E-8: Commissioner Christie’s Dissent to Award of Incentives to Southern California Edison, EL24-71

Docket No. EL24-71-000

I dissent from today’s order granting the Construction Work in Progress (CWIP) Incentive and the Abandoned Plant Incentive, which are nothing more than transfers of wealth from consumers to transmission developers and risk from developers to consumers.  For reasons I explain below, it is long past time for the Commission to revisit its “check-the-box” practice of granting transmission incentives, including as set forth in Order No. 679.[1]  The longer the Commission does nothing to address these unfair transfers of wealth and risk, the more consumers are exploited.

This case graphically illustrates the fundamental unfairness of the Commission’s practices regarding incentives.   First, it is noteworthy that in this case no state approval to construct has been given to the transmission projects that are the subject of these incentives.  The California Public Utilities Commission (CPUC) has not yet granted Southern California Edison Company (SoCal Edison) a Certificate of Public Need and Necessity (CPCN) for the Del Amo-Mesa-Serrano 500 kV Reinforcement Project (Del Amo Project) and the Lugo-Victor-Kramer 230 kV Upgrade Project (Lugo Project) (together, Projects).[2]  Instead, to justify granting these incentives, the order states that “[t]he Commission previously found that projects approved through a transmission planning process that evaluated whether the identified transmission projects will enhance reliability and/or reduce congestion are entitled to the rebuttable presumption established under Order No. 679.”[3]  That justification is one of the major problems with this Commission’s incentives policies.  No state CPCN proceeding has even been conducted reviewing both need and prudence, yet the Commission grants incentives anyway.  Although regional transmission planning process is only one rebuttable presumption established in Order No. 679 allowing qualification for incentive rate treatment, reliance on regional transmission planning in lieu of state approval to construct is one of the major problems with FERC’s policy.[4]  This practice is indefensible and always has been.

With all due respect to CAISO’s transmission planning process—and I do respect it along with planning processes in other RTOs/ISOs—the regional planning process in a transmission planning organization is not remotely the equivalent of a serious litigated state CPCN (or its individual state equivalent) process, which includes witness cross-examination and is open to intervenors such as consumer advocates.  FERC’s long-time policy of ignoring whether a state CPCN proceeding took place before granting incentives is one of the central issues that must be reconsidered.  As a former state regulator, I know firsthand how important it is to conduct credible state CPCN proceedings that evaluate the need and cost of a proposed project.  It is especially timely now, in light of a recent federal district court decision,[5] that this Commission must make it clear once again—as it did in Order No. 1000[6]—that while FERC regulates RTOs and ISOs such as CAISO, in no way does that regulatory oversight represent any intent to preempt the states’ decades-old authority to conduct CPCN proceedings that consider issues of need and prudence.  One may argue that the FERC’s incentive rate treatment policy is separate and apart from any consideration of need or prudence, but that belief ignores the fact that, with the CWIP Incentive, transmission developers are immediately able to recover that money from ratepayers, without an evaluation for need or prudence having occurred.[7]  Absent such an ex ante evaluation at the state level, FERC should not grant any incentives to a transmission project and should revisit its policy allowing that to occur.  The absence of state CPCN approval alone should result in a default practice of denying incentives until the state has acted.  But there are additional reasons, as this case illustrates.

Second, putting aside the flawed notion that regional transmission planning is somehow equivalent to a state CPCN proceeding, another major problem is that FERC’s practice in granting transmission incentives has become a “check-the-box” exercise.  Order No. 679 contemplates a fact-specific, careful evaluation of balancing the needs of consumers and the benefits to investors based on the nature of the transmission projects at issue.[8]  In no Commission order issued in my time as a Commissioner has there been anything other than a cursory analysis with the barest mention of the specifics of the underlying transmission projects.  Every transmission developer seems to cite the same reasons for the same incentives—e.g., for the CWIP Incentive and Abandoned Plant Incentive:  financing will be a challenge due to regulatory risks, preserving the developer’s credit rating, etc.  Coincidentally, these are the same reasons identified as examples in Order No. 679 and are parroted by developers in every proceeding.[9]  And to date, FERC has not contested the now too familiar reasons to actually attempt to evaluate whether each (and every, it seems) transmission project truly faces the same risks as the last.  Thus, whether the total package of incentives is tailored to address the demonstrable risks and challenges faced by the applicant undertaking the project, as required by Order No. 679-A,[10] is questionable at best.  The CPUC has expressed similar concerns in this proceeding with respect to the CWIP Incentive in particular.[11] 

But even assuming today’s order could be construed as consistent with the Commission’s existing policies in Order No. 679, in my view those policies concerning the various incentives regularly awarded by this Commission produce rates that are unjust and unreasonable.  In this case, the CPUC has shown just how massive the impact is on California consumers, and this reflects only SoCal Edison’s projects:  SoCal Edison’s reported CWIP rate base for 2022 is over $340 million,[12] and the CPUC explains that rather than getting projects built more quickly, the CWIP Incentive instead often results in extensive project delays as utilities no longer have the incentive (pun unfortunately intended) to build projects as quickly as possible in order to receive rate recovery once projects are used and useful.[13]   

A core principle of utility law and regulation for decades is that consumers can be forced to pay costs only for assets that are “used and useful” to them.  In Order No. 679, the Commission determined that it may be necessary to depart from this long-standing ratemaking principle to “address the substantial challenges and risks in constructing new transmission.”[14]  In my prior statements, I questioned, among other concerns, whether the Commission’s determination of whether “substantial challenges and risks” exist when granting the CWIP Incentive and Abandoned Plant Incentive and other incentives has become nothing more than a “check-the-box” exercise.[15]

In particular:

The Commission’s incentive policies—particularly the CWIP Incentive, which allows recovery of costs before a project has been put into service—run the risk of making consumers “the bank” for the transmission developer; but, unlike a real bank, which gets to charge interest for the money it loans, under our existing incentives policies the consumer not only effectively “loans” the money through the formula rates mechanism, but also pays the utility a profit, known as Return on Equity, or “ROE,” for the privilege of serving as the utility’s de facto lender.[16] 

Further, just as the CWIP Incentive effectively makes consumers the bank for transmission developers, the Abandoned Plant Incentive effectively makes them the insurer of last resort as well.  This incentive allows transmission developers to recover from consumers the costs of investments in projects that fail to materialize and thus do not benefit consumers.  Just as consumers receive no interest for the money they effectively loan transmission developers through the CWIP Incentive, they receive no premiums for the insurance they provide through the Abandoned Plant Incentive if the project is never built.  And if the CWIP Incentive is a de facto loan and the Abandoned Plant Incentive is de facto insurance — both provided by consumers — then the RTO participation adder, which increases the transmission owner’s ROE above the market cost of equity capital, is an involuntary gift from consumers.[17]  There has been and continues to be something really wrong with this picture.

If the Commission determines it is appropriate to channel risks to consumers, those risks must be carefully weighed and considered and not simply be mitigated at the expense of consumers in an exercise of “check-the-box.”  Any decision that is a result of this “check-the-box” exercise cannot be anything but unjust and unreasonable.  Until the Commission develops a meaningful analysis that does not simply transfer risk to and extract wealth from consumers, I cannot in good conscience support the outcome here.   

In early 2021, a majority of the Commission voted to approve a supplemental notice of proposed rulemaking which proposed, among other things, to limit the RTO participation adder to the three years following a transmitting utility’s initial membership in an RTO.[18]  I joined in that vote and continue to support such a time limit.  More than three years after we took that vote, no further action has been taken on that supplemental notice of proposed rulemaking.  And although the Commission initially proposed to eliminate the CWIP Incentive in the Transmission Planning and Cost Allocation NOPR,[19] this Commission then reversed course and declined to adopt that proposal in Order No. 1920.  It instead chose to reject what should have been the easiest of decisions for this Commission if Order No. 1920 were truly about fulfilling its duty to protect consumers, which is its primary duty under the Federal Power Act (FPA).[20]  This continuing failure to protect consumers by eliminating the CWIP Incentive was one of the pillars of my dissent to Order No. 1920.[21]

Despite the appearance of action by the Commission to address unfair and excessive transmission costs to consumers from incentives and other Commission policies,[22] the record of the past three years shows that nothing has been accomplished to reform these incentives.  Indeed, this order is yet another graphic example of why I have repeatedly argued that the Commission needs to revisit Order No. 679 and its “check-the-box” practice of granting the array of incentives offered to transmission developers, including the Abandoned Plant and CWIP Incentives addressed in this order, as well as the Hypothetical Capital Structure Incentive and the RTO participation adder.[23]  

Finally, as a sobering case study, ‘“attention must be paid’” to the Potomac-Appalachian Transmission Highline (PATH) project “because of the major lessons – and warnings – it holds for long-term regional transmission planning driven by policy goals, the substantial costs that go with such projects, and how FERC’s policies inflate those costs to consumers.”[24]  As I explained:

The PATH project was planned as a long-distance, high-voltage transmission line crossing three states that was approved for construction and regional cost allocation through selection for PJM’s regional transmission expansion plan (RTEP).  PATH applied for certificates of public need in three states – West Virginia, Virginia, and Maryland – none of which ever issued a certificate.  PJM later removed PATH from the RTEP, and it was never built.

Even though not a single ounce of steel was ever put in the ground, PATH’s developers have been collecting money from retail customers in the PJM states ever since it was approved for PJM’s RTEP.  Since 2008, the total amount that consumers have been forced to pay to PATH’s developers has been approximately $250 million – that’s right, let me repeat:  consumers have paid roughly $250 million for a project that was never built nor found needed by a single state regulator.  Adding insult to consumers’ injury, that amount was caused and inflated by a whole host of Commission-approved transmission incentives.[25]

Among the multitude of incentives available to PATH were the very CWIP Incentive and Abandoned Plant Incentive SoCal Edison requests here.  It is well past time for the Commission to address the unfairness of “check-the-box” awards of incentives to transmission developers at the expense of consumers.  There are obvious compromise reforms that could be implemented; both PATH and this proceeding illustrate that one such possibility is not to award the CWIP and Abandoned Plant Incentives, and possibly other incentives, until after state regulators have had the opportunity to vet and approve transmission projects through their own CPCN proceedings.  Costs associated with the Commission’s inaction have been mounting and will continue to mount and be inflicted on consumers.  We have failed to act for three years.  It is time to act now.

For these reasons, I respectfully dissent.