Docket Nos. EC26-28-000, EL26-24-000
In companion orders issued today, the Commission rejects Federal Power Act (FPA) section 203 and 205 filings from PacifiCorp that implement a proposed sale-leaseback and accompanying levelized rate proposal to facilitate a capital investment in the Boardman-to-Hemingway Transmission Project (B2H Project).1 I dissent from both orders because I believe PacifiCorp has satisfied its burdens under FPA sections 203 and 205 to demonstrate, as relevant here, that its proposed levelized rate proposal does not create an adverse effect on rates and is otherwise just and reasonable.
Overview of Levelized Rates versus Traditional Cost of Service Rates
The decision before the Commission in these proceedings turns largely on the differences between a traditional cost of service (COS) rate design and a levelized rate design. Under traditional COS ratemaking, the revenue requirement associated with an individual capital asset declines over time. Specifically, as a capital asset depreciates, the regulated return – which is a major component of the total rate – decreases, leading to higher rates in the early years of the asset’s life and lower rates in the later years.2
By comparison, a levelized rate flattens these payments into equal installments over time, similar to a fixed-rate mortgage. As compared to a declining traditional COS rate for a specific capital asset, customers with levelized rates pay comparatively less in the early years and more in the outer years, with the utility recovering the same investment over the same period of time. This alternate payment structure can benefit customers by, for example, reducing rate shock associated with large capital investments as they enter service. The total nominal amount of costs associated with a levelized rate – not adjusted for the time value of money (e.g., paying a dollar today costs more to the customer than paying a dollar in five years) – generally exceeds the total nominal amount of a traditional COS rate approach.
While the two rate structures involve different nominal dollar recovery and distribution of the rate recovery over a common period of time (e.g., 20 years), utilities can set the levelized rates based on equal net present value (NPV) of the traditional COS rates. NPV-based assessments and rate setting are common in the financial and utility sectors. NPV-based rate design accounts for the time value of money by setting levelized rates in a manner that is financially equivalent to the front-loaded traditional COS rate, providing ratepayers with lower rates in the early years (when their money is worth more) and higher rates in the out years (when their money is worth less). This approach can achieve the benefits of a levelized rate design while holding both the utility and its customers harmless compared to a traditional COS rate.
PacifiCorp’s Proposals and Today’s Orders
As explained in the orders, PacifiCorp submitted three filings to facilitate a capital investment in the B2H Project by a passive special-purpose entity (SPE Lessor) that is affiliated with PacifiCorp: (1) an FPA section 203 application requesting approval of a proposed sale-leaseback involving PacifiCorp’s ownership interest in the B2H Project (Proposed Transaction); (2) a 20-year Master Lease Agreement (Lease Agreement) between PacifiCorp and SPE Lessor, submitted under FPA section 205, which governs the rates, terms, and conditions through which PacifiCorp will lease transmission capacity on the B2H Project; and (3) a petition for declaratory order (Petition) requesting that the Commission affirm that SPE Lessor will not, as a result of the Proposed Transaction, be considered a public utility under section 201(e) of the FPA.
To recover SPE Lessor’s investment in the B2H Project, the Lease Agreement provides that PacifiCorp will pay SPE Lessor a levelized rate designed to mimic the return of, and on, the investment in the B2H Project that customers would pay under traditional ratemaking. For purposes of the Commission’s FPA section 203 analysis, the Proposed Transaction’s potential rate effect is the potential difference between this levelized rate structure and the traditional COS rate that PacifiCorp would otherwise charge its customers for the B2H Project.
In the B2H 203 Order, the Commission denies, without prejudice, PacifiCorp’s requested FPA 203 authorization for the Proposed Transaction. Specifically, the B2H 203 Order finds that PacifiCorp has failed to demonstrate that its proposed levelized rate structure will not have an adverse effect on rates or that the benefits of the proposed transaction are sufficient to offset an adverse effect. The B2H 203 Order also dismisses PacifiCorp’s Petition as moot, given its rejection of the Proposed Transaction. In the B2H 205 Order, the Commission finds that PacifiCorp has not demonstrated that the Lease Agreement is just and reasonable because it does not include a “final, populated project-specific schedule in Exhibit 1 for the B2H Project, including the final lease payment amount, SPE Lessor’s cost, and the net book value of the B2H Project….”3
PacifiCorp Has Adequately Justified Its Levelized Rate Proposal
As discussed below, I disagree with the orders’ conclusion that PacifiCorp has failed to demonstrate that its Proposed Transaction and levelized rate construct satisfy the requirements of FPA sections 203 and 205. In particular, PacifiCorp has provided sufficient detail to demonstrate that its proposed levelized rate is reasonably designed and will be equivalent to a traditional COS rate on an NPV basis. Consequently, its proposed levelized rate does not represent an adverse “effect on rates” and thus satisfies the requirements of FPA section 203.
PacifiCorp’s Proposed Levelized Rate Structure Is Well-Designed and Will Not Create an Adverse Effect on Rates
The Proposed Transaction raises an issue of first impression regarding how the Commission should assess levelized rate structures under FPA section 203. As the B2H 203 Order explains, the Commission’s “focus here is on the effect that the Proposed Transaction will have on rates; whether that effect is adverse; and whether any adverse effect will be mitigated or offset by benefits that are likely to result from the Proposed Transaction.”4
I am persuaded based on the record before us that PacifiCorp’s proposed levelized rate structure will not result in an adverse effect on rates. Broadly, PacifiCorp proposes first to calculate the traditional COS revenue requirement for each year of the 20-year Lease Agreement.5 PacifiCorp then proposes to convert that amount to its NPV by applying a discount rate equal to the after-tax weighted average cost of capital (WACC)6 – recognizing that a dollar in the future is less valuable than a dollar today. It then converts that aggregate 20-year NPV amount into a levelized rate, again relying on the WACC discount rate. Based on my review of the records, PacifiCorp’s levelized rate design is economically sound and well-supported, using reasonable assumptions for key inputs and demonstrating via calculations how it will ensure the levelized rate is equivalent on an NPV-basis to a traditional COS rate. While PacifiCorp’s levelized rate yields a nominal difference of $95 million over the life of the 20-year lease, about 5.5% of the total nominal revenue requirement under the traditional COS rate, this is a result of the NPV calculation and the different periods over which the investment is recovered; it is not an adverse rate effect. Rather, accounting for the timing of recovery, PacifiCorp has demonstrated that the levelized rate is equivalent to a traditional COS rate for both PacifiCorp and its customers.
Accordingly, I am persuaded that PacifiCorp’s levelized rate proposal provides sufficient protection for customers over the 20-year term of the Lease Agreement, does not create an adverse rate effect under our FPA section 203 framework,7 and is just and reasonable under FPA section 205.8 Unfortunately, as discussed further below, the B2H 203 and 205 Orders reach a different conclusion.
The Orders Unnecessarily Undermine the Use of Levelized Rates
Instead of accepting PacifiCorp’s well-reasoned rate design, today’s orders conclude that PacifiCorp has failed to demonstrate that its levelized rate proposal satisfies the requirements of FPA sections 203 and 205. The logic of today’s orders (particularly the B2H 203 Order) creates a significant hurdle for the use of levelized rates in Commission ratemaking.
The B2H 203 Order finds that PacifiCorp’s NPV “equivalency does not provide assurance that rates will be unchanged by the Proposed Transaction and that that effect on rates would not be adverse because the nominal dollar amount of the total lease payments collected under the proposed levelized approach would be higher than the total payments that would have been collected under traditional ratemaking.”9 The B2H 203 Order then dismisses PacifiCorp’s effort to demonstrate offsetting benefits, concluding that (1) the “stability in recovery of the B2H Project, and the ‘lower of approach’ in setting the return on equity…could also be considered adverse to customers,” and (2) any cited benefits “of a levelized approach versus traditional ratemaking” do not overcome the “higher rates under the Proposed Transaction under levelized ratemaking than under traditional ratemaking.”10 The B2H 205 Order rejects the Lease Agreement, concluding that, notwithstanding the detail PacifiCorp provides regarding how its lease payment will ultimately be derived, the Commission cannot assess whether it is just and reasonable without the “final, populated project-specific schedule in Exhibit 1 for the B2H Project, including the final lease payment amount, SPE Lessor’s cost, and the net book value of the B2H Project,”11 which cannot be known until the B2H Project is actually completed.
Taken together, these findings undermine the broader case for levelized rates. The B2H 203 Order identifies deficiencies and rejects the Proposed Transaction based on factors that are not specific to PacifiCorp’s proposal. Rather, these factors are inherent to the use of levelized rates as compared to COS rates, which will necessarily result in both (1) higher nominal costs and (2) periods in which the levelized rate will be higher than what customers otherwise would have paid. These factors alone do not constitute an adverse impact on rates.
First, the relative difference in the nominal dollar amount between a traditional COS rate versus a levelized rate is not the proper way to assess the rate impacts of a levelized rate structure that is designed, from the ground up, to be equivalent on an NPV basis.12 NPV-based analysis is an economically sound way to set and compare different transmission rates to account for the time value of money to both transmission owners and transmission customers. Just as a dollar today is worth more than a dollar in a decade, a well-designed NPV-based rate (as PacifiCorp has proposed here) holds both parties harmless by redistributing the timing of recovery and adjusting the charged rate accordingly.
Second, levelized rates are just that – level – while a traditional cost-of-service rate features higher rates in the early years and lower rates in the out years, reflecting the depreciation of the underlying asset and transmission owner’s recovery of its capital investment. As a result, every levelized rate will be lower than an equivalent traditional COS rate in the early years, and higher in the later years. The order addresses this inherent design element and concludes that “these features of the levelized approach could also be considered adverse to customers, such that the purported benefits may also create an adverse effect on rates….”13 Again, this finding is not specific to PacifiCorp’s proposal. If these factors constitute an adverse effect on rates, then every levelized rate proposal, regardless of how well-designed, will be presumptively harmful to customers as compared to the traditional COS construct.
The net effect of these conclusions – that the combination of nominal dollar value increases and “higher” rates in the out years is sufficient to create an adverse rate effect for customers – is that, going forward, applicants will have a higher burden to justify the use of levelized rates over traditional COS rates. Furthermore, this effect might not be limited to FPA section 203 proceedings and could easily bleed into our FPA section 205 precedent as well, if opponents cite the findings here to argue that levelized rates are harmful to customers.14 These findings do not protect customers; instead, they may limit ways that utilities can help mitigate rate increases for customers in the near-term by using levelized rates. Further, they could structurally bias our ratemaking against levelized rates, notwithstanding their potential benefits.15
Conclusion
Today’s orders create an unnecessary evidentiary hurdle to the use of levelized rate structures under both FPA sections 203 and 205. I do not believe that hurdle is warranted based on the records before us. Instead, I would have authorized the Proposed Transaction and accepted the Lease Agreement, while requiring that PacifiCorp submit a future FPA section 205 filing once the final B2H Project costs are known and the actual lease payments are calculated. Going forward, I encourage applicants that propose levelized rate structures to bolster their filings with additional explanation of the benefits their proposals will provide, to ensure the Commission has a full record upon which it can assess those rates.
For these reasons, I respectfully dissent.
- 1PacifiCorp, 197 FERC ¶ 61,086 (2026) (B2H 203 Order); PacifiCorp, 197 FERC ¶ 61,088 (2026) (B2H 205 Order).
- 2Utilities recover the costs of investments through the depreciation component of rates and essentially earn a profit on investments through the return.
- 3B2H 205 Order at P 21.
- 4B2H 203 Order at P 34.
- 5Such a calculation considers the underlying cost of the investment, depreciation rates, income tax rates, and an adjustment for Accumulated Deferred Income Taxes.
- 6The WACC considers the amount and the costs of debt and equity.
- 7Because the B2H 203 Order rejects the Proposed Transaction without prejudice, it also dismisses the accompanying Petition as moot. I would have granted the Petition and affirmed, on the record before us, that SPE Lessor will not become subject to the Commission’s jurisdiction as a result of the Proposed Transaction. To the extent PacifiCorp resubmits a petition for declaratory order in conjunction with a revised FPA section 203 filing, I will consider the record of that new request at that time.
- 8The B2H 205 Order rejects the Lease Agreement because PacifiCorp has not provided certain information that can only be known once construction of the B2H Project is complete. I disagree that this information is essential to find that the filing in front of us – the Lease Agreement – is just and reasonable, given the fulsome explanation PacifiCorp has provided regarding how the lease payment will ultimately be derived. Instead of rejecting the Lease Agreement, I would have accepted it and found that PacifiCorp must submit a subsequent FPA section 205 filing to provide those final details once available and before it could charge customers for the lease payment. This subsequent filing would ensure that the Commission, transmission customers, and other interested parties have a full and fair opportunity to review the prudence of the capital expenditures for the B2H Project in conjunction with those costs flowing into PacifiCorp’s rates via the lease payments.
- 9B2H 203 Order at P 36.
- 10Id. P 37.
- 11B2H 205 Order at P 21.
- 12The B2H 203 Order finds an adverse impact on rates because, on a nominal basis, total payments under PacifiCorp’s levelized rate structure are estimated to be over $95 million more over the 20-year term of the lease rather than under traditional ratemaking. This is true but, from an economic analysis standpoint, beside the point because it fails to account for the time value of money and when those nominal dollar value differences occur over the 20-year term of the Lease Agreement.
- 13B2H 203 Order at P 37 (emphasis added).
- 14Our standards of review under FPA 203 and FPA 205 are different, and I expect that would likely be the basis to distinguish approval of a levelized rate under FPA section 205 from the skepticism conveyed here under FPA section 203. To its credit, the B2H 203 Order describes how PacifiCorp could re-file its proposals with additional support and better explanations, particularly a demonstration that its sale-leaseback arrangement and levelized rate proposals will provide offsetting benefits to customers. That is certainly preferable to foreclosing the use of levelized rates and might ultimately prove to be a low bar for applicants, including PacifiCorp, to clear under both FPA sections 203 and 205. Depending on what rationales the Commission ultimately finds persuasive in future proceedings, today’s orders therefore might be more of a speed bump than a wall.
- 15These benefits can be particularly pronounced during periods of significant capital investment to mitigate potential rate shock associated with the frontloaded nature of traditional ratemaking.