis, despite the ITC Companies’ statement that investment decisions made by ITC Holdings’ Board of Directors are rolled up, rather than dictated from the top down.
- With respect to capital formation, FERC found that the ITC Companies demonstrate some level of independence in that they can issue their own debt independently from Fortis. However, Fortis’ 2017 Annual Report states that “[c]ash required of Fortis to support subsidiary capital expenditure programs is expected to be derived from a combination of borrowings under the Corporation’s committed corporate credit facility and proceeds from the issuance of common shares, preference shares and long-term debt.” Therefore, because of the merger, ITC Holdings can no longer issue its own common stock, and, to some degree, the ITC Companies rely on Fortis for financing.
- With respect to business structure, FERC found that the ITC Companies demonstrate some level of independence in that the majority of ITC Holdings’ 11-person Board of Directors is unaffiliated with Fortis. However, Fortis both has representatives on ITC Holdings’ Board of Directors and thus provide some oversight to ITC Holdings’ executives. In addition, the Fortis Operations Group, which includes executives of all of Fortis’ regulated utility subsidiaries, meets regularly to discuss business operations.
Given the ITC Companies’ reduced level of independence, FERC found that it must revisit the appropriate level of the Transco Adder for the ITC Companies. Given the ITC Companies’ reduced level of independence, FERC found that a Transco Adder of 25 basis points appropriately encourages the Transco business model in these circumstances and promotes corresponding consumer benefits. This is a reduction from 100 basis points and 50 basis points for the ITC Companies. As a result, FERC directed the ITC Companies to revise their formula rates in Attachment O of the MISO Tariff to reflect a 25-basis point Transco Adder, effective April 20, 2018, the date of the complaint, and to make associated refunds for the period from April 20, 2018 through the date of this order. FERC directed the ITC Companies to submit their revised MISO Tariff Attachment O formula rates in a compliance filing due within 30 days of the date of this order and to submit a refund report within 45 days of the date of this order.
Commissioner LaFleur expressed concerns regarding the level of independence demonstrated by the ITC entities. However, she believes that FERC precedent adequately justifies the 25-basis point Transco Adder for the ITC companies as she believes the order reflects a reasonable compromise that provides immediate rate relief to customers. She then suggested that FERC generically consider its incentive policies to ensure that they are aligned with the goals of promoting investment in transmission infrastructure under Section 219 of the Federal Power Act, while also ensuring just and reasonable rates.
Commissioner Glick dissented because he does not believe that the ITC Companies are sufficiently independent to justify any ROE adder since the acquisition by Fortis eliminated the principal justifications for awarding the ITC Companies an additional return on their investment. He went on to say that he strongly supports the development of new transmission infrastructure, which benefits consumers in many ways, including by reducing congestion, increasing reliability, and providing access to remotely located renewable energy resources and that FERC’s transmission incentives policy can play an important role in fostering investment in transmission facilities. However, he asserts that FERC’s incentives policy must balance the need for new transmission facilities with its obligation to ensure rates that are just and reasonable and not unduly discriminatory or preferential, which is of particular importance for ROE-based incentives as those incentives—which come directly out of consumers’ pockets—must incent transmission owners to develop and operate their facilities in a manner that provides consumers with sufficient benefits to justify the extra costs they must pay. He then concludes his dissent by reiterating that it is time for FERC to revisit its transmission incentives program and evaluate whether the incentives established in Order No. 679 are meeting this standard and furthering the goals that Congress established in the Energy Policy Act of 2005. It is especially important that the Commission thoroughly examine its use of ROE incentives, including the Transco adder, to ensure that they are incenting actions and investments that will produce meaningful benefits for consumers, and he agrees with Commissioner LaFleur that an appropriate avenue going forward would be for the Commission to revisit its transmission incentives policies through a generic proceeding.