Item E-1: Commissioner Mark C. Christie Concurrence Regarding Electric Transmission Incentives Policy Under Section 219 of the Federal Power Act

Commissioner Mark C. Christie Statement
April 15, 2021
Docket No. RM20-10-000
Order:  E-1

I concur with today’s supplemental Notice of Proposed Rulemaking (NOPR) because it moves in the right direction.[1]  I write separately, however, to explain my reasons.

The Commission has previously enumerated the benefits of RTO/ISO participation to both public utilities and consumers, so the costs and benefits of such membership are not at issue here.  At a time, however, when transmission costs are already a significant and rising part of consumers’ retail bills,[2] ROE adders needlessly burden consumers with substantial additional costs without demonstrable evidence that they actually incentivize the particular action they are aimed at incentivizing.

Given the state of play today, I agree with certain commenters that the RTO adder “provides an unnecessary windfall [with] no nexus to public utilities’ decisions to join or remain in an RTO.”[3]  It may also be the case that such adders are duplicative of other Commission incentives already granted to public utilities by virtue of their participation in an RTO/ISO.[4]

It bears repeating that while section 219 of the Federal Power Act (FPA) requires the Commission to provide certain incentives—such as an incentive for joining an RTO/ISO—it also requires that resulting rates continue to be just and reasonable.[5]  As noted by the Delaware Division of Public Advocate and the Office of the People’s Counsel for of the District of Columbia, “Congress did not intend for [FPA section 219], or the rules promulgated pursuant to it, to unjustly enrich utilities and RTO members at the customers’ expense.”[6]  I agree.

I also agree with the supplemental NOPR’s conclusion that section 219 of the FPA does not require an incentive for RTO/ISO participation to take the form of an ROE adder[7] and with its request for commenters to propose alternative, non-ROE incentives that would qualify under section 219.[8]  Since the FPA does not require the award of ROE adders in this instance, I believe their use should be the subject of reassessment.  I also share the concern previously expressed by Chairman Glick regarding “gratuitous handouts at customers’ expense . . . .”[9]

In addition to the obvious impact on consumer costs, the broader reason for this need for reassessment goes to the very purpose of utility regulation.  Utility regulation developed for one primary purpose:  to protect captive customers of utility monopolies from the exercise of market power which monopolies, by definition, have and will exercise.  Market power is, of course, the ability of a seller to charge and sustain a price above the price it could charge in a competitive market, resulting in an unfair and uneconomic transfer of wealth from captive customers to the monopoly (or near-monopoly).

So, utility regulation developed the cost-of-service model, which tries to duplicate the results of a competitive market where there is none.  This is a challenge that one of my law students once described as trying to paint a rainbow.  The painting will never be a rainbow, but you want to come as close as possible.

One of the most important costs that utilities are allowed to recover in cost-of-service regulation is the cost of capital, which consists of the cost of debt and the cost of equity.  The cost of equity is ROE.  The Supreme Court of the United States set forth the constitutional standard for determining ROE in its workhorse case of Bluefield Water Works v. Public Service Commission of West Virginia.[10]  The Court said, in a standard still in use today, that investors in a utility company had a right to a return that is:

equal to that generally being made at the same time and in the same region of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties, but [a public utility] has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures.[11]

Utility regulators, in setting an ROE, attempt to set the ROE based on the actual market for equity capital, taking into account, under the Bluefield standard, the level of risk faced by investors in a company that has a monopoly on a vital public service versus the level of risk undertaken by investors in a company in a fiercely competitive market.  In the latter case, investors have no guarantee of receiving a single dollar of profit on their invested capital.  Further, for riskier ventures in the energy sector, such as certificated facilities that face significant costs during the development phase, those risks can be factored into the determination of the actual cost of equity capital.  Not all utilities face the same risks in each case.

That is all to say, setting the ROE is a fact-intensive inquiry that requires the regulator’s best effort at determining the actual market cost of equity capital for investments of similar risk.  Once it’s set, however, adding basis points to the ROE makes the regulator not the guardian against market power, but the facilitator of it.  For by definition, an ROE adder raises the cost of capital above the market cost, inflicting on consumers exactly the harm that utility regulation is supposed to prevent.  In sum, an ROE adder is a subsidy.

As a result, absent a clear declaration from Congress that a FERC-authorized incentive must take the form of an ROE adder—which it did not require for RTO participation incentives—awarding an ROE adder for any length of time as a “reward” for joining an RTO/ISO may be inconsistent with FPA section 219’s concurrent mandate that rates must be just and reasonable and not unduly discriminatory or preferential.

Because this supplemental NOPR proposes to limit the use of ROE adders for RTO/ISO membership to three years after joining—a welcome first move—I respectfully concur.  I look forward, however, to commenters’ responses regarding non-ROE incentives.

For these reasons, I respectfully concur.