The Federal Energy Regulatory Commission's March 20, 2020, Notice of Proposed Rulemaking (NOPR) in Docket No. RM20-10-000 proposed several changes to the Commission's electric transmission incentives policy under Section 219 of the Federal Power Act (FPA), including, notably, increasing the ROE adder for participation in an Independent System Operator (ISO) or Regional Transmission Organization (RTO) to 100 basis points, regardless of whether ISO/RTO participation is voluntary.

At its April 15, 2021, meeting, however, rather than act on the March 2020 NOPR, the Commission instead voted 3-2 to issue a draft supplemental NOPR focused solely on the ROE adder for ISO/RTO participation. Specifically—and contrary to the March 2020 NOPR's proposal to increase the ISO/RTO participation adder—the supplemental NOPR proposes to codify FERC's current practice of granting a 50-basis-point increase in ROE as an incentive for ISO/RTO participation.

Chairman Glick and the Majority's Findings

While noting the benefits of ISO/RTO participation, the majority (Chairman Glick, Commissioner Clements, and Commissioner Christie, concurring) focused on their interpretation of Section 219(c) of the FPA (16 U.S.C. § 824s(c)) as incentivizing the initial act of joining an RTO/ISO rather than rewarding ongoing membership. Accordingly, the supplemental NOPR proposes to limit a utility's eligibility for the 50-basis-point incentive to the first three years after the utility transfers operational control of its facilities to the transmission organization.

The supplemental NOPR would require utilities currently receiving the incentive to either revise their tariffs to eliminate the incentive or terminate the incentive three years from the date they turned over operational control of their transmission facilities.

Although the supplemental NOPR advocates for the appropriateness of a 50-basis-point ROE adder, it also requests comments regarding whether 50 basis points is the correct level of incentive and/or whether an alternative, non-ROE incentive would be more appropriate. Additionally, the supplemental NOPR requests comments on whether the incentive should only be available to utilities that join an ISO or RTO voluntarily and, if so, how to establish a standard for determining voluntariness.

Chairman Glick emphasized that incentives must actually incentivize and that in order to implement the directives of Congress, FERC should reward the decision to join an ISO or RTO instead of continuing to force consumers to hand out money in perpetuity.

Commissioners Chatterjee and Danly in Dissent

Commissioners Chatterjee and Danly contested the majority's statutory interpretation, stating that the majority's reading of Section 219(c) of the FPA would gut the transmission organization incentive entirely. Additionally, Commissioner Chatterjee argued that the proposal effectively disincentivizes RTO/ISO membership, will prevent companies from raising the capital necessary to pursue necessary transmission buildout, and is contrary to the Commission's prior holdings in Order Nos. 679 and 679-A.

Commissioner Chatterjee also criticized the majority's stance that the benefits of ISO/RTO membership accrue only to utilities, stating that the majority of these benefits accrue to customers rather than the utilities themselves. To that end, Commissioner Chatterjee encouraged transmission-owning utilities to provide responsive comments highlighting the substantial benefits that incentives allow utilities to provide for their customers, including, as the Commission emphasized in Order 769-A and Commissioner Chatterjee reiterated in his dissent, guaranteeing reliability and reducing costs.

Commissioner Christie's Concurrence

In his concurrence, Commissioner Christie emphasized his view that utility regulators ultimately exist to protect customers.

In Commissioner Christie's view, ROE incentive adders unnecessarily burden customers without demonstrably incentivizing the desired actions on the part of utilities, and the costs of ISO/RTO participation would be more appropriately considered in setting a utility's base ROE rather than addressed via a separate "subsidy." Commissioner Christie expressed additional support for potential non-ROE incentives, suggesting, in sum with his other comments, that he may oppose any form of ROE adder.

Moving Forward

The other items from the May 2020 NOPR remain open, and the Commission has indicated that it will continue to consider the incentives necessary for ensuring a robust transmission grid. In the meantime, comments on the supplemental NOPR are due 30 days after publication in the Federal Register, with reply comments due 15 days later.