Document ID: FERC-2007-0033-0001
Agency: ferc
Document Type: Rule
Title: Issued December 22, 2006.
Posted Date: 2007-01-10T05:00Z

[Federal Register: January 10, 2007 (Volume 72, Number 6)]
[Rules and Regulations]               
[Page 1152-1173]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10ja07-9]                         

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM06-4-001; Order No. 679-A]

 
Promoting Transmission Investment Through Pricing Reform

Issued December 22, 2006.

AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule; order on rehearing.

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SUMMARY: In this order on rehearing, the Federal Energy Regulatory 
Commission (Commission) reaffirms its determinations in part and grants 
rehearing in part of Promoting Transmission Investment through Pricing 
Reform, Order No. 679. Order No. 679 amended Commission regulations to 
establish incentive-based (including performance-based) rate treatments 
for the transmission of electric energy in interstate commerce by 
public utilities for the purpose of benefiting consumers by ensuring 
reliability and reducing the cost of delivered power by reducing 
transmission congestion.

DATES: Effective Date: This final rule and order on rehearing will be 
effective on February 9, 2007.

FOR FURTHER INFORMATION CONTACT: 

Jeffrey Hitchings (Technical Information), Office of Energy Markets and 
Reliability, Federal Energy Regulatory Commission, 888 First Street, 
NE., Washington, DC 20426, 202-502-6042.
Andre Goodson (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888

[[Page 1153]]

First Street, NE., Washington, DC 20426, 202-502-8560.
Tina Ham (Legal Information), Office of the General Counsel, Federal 
Energy Regulatory Commission, 888 First Street, NE., Washington, DC 
20426, 202-502-6224.

SUPPLEMENTARY INFORMATION: 
Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G. Kelly, 
Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

                            Table of Contents

                                                               Paragraph
                                                                numbers

I. Introduction.............................................           1
II. Background..............................................           9
III. Discussion.............................................          11
    A. Procedural Matters...................................          11
    B. Statutory Arguments..................................          13
        1. Rehearing Requests...............................          13
        2. Commission Determination.........................          14
    C. Nexus Requirement....................................          16
        1. Rehearing Requests...............................          17
        2. Commission Determination.........................          20
    D. Cost-Benefit Analysis................................          28
        1. Rehearing Requests...............................          29
        2. Commission Determination.........................          35
    E. Rebuttable Presumptions..............................          41
        1. Rehearing Requests...............................          42
        2. Commission Determination.........................          46
    F. ROE Sufficient to Attract Investment.................          51
        1. Rehearing Requests...............................          52
        2. Commission Determination.........................          59
    G. Incentives Available to Transcos.....................          71
        1. Rehearing Requests...............................          72
        2. Commission Determination.........................          76
    H. Transmission Organization Incentive..................          79
        1. Rehearing Requests...............................          80
        2. Commission Determination.........................          86
    I. Hypothetical Capital Structure.......................          91
        1. Rehearing Requests...............................          92
        2. Commission Determination.........................          93
    J. Single-Issue Ratemaking..............................          94
        1. Rehearing Requests...............................          95
        2. Commission Determination.........................          97
    K. Public Power.........................................         100
        1. Rehearing Requests...............................         101
        2. Commission Determination.........................         102
    L. Other Issues.........................................         103
        1. Recovery of Costs of Abandoned Facilities........         104
        2. Prudently Incurred Costs.........................         108
        3. Regional Planning................................         110
        4. CWIP.............................................         112
        5. Reporting Requirement: FERC-730..................         117
        6. Miscellaneous....................................         121
IV. Information Collection Statement........................         137
V. Document Availability....................................         138
VI. Effective Date..........................................         141
APPENDIX

Order on Rehearing

I. Introduction

    1. On July 20, 2006, the Commission issued a Final Rule in this 
proceeding.\1\ In the Final Rule, the Commission amended its 
regulations to establish incentive-based (including performance-based) 
rate treatments for the transmission of electric energy in interstate 
commerce by public utilities. These incentives are intended to benefit 
consumers by ensuring reliability and reducing the cost of delivered 
power by reducing transmission congestion. We took this action pursuant 
to section 1241 of the Energy Policy Act of 2005 (EPAct 2005),\2\ which 
added a new section 219 to the Federal Power Act (FPA). The Final Rule 
identified ratemaking treatments available under section 219. The Final 
Rule did not grant incentives to any particular entity, but rather 
required each applicant to demonstrate that it could meet the 
requirements of section 219 and the Final Rule.
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    \1\ Promoting Transmission Investment through Pricing Reform, 
Order No. 679, 71 FR 43294 (July 31, 2006), FERC Stats. & Regs. ] 
31,222 (2006) (Order No. 679 or Final Rule).
    \2\ Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 
594, 315 and 1283 (2005).
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    2. Many entities sought rehearing of the Final Rule.\3\ The 
petitioners representing consumer interests argue that the Final Rule 
was too permissive in offering rate incentives. We have carefully 
reviewed these petitions and grant them in part in this order.
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    \3\ The parties who filed the requests for rehearing and/or 
clarification are listed in Appendix A.
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    3. In doing so, we do not, however, depart from a fundamental 
commitment to provide incentives to support the development of 
transmission infrastructure. Section 219 was enacted

[[Page 1154]]

because of a long decline in transmission investment that is 
threatening reliability and causing billions of dollars in congestion 
costs. To reverse this historical trend, section 219 directed the 
Commission to ``establish, by rule, incentive-based (including 
performance-based) rate treatments'' that: ``Promote reliable and 
economically efficient transmission and generation of electricity by 
promoting capital investment in the enlargement, improvement, 
maintenance, and operation of all facilities for the transmission of 
electric energy in interstate commerce, regardless of the ownership of 
the facilities; provide a return on equity that attracts new investment 
in transmission facilities (including related transmission 
technologies); encourage deployment of transmission technologies and 
other measures to increase the capacity and efficiency of existing 
transmission facilities and improve the operation of the facilities; 
and allow recovery of--(A) all prudently incurred costs necessary to 
comply with mandatory reliability standards issued pursuant to section 
215 and (B) all prudently incurred costs related to transmission 
infrastructure development pursuant to section 216.'' \4\ The Final 
Rule fulfilled that command by providing a range of rate treatments 
that remove impediments to new investment or otherwise attract that 
investment.
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    \4\ 16 U.S.C.A. 824s(a), (b)(1) (West Supp. 2006).
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    4. This order retains those rate treatments, but modifies the way 
in which they are applied in three principal respects to address the 
concerns of petitioners.
    5. First, NARUC argues that we erred in rebuttably presuming that 
certain review processes (e.g., state siting approvals and regional 
planning processes) satisfy section 219's requirement that a 
transmission project ensure reliability or reduce congestion. NARUC 
contends that these review processes do not, in all cases, establish 
the need for a particular facility. We grant rehearing in part on this 
issue. The Commission created the rebuttable presumption because we do 
not wish to duplicate the work of state siting authorities, regional 
planning processes, or the U.S. Department of Energy (DOE) under EPAct 
section 1221. However, we agree with NARUC to the extent that, if 
review processes do not include a determination of whether a project 
ensures reliability or reduces congestion, no rebuttable presumption 
should exist for that project. We will therefore require that each 
applicant explain whether any process being relied upon for a 
rebuttable presumption includes a determination that the project is 
necessary to ensure reliability or reduce congestion. Furthermore, we 
clarify that this rebuttable presumption applies only to whether the 
project reduces congestion or encourages reliability, not the 
additional requirements of the Final Rule. As discussed more fully 
elsewhere in this order, we also grant rehearing with respect to the 
Final Rule's rebuttable presumption concerning a National Interest 
Electric Transmission Corridor (NIETC) designation.
    6. Second, the Final Rule required that each applicant demonstrate 
a nexus between the incentive being sought and the investment being 
made. Several petitioners argue that the nexus test is not sufficiently 
rigorous to protect consumers. We grant rehearing in part on this 
issue. The Final Rule stated that the nexus test is to be applied 
separately to each incentive, rather than to the package of incentives 
as a whole. We agree that this approach fails to protect consumers 
where an applicant both seeks incentives that reduce the risk of the 
project and seeks an enhanced rate of return on equity (ROE) for 
increased risk. We will therefore grant in part rehearing and require 
applicants to demonstrate that the total package of incentives is 
tailored to address the demonstrable risks or challenges faced by the 
applicant in undertaking the project.\5\ If some of the incentives in 
the package reduce the risks of the project, that fact will be taken 
into account in any request for an enhanced ROE.
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    \5\ The Commission will apply a rule of reason with respect to 
what is sufficient to meet the requirement of ``demonstrable'' risk 
or challenge. An applicant may provide specific evidence of a risk 
or challenge or a supported explanation of why it faces a particular 
risk or challenge.
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    7. Third, several petitioners argue that the Final Rule erred in 
its treatment of incentive returns on equity. Specifically, they fear 
the Commission will routinely grant ROEs at the top end of the zone of 
reasonableness. Although the Commission has broad discretion to 
establish returns on equity anywhere within the zone of reasonableness, 
we must be careful in the manner we exercise this discretion. The 
Commission clarifies below that we do not intend to grant incentive 
returns ``routinely'' or that, when granted, they will always be at the 
``top'' of the zone of reasonableness. Rather, each applicant will, 
first, be required to justify a higher ROE under the required nexus 
test and, second, to justify where in the zone of reasonableness that 
return should lie. Furthermore, we recognize that some investors may 
desire up-front certainty regarding ROE before they invest in a 
particular project. Because our traditional ratemaking practice 
typically determines ROE in a hearing only after an investment is made 
and a facility is constructed, it does not provide such up-front 
certainty. We therefore clarify that we will entertain requests for a 
specific ROE determination in a petition for declaratory order.
    8. In this order, the Commission denies in part and grants in part 
the requests for rehearing and/or clarification.

II. Background

    9. Section 1241 of EPAct 2005 directed the Commission to establish, 
no later than one year after enactment of section 219, by rule, 
incentive-based (including performance-based) rate treatments for the 
transmission of electric energy in interstate commerce by public 
utilities for the purpose of benefiting consumers by ensuring 
reliability and reducing the cost of delivered power by reducing 
transmission congestion.\6\ To that end, the Commission issued a Notice 
of Proposed Rulemaking (NOPR) \7\ on November 18, 2005 seeking comment 
on the Commission's proposal to comply with section 219. In the NOPR, 
the Commission stated that the purpose of this rulemaking is to promote 
greater capital investment in new transmission capacity, recognizing 
that the need for capital investment in energy infrastructure is a 
national problem that requires a national solution. Inadequate 
transmission infrastructure results in transmission congestion that 
impedes competitive wholesale markets and impairs the reliability of 
the electric grid.\8\
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    \6\ 16 U.S.C.A. 824s(a) (West Supp. 2006).
    \7\ Promoting Transmission Investment Through Pricing Reform, 
Notice of Proposed Rulemaking, 70 FR 71409 (Nov. 29, 2005), FERC 
Stats. & Regs., Proposed Regs. ] 32,593 (2005).
    \8\ Id. P 2.
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    10. After considering the comments on the NOPR, the Commission 
issued its Final Rule on transmission investment incentives to address 
the need for transmission capacity. In the Final Rule, the Commission 
provided incentives for transmission infrastructure investment that 
will help ensure the reliability of the bulk power transmission system 
in the United States and reduce the cost of delivered power to 
customers by reducing transmission congestion. The Final Rule 
identified specific incentives that the Commission will allow when 
justified in the context of individual declaratory orders or section 
205 filings

[[Page 1155]]

by public utilities under the FPA.\9\ The Commission stated that the 
Final Rule does not grant incentives to any public utility but instead 
permits an applicant to tailor its proposed incentives to the type of 
transmission investments being made and to demonstrate that its 
proposal meets the requirements of section 219. Further, incentives 
will be permitted only if the incentive package as a whole results in a 
just and reasonable rate.\10\
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    \9\ Order No. 679, FERC Stats. & Regs ] 31,222 at P1.
    \10\ Id. P. 2. Also, in the Final Rule, the Commission agreed 
with comments that new transmission technologies will be adopted 
when they are cost effective. The Commission determined that 
incentives will be considered for advanced technologies through the 
same evaluation process as other technologies. The Commission 
declined to make generic determinations regarding the applicability 
of incentives to particular technologies. Rather, the Final Rule 
determined that to the extent that applicants seek additional 
incentives for advanced technologies, the Commission will consider 
the propriety of such incentives on a case-by-case basis. Id. P 288-
93, 298-99. The Final Rule required applicants for incentive rate 
treatment to provide a technology statement that describes what 
advanced technologies have been considered and, if those 
technologies are not to be deployed or have not been deployed, an 
explanation of why they were not deployed. Id. P 302. No party 
sought rehearing concerning the Final Rule's determinations 
regarding advanced technologies.
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III. Discussion

A. Procedural Matters

    11. In response to the Final Rule, a number of parties submitted 
timely requests for rehearing and/or clarification. On August 22, 2006, 
the Attorney General of the State of Connecticut (Connecticut AG) filed 
a request for rehearing out of time, seeking to support and join in all 
aspects the New England Commissions' request for rehearing. On 
September 21, 2006, International Transmission Company (International 
Transmission) filed an answer to SoCal Edison's request for rehearing.
    12. Pursuant to Rule 713(b) of the Commission's Rules of Practice 
and Procedure, 18 CFR 385.713(b) (2006), we will deny the request for 
rehearing of the Connecticut Attorney General because it was filed more 
than 30 days after issuance of the Final Rule.\11\ Rule 713(d) of the 
Commission's Rules of Practice and Procedure \12\ prohibits an answer 
to a request for rehearing. Therefore, we deny International 
Transmission's answer to SoCal Edison's request for rehearing.
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    \11\ We note, however, that the Connecticut Attorney General 
supports New England Commissions' request for rehearing, which we 
address in this order.
    \12\ 18 CFR 385.713(d) (2006).
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B. Statutory Arguments

1. Rehearing Requests
    13. APPA/NRECA argue that the Commission misinterpreted section 219 
as requiring greater flexibility in ratemaking practices. According to 
APPA/NRECA, ``incentives'' are not necessary to attract capital 
because, under existing Supreme Court precedent, ``a public utility's 
rate of return should also be sufficient to attract investment in new 
transmission facilities.'' \13\ APPA/NRECA therefore conclude that 
section 219 merely ``codified the longstanding Commission and judicial 
interpretations of FPA section 205's requirement that rates be just and 
reasonable.'' \14\
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    \13\ APPA/NRECA at 12.
    \14\ Id. at 12-13.
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2. Commission Determination
    14. We agree with APPA/NRECA that section 219 did not modify the 
requirement that rates be just and reasonable under section 205, but 
disagree that it did no more than restate that longstanding principle. 
Section 219 makes very clear that the Commission ``shall establish, by 
rule, incentive-based (including performance-based) rate treatments'' 
and that these rate treatments ``shall * * * promote reliable and 
economically efficient transmission and generation of electricity by 
promoting capital investment in the enlargement, improvement, 
maintenance, and operation of all facilities for the transmission of 
electric energy in interstate commerce, regardless of the ownership of 
the facilities; provide a return on equity that attracts new investment 
in transmission facilities (including related transmission 
technologies); encourage deployment of transmission technologies and 
other measures to increase the capacity and efficiency of existing 
transmission facilities and improve the operation of the facilities and 
allow recovery of--(A) all prudently incurred costs necessary to comply 
with mandatory reliability standards issued pursuant to section 215 and 
(B) all prudently incurred costs related to transmission infrastructure 
development pursuant to section 216.'' \15\ These words do far more 
than ``codify'' the just and reasonable standard; they command the 
Commission to use its discretion under section 205 to promote capital 
investment. Furthermore, Congress in section 219 even highlighted the 
importance of investment in economically or technologically efficient 
transmission infrastructure.\16\ Section 219 was enacted against the 
backdrop of a long decline in transmission investment that is imposing 
substantial costs--in congestion and service interruptions--on 
consumers. If Congress had deemed our existing practices sufficient to 
reverse this trend, there would have been little need to enact section 
219. Section 219 does not simply ``codify'' our legal authority; it 
requires us to take affirmative action to promote new investment. 
Although the resulting rates must be just and reasonable, the 
Commission has significant discretion under section 205 in making that 
determination and section 219 provides clear direction that we use that 
discretion to promote new infrastructure, not simply maintain the 
status quo.
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    \15\ 16 U.S.C.A. 824s(a), (b)(1)-(4) (West Supp. 2006).
    \16\ See id. at 824s(a) and (b)(3).
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    15. While section 219 requires us to do more than maintain the 
status quo for transmission pricing, we recognize that our traditional 
ratemaking authority also requires us to establish a return on a public 
utility's assets that is ``reasonably sufficient to assure confidence 
in the financial soundness of the utility and should be adequate to 
maintain and support its credit and enable it to raise money necessary 
for the proper discharge of its public duties'' \17\ and ``should be 
sufficient to assure confidence in the financial integrity of the 
enterprise, so as to maintain its credit and to attract capital.'' \18\ 
Thus, a base-level ROE sufficient to promote capital investment in 
transmission facilities historically has not been considered an 
``incentive,'' but a requirement of establishing a just and reasonable 
rate.\19\ In this regard, we

[[Page 1156]]

recognize that our responsibilities under section 205 and our 
responsibilities under section 219 overlap in significant ways. We 
recognize that it may be difficult to meaningfully distinguish between 
an ROE that appropriately reflects a utility's risk and ability to 
attract capital and an ``incentive'' ROE to attract new investment. 
Notwithstanding this difficult distinction, consistent with Congress' 
direction in section 219, we are obligated to establish ROEs for public 
utilities that both reflect the financial and regulatory risks 
attendant to a particular project and that are sufficient to actively 
promote capital investment. We will do so within the zone of 
reasonableness, including above the midpoint where appropriate, to 
accomplish these regulatory responsibilities.\20\ This end-result ROE, 
whether characterized as an incentive pursuant to section 219 or as a 
base-level ROE consistent with the just and reasonable standard of 
section 205, will take into consideration financial and regulatory 
risks attendant to the project and thereby satisfy Congress' direction 
that the Commission ``provide a return on equity that attracts new 
investment in transmission facilities * * *.'' \21\
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    \17\ Bluefield Waterworks & Improvement Co. v. Pub. Serv. Comm'n 
of W. Va., 262 U.S. 679, 693 (1923).
    \18\ FPC v. Hope Natural Gas Co., 320 U.S. 591, 603 (1944).
    \19\ In contrast to a base-level ROE that reflects the financial 
and regulatory risks of an investment, an ``incentive'' has been 
more typically associated with specific basis point additions to a 
base ROE to satisfy discrete policy objectives. See, e.g., Western 
Area Power, 99 FERC ] 61,306, reh'g denied, 100 FERC ] 61,331 (2002) 
(Western), aff'd sub nom. Public Utilities Commission of the State 
of California v. FERC, 367 F.3d 925 (D.C. Cir. 2004); Michigan 
Electric Transmission Co., LLC, 105 FERC ] 61,214 (2003) (METC); 
American Transmission Company, L.L.C., 105 FERC ] 61,388 (2003) 
(American Transmission); ITC Holdings Corp., 102 FERC ] 61,182, 
reh'g denied, 104 FERC ] 61,033 (2003) (ITC Holdings); Regional 
Transmission Organizations, Order No. 2000, 65 FR 809 (Jan. 6, 
2000), FERC Stats. & Regs. ] 31,089 (1999), order on reh'g, Order 
No. 2000-A, 65 FR 12088 (Mar. 8, 2000), FERC Stats. & Regs. ] 31,092 
(2000), aff'd sub nom. Pub. Util. Dist. No. 1 of Snohomish County, 
Washington v. FERC, 272 F.3d 607 (D.C. Cir. 2001) (Order No. 2000). 
Section 219 addresses both situations. In addition to requiring the 
Commission to establish, by rule, incentive rate treatments to 
promote transmission investment generally, section 219 also requires 
the Commission to establish incentive-based rates to encourage 
transmission technologies and other measures to increase the 
capacity and efficiency of existing transmission facilities. Thus, 
Congress intended for us to establish an ROE sufficient to reflect 
financial and regulatory risks and also to consider discrete ROE 
incentives for, among other things, participation in transmission 
organizations, projects with particular benefits to reliability or 
reducing congestion, new technologies and efficiency enhancements.
    \20\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 93.
    \21\ 16 U.S.C.A. 824s(b)(2) (West Supp. 2006).
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C. Nexus Requirement

    16. In the Final Rule, the Commission stated that the applicant 
must demonstrate that: (1) The facilities for which it seeks incentives 
either ensure reliability or reduce the cost of delivered power by 
reducing transmission congestion consistent with the requirements of 
section 219; (2) there is a nexus between the incentive sought and the 
investment being made; and (3) the resulting rates are just and 
reasonable.\22\ The Commission stated that an applicant is not required 
to show that, but for the incentives, the expansion would not occur 
because Congress did not require such a showing. Nevertheless, the 
Commission maintained that it will require applicants to show some 
nexus between the incentives being requested and the investment being 
made, i.e., to demonstrate that the incentives are rationally related 
to the investments being proposed.\23\
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    \22\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 2, 26.
    \23\ Id. P 26, 48.
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3. Rehearing Requests
    17. Industrial Consumers oppose allowing applicants to request 
multiple incentives, arguing that the Commission erred by determining 
that section 219 does not require applicants to demonstrate a 
relationship between an incentive proposal and transmission 
investment.\24\ According to Industrial Consumers, the just and 
reasonable requirements of section 219(d) require that incentive rates 
must be based on a showing that there is a relationship between 
increased rates and the attraction of new capital.\25\ They assert that 
customers should not be forced to pay for incentives unless those 
incentives are actually necessary to deliver additional transmission 
capacity. Therefore, Industrial Consumers claim that contrary to the 
Commission's conclusion, section 219 does not authorize the Commission 
to depart from judicial precedent on just and reasonable incentive 
rates.\26\ Further, to the extent that the Commission relies on non-
cost factors in determining just and reasonable incentive rates, the 
Commission must specify the nature of the relevant non-cost factors and 
offer a reasoned explanation of how the factors justify the resulting 
rates.\27\ Industrial Consumers contend that the reasoned explanation 
must calibrate the relationship between increased rates and the 
attraction of new capital, ensure that the increase is in fact needed, 
and is no more than needed to accomplish the objective.\28\
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    \24\ Industrial Consumers at 3-7.
    \25\ Id. at 4, citing Farmers Union Cent. Exch. v. FERC, 734 
F.2d 1486, 1503 (D.C. Cir. 1984) (Farmers Union).
    \26\ Id. at 5.
    \27\ Id. at 6-7
    \28\ Id.
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    18. APPA/NRECA also argue that applicants must demonstrate a need 
for the incentive rate treatments and make a showing sufficient for the 
Commission to find that a particular incentive rate treatment ``is in 
fact needed and no more than is needed'' under the FPA and the 
Administrative Procedure Act.\29\ APPA/NRECA consider the nexus 
requirement to be inadequate because it fails to require applicants to 
show that a particular rate treatment is actually a lawful incentive 
under sections 205 and 219 of the FPA.\30\ They assert that under the 
nexus requirement, an applicant could show a sufficient rational 
relationship merely by claiming that granting the incentive rate 
treatment will make the investment more profitable and thus more 
attractive to investors.\31\ TDU Systems repeat these points and claim 
that the nexus requirement will have no effect on the granting or 
denying of incentive applications unless the Commission provides 
concrete examples of categories of asserted relationships between 
proposed incentives and facilities that will not satisfy the nexus 
requirement. They also do not consider the nexus requirement to be a 
reasonable substitute for a cost-benefit analysis.\32\
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    \29\ 5 U.S.C. 556 (2000).
    \30\ APPA/NRECA at 22.
    \31\ Id. at 23, citing Order No. 679, FERC Stats. & Regs. ] 
31,222 at P 91, 117, and 133.
    \32\ TDU Systems at 19-20.
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    19. Likewise, TAPS argues that the nexus requirement is unduly 
vague because it fails to clearly require a causal connection between 
the incentive and consumer benefits. TAPS asserts that the nexus 
requirement should test whether a requested incentive would reasonably 
be expected to cause either a net decrease in delivered power costs 
even after considering incentive-increased transmission costs, or, 
where the expected net effect on delivered power costs is an increase, 
reliability gains that make that increase worthwhile.\33\ To remedy the 
alleged deficiencies of the nexus requirement, TAPS proposes that the 
nexus requirement be revised to provide: ``That the incentive sought is 
designed to result in those facilities being invested in, completed, 
and placed into service.'' \34\ TAPS also recommends that the rule be 
amended to explicitly retain a reasonable calculation test, so that the 
Commission can determine which incentives return net consumer benefits 
and will be able to verify the accuracy of its prediction that granting 
incentives will spur increased investment.\35\
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    \33\ TAPS at 8-9.
    \34\ Id. at 11.
    \35\ Id. at 16, citing City of Charlottesville v. FERC, 661 F.2d 
945, 955 (D.C. Cir. 1981).
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3. Commission Determination
    20. Petitioners raise two related objections to the nexus 
requirement: (i) That it is too vague and therefore will be too easy to 
satisfy, and (ii) because it is not sufficiently rigorous, a different 
standard should be adopted. We address each in turn.
    21. The required nexus test requires an applicant to demonstrate 
that the

[[Page 1157]]

incentives being requested are `` tailored to the risks and challenges 
faced'' by the project.\36\ By this we mean that the incentive(s) 
sought must be tailored to address the demonstrable risks and 
challenges faced by the applicant in undertaking the project.\37\ The 
required nexus test therefore satisfies the Industrial Consumers 
request that there be a relationship between the rate treatments sought 
and the attraction of new capital.\38\ It also satisfies TAPS' request 
that ``the incentive sought is designed to result in'' new facilities 
being constructed.\39\ We disagree with TAPS and APPA/NRECA, however, 
that the test is designed to be lenient or that it will necessarily be 
satisfied in every case. As we indicated in the Final Rule, ``[n]ot 
every incentive will be available for every new investment. Rather, 
each applicant must demonstrate that there is a nexus between the 
incentive sought and the investment being made.'' \40\ In evaluating 
whether the applicant has satisfied the required nexus test, the 
Commission will examine the total package of incentives being sought, 
the inter-relationship between any incentives, and how any requested 
incentives address the risks and challenges faced by the project.
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    \36\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 26.
    \37\ We also note that the Commission retains its discretion to 
provide policy-based incentives. As the courts have said, even prior 
to our new authority in section 219, the Commission's incentive rate 
determinations ``involve matters of rate design * * * [and] policy 
judgments [that go to] the core of [the Commission's] regulatory 
responsibilities.'' Maine Public Utilities Commission v. FERC, 454 
F.3d 278, 288 (D.C. Cir. 2006). See also Permian Basin Area Rate 
Cases, 390 U.S. 747 (1968) (Permian).
    \38\ Industrial Consumers at 4.
    \39\ TAPS at 11.
    \40\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 26.
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    22. TDU Systems complain that we did not provide ``concrete 
examples'' of showings that would either satisfy or fail the nexus 
test. Although that was not the purpose of the Final Rule--the purpose 
was to enunciate the criteria to be applied in individual cases--we did 
provide certain illustrations. For example, we emphasized the need for 
incentives for new transmission projects that can integrate new 
generation and load and thereby improve reliability and reduce 
congestion:

    New transmission is needed to connect new generation sources and 
to reduce congestion. However, because there is a competitive market 
for new generation facilities, these new generation resources may be 
constructed anywhere in a region that is economic with respect to 
fuel sources or other siting considerations (e.g., proximity to wind 
currents), not simply on a ``local'' basis within each utility's 
service territory. To integrate this new generation into the 
regional power grid, new regional high voltage transmission 
facilities will often be necessary and, importantly, no single 
utility will be ``obligated'' to build such facilities. Indeed, many 
of these projects may be too large for a single load serving entity 
to finance. Thus, for the Nation to be able to integrate the next 
generation of resources, we must encourage investors to take the 
risks associated with constructing large new transmission projects 
that can integrate new generation and otherwise reduce congestion 
and increase reliability.[\41\]
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    \41\ Id. P 25.

    We also emphasized that ``this does not mean that every new 
transmission investment should receive a higher return than otherwise 
would be the case. For example, routine investments to meet existing 
reliability standards may not always * * *, qualify for an incentive-
based ROE.'' \42\
---------------------------------------------------------------------------

    \42\ Id. P 27.
---------------------------------------------------------------------------

    23. The Commission reaffirms that the most compelling case for 
incentives are new projects that present special risks or challenges, 
not routine investments made in the ordinary course of expanding the 
system to provide safe and reliable transmission service. We therefore 
reject the arguments of EEI and Southern Companies that such routine 
investments should be treated the same, for purposes of applying the 
required nexus test, as new projects that present special risks or 
challenges.\43\
---------------------------------------------------------------------------

    \43\ See infra P 52.
---------------------------------------------------------------------------

    24. We also believe that the guidance provided in the Final Rule is 
sufficient. The purpose of the Final Rule was to establish criteria to 
be applied in individual cases, not to provide an exhaustive list of 
situations where incentives will be granted or denied. The decision 
whether to grant or deny incentives to a particular project is 
appropriately the subject of an individual rate application (or 
declaratory order) where the Commission can evaluate whether the 
applicants have fully supported any incentive rate treatments being 
sought.
    25. We now turn to the alternative tests advocated by petitioners, 
discussing the ``but for'' test in this section and the ``cost-
benefit'' test in the following section. The Final Rule rejected a 
``but for'' test as inconsistent with Congressional intent in enacting 
section 219.\44\ We reaffirm that finding here. In doing so, we 
emphasize that both the required nexus test and the ``but for'' test 
share one thing in common: Their common objective is to ensure that 
incentives are not provided in circumstances where they do not 
materially affect investment decisions. They differ sharply, however, 
in the means by which they seek to achieve that objective. The ``but 
for'' test requires an applicant to show that a facility would not be 
constructed unless the incentive is granted. We reject that test 
because it erects an evidentiary hurdle that could only, in very rare 
cases, be satisfied. There are many impediments to investing in new 
transmission, including siting concerns, financing challenges, rate 
recovery concerns, etc. It is therefore unreasonable to expect or 
require an applicant to show that a facility could not be constructed 
``but for'' the removal of a single impediment--e.g., increased cash 
flow through 100 percent construction work-in-progress (CWIP) or an 
enhanced ROE. This test could rarely, if ever, be satisfied, 
particularly given that incentives are ordinarily sought before 
investment decisions are made and, hence, before any siting impediments 
are even confronted.
---------------------------------------------------------------------------

    \44\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 48.
---------------------------------------------------------------------------

    26. The Commission therefore reaffirms its rejection of the ``but 
for'' test as the appropriate test for applying section 219. It would 
erect a barrier that is nearly impossible to meet and is thereby 
fundamentally incompatible with Congressional intent in enacting 
section 219. In enacting EPAct 2005, Congress plainly understood that 
there are many impediments to new transmission investment. Congress 
therefore took a variety of actions to address that problem, including 
giving the Commission backstop siting authority, requiring that 
entities have long-term transmission rights to support new investment 
and, in section 219, providing appropriate rate incentives. We decline 
to render section 219 essentially an empty letter by requiring the 
demonstration of a negative--that absent an incentive rate treatment, 
under no circumstance would a transmission project possibly be built. 
This would be directly contrary to the intent of Congress to encourage 
the construction of needed transmission.
    27. We will grant rehearing, however, in one respect. The Final 
Rule states that the nexus test is to be applied separately to each 
incentive, rather than to the package of incentives as a whole. We 
agree that this approach fails to protect consumers where an applicant 
seeks incentives that both reduce the risk of the project and offer an 
enhanced ROE for increased risk. Even though the applicant no longer 
has to apply the nexus requirement separately to each incentive, the 
applicant will be required to demonstrate that the total package of 
incentives is tailored to address the

[[Page 1158]]

demonstrable risks or challenges faced by the applicant. In presenting 
a package to the Commission, applicants must provide sufficient 
explanation and support to allow the Commission to evaluate each 
element of the package and the interrelationship of all elements of the 
package. If some of the incentives would reduce the risks of the 
project, that fact will be taken into account in any request for an 
enhanced ROE. We are revising Sec.  35.35(d) to reflect this 
clarification.

D. Cost-Benefit Analysis

    28. In the Final Rule, the Commission adopted the proposal in the 
NOPR not to require applicants for incentive-based rate treatments to 
provide cost-benefit analyses. The Commission noted that courts have 
recognized that the Commission may consider non-cost factors in its 
ratemaking decisions.\45\ Therefore, the Commission stated that it may 
consider non-cost factors as well as cost factors and that it will 
consider the justness and reasonableness of any proposal for incentive 
rate treatment in individual proceedings.
---------------------------------------------------------------------------

    \45\ Id. P 65, citing Permian, 390 U.S. 747, 815 (1968); Pub. 
Utils. Comm'n of Cal. v. FERC, 367 F.3d 925, 929 (D.C. Cir. 2004) 
(CPUC v. FERC); Maine Pub. Utils. Comm'n. v. FERC, 454 F.3d 278, 
slip op. at 19 (D.C. Cir. 2006) (Maine PUC v. FERC).
---------------------------------------------------------------------------

1. Rehearing Requests
    29. TDU Systems and APPA/NRECA contend that the Final Rule's 
failure to require that incentive rates be justified by a cost-benefit 
analysis is inconsistent with sections 205 and 219 of the FPA. They 
assert that the Commission needs the information in the cost-benefit 
analysis to determine whether a particular incentive rate is just and 
reasonable, i.e. whether its cost is outweighed by the benefits 
customers will receive.\46\ APPA/NRECA also contend that the Commission 
has no basis for concluding that a particular incentive provides 
consumers with a net benefit, as required under section 219(a), without 
a cost-benefit analysis.\47\ TDU Systems also point out that the 
Commission and affected customers must have the information necessary 
to distinguish between proposed projects that would benefit customers a 
great deal and proposed projects that would benefit customers minimally 
if at all.\48\ Further, in considering non-cost factors, these parties 
argue that the Commission cannot make a reasoned decision about the 
appropriateness of non-cost factors in approving an incentive rate 
without first knowing the costs and benefits of the incentive rate.\49\ 
They assert that intervenors also need this information to evaluate the 
impact of the rate proposal on them and to understand how much the 
applicant is relying on non-cost considerations. Moreover, APPA/NRECA 
contend, if the applicant is not required to present any evidence that 
consumers obtain net benefits from an increase in their transmission 
rates, the Commission cannot strike a fair balance between the 
financial interests of the regulated company and the relevant public 
interests, both existing and foreseeable.\50\ Further, TDU Systems and 
APPA/NRECA state that the plain language of section 219 demonstrates 
that Congress' intent is to promote only efficient investment, 
investment that benefits consumers. They assert that Congress' 
unqualified adoption in section 219(d) of the statutory just and 
reasonable standard demands a cost-benefit analysis.
---------------------------------------------------------------------------

    \46\ APPA/NRECA at 26; TDU Systems at 11.
    \47\ APPA/NRECA at 26-27.
    \48\ TDU Systems at 12.
    \49\ Id. at 15; APPA/NRECA at 27.
    \50\ APPA/NRECA at 29, citing Farmers Union, 734 F.2d at 1502.
---------------------------------------------------------------------------

    30. TDU Systems and APPA/NRECA also argue that elimination of the 
cost-benefit analysis will be harmful to customers because of the two-
stage application procedure.\51\ They assert that applicants should be 
required to provide the Commission and customers with all relevant 
facts concerning costs and benefits at the petition for declaratory 
order stage, where the applicant's right to the incentive will be 
decided, because the Final Rule precludes relitigation of these issues 
in the later section 205 proceeding.\52\ They state that the interested 
parties must have the information needed to raise specific issues as to 
whether the likely customer benefits of the project justify the likely 
costs of the incentives to be awarded. They also argue that without a 
rigorous cost-benefit analysis at the initial stage, the benefits that 
formed the Commission's initial approval would be so amorphous that 
there would be little objective data for the Commission to assess in 
its periodic progress assessments. Allowing recipients of incentives to 
fix the term of their incentive-rate awards in the absence of a 
rigorous initial cost-benefit analysis would serve only to perpetuate 
the contravention of the statutory just and reasonable standard, 
according to APPA/NRECA. TDU Systems agree, stating that they can 
perceive no justification for allowing incentive awardees to define the 
duration of their own awards in the absence of a rigorous initial cost-
benefit analysis.
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    \51\ Under the Commission's two-stage application procedure, an 
applicant can petition for a declaratory order seeking an incentive-
based rate treatment for its project. After the Commission issues 
the declaratory order, the applicant must seek to put the rates into 
effect through a separate single-issue or comprehensive section 205 
filing. See Order No. 679, FERC Stats. & Regs. ] 31,222 at P 76-78.
    \52\ TDU Systems at 12-14; APPA/NRECA at 29-30.
---------------------------------------------------------------------------

    31. Industrial Consumers argue that the Commission impermissibly 
departed from Order No. 2000,\53\ without a reasoned explanation, by 
eliminating the cost-benefit analysis. They assert that the Commission 
wrongly concluded that the cost-benefit analysis is not necessary 
because customers will be protected by the Commission's review of 
applications pursuant sections 205, 206, and 219 of the FPA, which 
require that all rates be just and reasonable and not unduly 
discriminatory or preferential.\54\ They state that in Order No. 2000, 
the Commission required applicants for innovative transmission rate 
treatments to demonstrate how the investment in the transmission system 
benefits consumers and to provide a cost-benefit analysis, including 
rate impacts. Such a disconnect with Commission precedent reflects an 
absence of reasoned decision making.\55\
---------------------------------------------------------------------------

    \53\ Order No. 2000, supra note 19.
    \54\ Industrial Consumers at 7-8.
    \55\ Id.
---------------------------------------------------------------------------

    32. Further, Industrial Consumers contend that, to successfully 
balance the competing interests of providing incentives to encourage 
transmission investment and its statutory responsibility of protecting 
customers from excessive rates, the Commission must narrowly tailor 
incentives that require a close calibration between the increased rates 
and a corresponding level of benefits. Without such a close calibration 
between the proposed incentive rates and the anticipated benefit, the 
Commission risks thwarting the just and reasonable requirements of the 
FPA. Thus, according to Industrial Consumers, applicants for incentive 
treatment must be required to demonstrate that incentives will actually 
yield a positive return in the form of otherwise unachievable 
reliability improvements and reduced congestion costs.\56 \
---------------------------------------------------------------------------

    \56\ Id. at 10.
---------------------------------------------------------------------------

    33. SMUD contends that the nexus requirement is not sufficient to 
justify eliminating the cost-benefit analysis required under Order No. 
2000. It asserts that there is no connection between the lawfulness of 
non-cost factors and the elimination of the cost-benefit test for 
incentive rates. SMUD states that, while the Commission recognized the 
non-cost-based nature of incentive ratemaking in the 1992 Policy

[[Page 1159]]

Statement, the Commission, nonetheless concluded that benefits to 
consumers must be quantifiable, and SMUD asserts that nothing in 
section 219 alters the requirement for a cost-benefit test.\57\ 
Further, SMUD contends that the nexus test results in a lower burden of 
proof for applicants without explaining why a cost-benefit test is no 
longer necessary. SMUD requests the Commission to clarify that the 
incentives for new construction to reduce congestion will be capped so 
that the delivered cost of power to the consumer is lower than what it 
was before the facilities were constructed, thereby ensuring that 
consumers will not pay incentive rates for congestion-reducing 
construction unless the result is a lower cost of delivered power. SMUD 
also requests clarification that incentives for reliability upgrades 
will not reward the construction of more transmission capacity than is 
reasonably necessary to meet new reliability standards, thereby 
ensuring that incentive payments for reliability improvements will not 
be awarded for more than what is needed to ensure reliability.
---------------------------------------------------------------------------

    \57\ SMUD at 2, citing Incentive Ratemaking for Interstate 
Natural Gas Pipelines, Oil Pipelines, and Electric Utilities: Policy 
Statement on Incentive Regulation, 61 FERC ] 61,168 at 61,590 (1992) 
(1992 Policy Statement).
---------------------------------------------------------------------------

    34. TAPS asserts that the Commission's authority to award above-
cost incentives has always turned on whether the incentive's cost is 
outweighed by the benefits customers will receive.\58\ TAPS advocates 
that the Final Rule be amended to explicitly retain a reasonable 
calculation test that analyzes which incentives spur increased 
investment, and require the Commission to use this test to replace the 
cost-benefit requirement.
---------------------------------------------------------------------------

    \58\ TAPS at 9, citing CPUC v. FERC, 367 F.3d at 929.
---------------------------------------------------------------------------

2. Commission Determination
    35. The Commission reaffirms the decision not to adopt a ``cost-
benefit'' analysis for four principal reasons.
    36. First, the arguments in favor of a cost-benefit analysis start 
from the premise that our traditional approach to setting transmission 
rates is fully sufficient to attract new transmission investment in all 
cases. This premise cannot be squared with section 219. As discussed 
above, section 219 was enacted to counteract a long decline in 
transmission investment. Its provisions are mandatory, not permissive, 
and they proceed from the premise that the Commission must use its full 
discretion under section 205 to ``promot[e] capital investment.'' It 
did not, as noted above, simply codify the status quo; it required the 
Commission to pass a new rule adopting incentive-based rate treatments.
    37. These facts readily distinguish the Final Rule from prior 
instances where the Commission required a cost-benefit analysis.\59\ 
None of those policies was adopted in response to a Congressional 
directive to use the Commission's discretion under section 205 to 
address a national problem--the decline in transmission investment that 
is threatening reliability and imposing billions of dollars in 
congestion costs on consumers.
---------------------------------------------------------------------------

    \59\ Order No. 2000 required as a condition for any innovative 
transmission rate treatment that the applicant demonstrate ``a cost-
benefit analysis, including rate impacts.'' 18 CFR 35.34(e)(ii) 
(2006). The Commission notes that in the 6 years since Order No. 
2000 was issued, we have not received a single application seeking 
any of the innovative rate treatments that were provided for in that 
order. We believe that the requirement of a cost benefit analysis 
was perceived as an insurmountable hurdle which inhibited the 
utilities from seeking innovative rate treatments. Accordingly, in 
developing incentive rate treatments under section 219, the 
Commission expressly deleted the requirement for a cost-benefit 
analysis.
---------------------------------------------------------------------------

    38. Second, petitioners fail to recognize that applicants will be 
required to show that all rates are just and reasonable under section 
205. For example, any ROE will remain within the range of reasonable 
returns. Further, many of the incentives described in the Final Rule 
only change the timing of cost recovery (e.g., 100 percent CWIP), not 
the level of cost recovery. Others reduce the risks of investment 
(e.g., abandoned plant recovery), rather than changing the cost levels. 
We reiterate that each of the incentives adopted by the Final Rule is 
fully consistent with our responsibility to ensure that rates are just 
and reasonable under section 205.
    39. Third, those advocating a cost-benefit analysis fail to 
recognize that the courts have held that the Commission may consider 
non-cost factors in setting rates.\60\ Our authority to consider non-
cost factors applies equally in the development of incentive rate-
treatments.\61\
---------------------------------------------------------------------------

    \60\ See Permian, 390 U.S. 747 at 791-2; CPUC v. FERC, 367 F.3d 
925 at 929.
    \61\ Maine PUC v. FERC, 454 F.3d at 289 (``particularly in view 
of the [Commission's] authority to consider non-cost factors in 
setting rates, the State Commissions' position on calibration 
demands too much'').
---------------------------------------------------------------------------

    40. Finally, although the Commission is rejecting a cost-benefit 
analysis for the reasons stated above, applicants will nonetheless be 
required, as discussed above, to demonstrate the required nexus between 
the incentive being sought and the investment being made. This 
requirement will ensure that incentives are granted only where the 
incentives are tailored to address the demonstrable risks or challenges 
faced by the applicant.

E. Rebuttable Presumptions

    41. In the Final Rule, the Commission adopted a set of processes 
that, if an applicant satisfies them, its project will be afforded a 
rebuttable presumption that it qualifies for transmission incentives. 
First, it created a rebuttable presumption that an applicant has met 
the requirements of section 219 if that project results from a fair and 
open regional planning process that considers and evaluates projects 
for reliability and/or congestion and is found to be acceptable to the 
Commission.\62\ Second, the Commission stated that regional planning 
processes can provide an efficient and comprehensive forum for 
evaluating transmission investments' qualifications under section 219 
by looking at a variety of options across a large geographic footprint. 
For example, such a process has the ability to determine whether a 
given project is needed, whether it is the better solution, and whether 
it is the most cost-effective option among other alternatives.\63\ The 
Commission also adopted a rebuttable presumption that an applicant has 
met the requirements of section 219 if a proposed project is located in 
a NIETC or has received construction approval from an appropriate state 
commission, agency or state siting authority.\64\ The Commission also 
stated that ``other applicants not meeting these criteria may 
nonetheless demonstrate that their project is needed to maintain 
reliability or reduce congestion by presenting [to the Commission] a 
factual record that would support such a finding.'' \65\
---------------------------------------------------------------------------

    \62\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 58.
    \63\ Id. The Commission noted that the value of regional 
planning was expressly recognized when it proposed to amend the pro 
forma Open Access Transmission Tariff of jurisdictional public 
utilities to require regional planning to ensure that transmission 
is planned and constructed on a nondiscriminatory basis to support 
reliable and economic service to all eligible customers in the 
region. See Preventing Undue Discrimination and Preference in 
Transmission Service, Notice of Proposed Rulemaking, 71 FR 32,536 
(June 6, 2006), FERC Stats & Regs., Preambles ] 32,603 at P 36 
(2006) (OATT Reform NOPR).
    \64\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 58.
    \65\ Id. P 57.
---------------------------------------------------------------------------

1. Rehearing Requests
    42. NARUC and TAPS contend that the Final Rule's rebuttable 
presumption is not consistent with the statutory requirements of 
section 219. They state that there was no showing in the Final Rule 
that assessments in the regional planning processes satisfy the

[[Page 1160]]

requirements of section 219 and there is no basis to assume that the 
criteria employed in regional planning processes utilize the criteria 
set out in section 219.\66 \Therefore, they argue that it cannot be 
reasonably presumed that every project that is subject to regional 
planning will benefit customers by ensuring reliability and reducing 
the cost of delivered power by reducing transmission congestion. NARUC 
further contends that incentives for using regional planning processes 
are inappropriate in view of the Commission's proposal in the OATT 
Reform NOPR to require all jurisdictional public utilities to engage in 
regional planning.\67\ Under such a mandatory requirement, all projects 
will effectively qualify for the rebuttable presumption because all 
projects will, presumably, be included in approved regional plans.\68 \
---------------------------------------------------------------------------

    \66\ NARUC at 5-6; TAPS at 7-8.
    \67\ See OATT Reform NOPR, FERC Stats & Regs., Preambles ] 
32,603 at P 36.
    \68\ NARUC at 6.
---------------------------------------------------------------------------

    43. APPA/NRECA, NARUC, TDU Systems, and TAPS argue that the 
rebuttable presumption for state approvals should be deleted because 
there is no legal or logical basis to presume that projects falling 
into this category will ensure reliability or reduce the cost of 
delivered power.\69\ They assert that the criteria applied by the state 
may not resemble the criteria that the Commission is required to apply 
under section 219 of the FPA. They argue that state commissions are 
mainly concerned with protecting retail customers in their respective 
states and state authorities apply state laws to construction-permit 
applications. Accordingly, states are not focused on public utility 
wholesale customers who may be in other states, or ensuring reliability 
or reducing transmission congestion. Therefore, APPA/NRECA assert that 
the Commission cannot delegate its responsibilities under section 219 
to state authorities that may of necessity have a very different 
mission.\70\
---------------------------------------------------------------------------

    \69\ Id. at 7; TAPS at 6; APPA/NRECA at 37-39; TDU Systems at 
25-27.
    \70\ APPA/NRECA at 38.
---------------------------------------------------------------------------

    44. NARUC also claims that projects receiving a designation as 
projects in NIETC should not receive a rebuttable presumption because 
such a designation, alone, cannot assure that the statutory 
prerequisites of section 219 have been satisfied when the criteria for 
NIETC designation do not mirror those set out for incentives under the 
statute.\71\
---------------------------------------------------------------------------

    \71\ NARUC at 7.
---------------------------------------------------------------------------

    45. Additionally, NARUC, APPA/NRECA, and TDU Systems claim that the 
scope of the rebuttable presumption is ambiguous and needs to be 
clarified. They state that it is not clear to which part of the three-
part showing that the rebuttable presumption applies to.\72\ They state 
that the rebuttable presumption should only apply to the first part 
(ensure reliability or reduce the cost of delivered power by reducing 
transmission congestion) of the three-part showing because the only way 
an applicant can appropriately satisfy the statutory requirements of 
FPA section 219 is to demonstrate on the record that the project either 
ensures reliability or reduces the cost of delivered power and that the 
rates satisfy sections 205 and 206 of the FPA. Therefore, the applicant 
must still demonstrate with factual evidence that there is a nexus 
between the incentive sought and the investment being made and that the 
resulting rates are just and reasonable.\73\ APPA/NRECA also request 
the Commission to clarify that this interpretation applies to both 
section 205 filings and petitions for declaratory order.\74\ TAPS 
contends that the rebuttable presumptions conflict with the 
Commission's intended limitations on the receipt of incentives, such as 
routine investments, which may be included in a regional plan and 
required to receive state siting approval prior to construction, but 
may not always qualify for an incentive-based ROE.\75\
---------------------------------------------------------------------------

    \72\ Under section 35.35(d) of the regulatory text, an applicant 
for incentive rates is required to make a three-part showing that: 
(1) The facilities for which it seeks incentives either ensure 
reliability or reduce the cost of delivered power by reducing 
transmission congestion consistent with the requirements of section 
219; (2) there is a nexus between the incentive sought and the 
investment being made; and (3) resulting rates are just and 
reasonable. 18 CFR 35.35(d) (2006).
    \73\ APPA/NRECA at 35-36; NARUC at 7-8; TDU Systems at 24-25.
    \74\ APPA/NRECA at 36.
    \75\ TAPS at 8, citing Order No. 679, FERC Stats. & Regs. ] 
31,222 at P 94.
---------------------------------------------------------------------------

2. Commission Determination
    46. We will grant rehearing and clarification in part. The 
Commission created the rebuttable presumption for the purpose of 
avoiding duplication in determining whether a project maintains 
reliability or reduces congestion. We do not wish to repeat the work of 
state siting authorities, regional planning processes, or the DOE in 
evaluating these issues. However, we agree with NARUC that if such 
processes do not in fact include such a determination, a rebuttable 
presumption would not be appropriate. Accordingly, we grant rehearing 
and are modifying Sec.  35.35 in three ways.
    47. First, we agree with NARUC that the NIETC process will not 
necessarily determine that every transmission project within a 
designated corridor will meet the section 219(a) requirements, nor is 
DOE required to make such a determination. However, we do not believe 
it is necessary to retain this particular rebuttable presumption in our 
regulations because any project which is proposed in a NIETC will of 
necessity have to go through a state or federal siting process. If an 
applicant's proposed project is within a NIETC, we expect that it will 
be sited in most instances by the appropriate state siting authority 
and the applicant will be able to rely on the state siting rebuttable 
presumption for meeting the requirements of section 219(a). In those 
cases where projects within a NIETC are sited by this Commission 
pursuant to our new authority in section 216, an applicant may rely on 
our findings in our siting process for meeting the requirements of 
section 219(a).\76\ Thus, applicants with projects in a NIETC have an 
opportunity to rely upon the appropriate siting processes to meet the 
requirement that a project ensure reliability or reduce the cost of 
delivered power by reducing transmission congestion, and we need not 
include the NIETC process as a rebuttable presumption.\77 \
---------------------------------------------------------------------------

    \76\ As stated in section 216, the Commission may exercise its 
new siting authority if inter alia it finds that the construction or 
modification of the facilities ``significantly reduce transmission 
congestion in interstate commerce and protects or benefits 
consumers.'' Since the Commission is required to find that a project 
reduces transmission congestion before it can authorize the siting 
of a transmission facility within a NIETC, such facilities 
necessarily satisfy the requirement of section 219(a) and these 
regulations.
    \77\ While DOE is not required to determine whether all projects 
within a NIETC meet the pre-requisites of section 219, we anticipate 
that DOE is likely to consider whether transmission projects within 
these corridors ensure reliability or reduce the cost of delivered 
power by reducing transmission congestion. Thus, an applicant that 
does not rely upon a rebuttable presumption for meeting the pre-
requisites of section 219 may nonetheless use the findings made by 
the DOE. Accordingly, the Commission will give due weight to the 
DOE's determinations concerning the ability of transmission projects 
within a NIETC to ensure reliability or reduce the cost of delivered 
power by reducing transmission congestion.
---------------------------------------------------------------------------

    48. We are amending our regulations to provide that an applicant 
that obtains Commission authorization under section 216 to site 
electric transmission facilities in interstate commerce shall be deemed 
to satisfy the requirements of section 219(a).\78\
---------------------------------------------------------------------------

    \78\ Section 216(b)(4). See also Regulations for Filing 
Applications for Permits to Site Interstate Electric Transmission 
Facilities, Order No. 689, 71 FR 69,440 at P 41 (Dec. 1, 2006) 
(``The Commission will review the proposed project and determine if 
it reduces the transmission congestion identified in DOE's study and 
if it will protect or benefit consumers. It will investigate and 
determine the impact the proposed facility will have on the existing 
transmission grid and the reliability of the system'').

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[[Page 1161]]

    49. Second, we will modify our regulations to require each 
applicant seeking to invoke the rebuttable presumption to explain in 
its filing how the applicable process (regional planning or state 
approval) in fact considered whether the project ensures reliability or 
reduce congestion. We continue to believe that, these approval 
processes will, in all likelihood, examine whether the project 
maintains reliability or reduces congestion. But in instances where 
this is not the case the applicant will bear the full burden of 
demonstrating such facts.
    50. Third, we also clarify that the rebuttable presumption applies 
only to the requirement that an applicant demonstrate, that a project 
is needed to ensure reliability or to reduce congestion. It does not 
apply to any other requirement in 18 CFR 35.35, such as the 
requirement, that the applicant demonstrate the required nexus between 
the incentive sought and the investment being made \79\ and that the 
resulting rates are just and reasonable in either the petition for 
declaratory order or section 205 filing. We will modify our regulations 
accordingly.
---------------------------------------------------------------------------

    \79\ We note that the Final Rule's statement regarding routine 
investment cited by TAPS, applies to the nexus demonstration, and 
therefore there is no conflict between the rebuttable presumption 
and that statement.
---------------------------------------------------------------------------

F. ROE Sufficient To Attract Investment

    51. In the Final Rule, the Commission adopted the NOPR's proposal 
to allow, when justified, an incentive-based ROE to all public 
utilities (i.e., traditional public utilities and Transcos) for new 
investments in transmission facilities that benefit consumers by 
ensuring reliability or reducing the cost of delivered power by 
reducing congestion.\80\ By including this provision in the Final Rule, 
the Commission stated that it satisfied the requirement of section 219 
to provide an ROE that attracts new investment in transmission 
facilities (including related transmission technologies). The 
Commission stated that it will provide ROEs at the upper end of the 
zone of reasonableness for transmission investments that meet the 
requirements of section 219. Further, the Commission clarified that it 
will continue to use the DCF analysis for ROE determinations.\81\ The 
Commission also noted that not every investment that increases 
reliability or reduces congestion will qualify for an incentive-based 
ROE. For example, routine investments may continue to be assessed under 
traditional ROE determinations because there is an obligation to 
construct them and high assurance of recovery of the related costs.\82\
---------------------------------------------------------------------------

    \80\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 91.
    \81\ This analysis, undertaken in individual rate applications, 
assesses representative proxy companies and the impact of other 
factors, including risk, on the zone of reasonableness for ROE. Id. 
P 92.
    \82\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 94.
---------------------------------------------------------------------------

1. Rehearing Requests
    52. EEI and Southern Companies take exception to the statement in 
the Final Rule that ``routine investments made to comply with existing 
reliability standards may not always qualify for an incentive-based 
ROE.'' \83\ They argue that the statement discriminates against 
projects or upgrades that may be proposed to address reliability 
concerns, and therefore the statement should be deleted.\84\ Southern 
Companies emphasize that the statutory requirement under 219 makes no 
distinction between routine or non-routine status; therefore, 
regardless of status, an investment that promotes reliability should be 
entitled to incentive rate treatment. In that respect, Southern 
Companies request the Commission to confirm that all reliability-
related investments qualify for incentive-based ROEs.\85\ Furthermore, 
Southern Companies request the Commission to clarify that a single 
incentive-based ROE should apply to all, not just new, transmission 
investment.\86\
---------------------------------------------------------------------------

    \83\ Id.
    \84\ EEI at 11; Southern Companies at 3.
    \85\ Southern Companies at 4.
    \86\ 86 Southern Companies argue that section 219(b)(2) should 
be read to require the Commission to re-examine its ratemaking 
methods and revise it current ROE policies for all transmission 
investment, and that the base ROE must be sufficient to attract new 
investment. It contends that Congress did not state that the 
Commission shall provide a return on equity for new investment in 
transmission. Instead, section 219(b)(2) states that the Commission 
shall ``provide a return on equity that attracts new investment in 
transmission.'' See Id. at 5 (emphasis provided by commenter).
---------------------------------------------------------------------------

    53. TDU Systems contend that the Commission should reconsider its 
commitment to grant incentive applicants an ROE at the upper end of the 
zone of reasonableness. Specifically, TDU Systems claim that the 
Commission may have difficulty handling all the rate filings that seek 
extremely high ROEs because of the two-stage process. They contend that 
the Commission is placing too much reliance on its ability to protect 
consumer interests in the second stage, section 205 review, and 
recommends that the Commission relieve some of the pressures by giving 
incentive applicants a more specific message that the incentives have 
limits.\87\ APPA/NRECA also assert that the Commission has not 
explained why such an increase in allowed ROEs is, or could be, either 
necessary to attract capital or otherwise just and reasonable and that 
the rule does not balance investor and consumer interests in setting 
incentive ROEs.\88\ Accordingly, these parties assert that the 
Commission should permit incentives only if the package as a whole 
results in a just and reasonable rate. In so doing, they argue, the 
Commission should disavow any intent to allow ROEs near the top of the 
zone of reasonableness and ensure that companies in the proxy group 
with ROEs at the top of the zone of reasonableness do not become the 
basis for determining the zone, particularly to the extent incentive 
ROEs become the base case in future DCF analyses.
---------------------------------------------------------------------------

    \87\ TDU Systems at 27-29.
    \88\ APPA/NRECA at 9, 47.
---------------------------------------------------------------------------

    54. Similarly, TAPS argues that the Commission must be prepared to 
apply a much stricter scrutiny to the composition of the proxy group 
that determines the range of the zone of reasonableness to the extent 
the Commission continues to declare in favor of rates set at the top of 
a range that has not yet been established.\89\ Also, TAPS recommends 
that the Commission modify its methodology for proxy results by first 
averaging the two results per proxy company so that there is one, 
average result per proxy company, as it does in gas cases,\90\ thereby 
providing a more defensible basis for just and reasonable returns. TAPS 
requests the Commission to clarify that it will ensure that the top of 
the range does not become a self-

[[Page 1162]]

escalating spiral with the highest proxy result reflecting an investor 
expectation that the proxy itself will garner above-cost incentive 
profits.\91\
---------------------------------------------------------------------------

    \89\ TAPS explains that many transmission owners will request 
rates at the high end of the zone of reasonableness and that the 
main restraint on transmission rates will be the ceiling that is set 
by the placement of the top of the zone of reasonableness. The zone 
has been defined by taking a sample group that includes a large 
number of proxy companies and calculating two data points per proxy. 
Each pair of points represents the extreme values for each company. 
The zone of reasonableness is often characterized as reaching up to 
the higher data point for the most extreme company in the proxy set. 
Thus, when the top of the range sets the return, it becomes critical 
to ensure that every company included in the proxy group very 
closely resembles the utility whose return is being capped, i.e., 
its capital structure, business risk, financial risk, and associated 
capital costs. See TAPS at 18-22.
    \90\ Id. at 21, citing High Island Offshore System, L.L.C., 110 
FERC ] 61,043, at P 148 (2005).
    \91\  Id. at 22.
---------------------------------------------------------------------------

    55. Southern Companies consider the Commission's continued reliance 
on DCF analysis in the Final Rule to be contrary to Congressional 
intent and policy.\92\
---------------------------------------------------------------------------

    \92\ According to Southern Companies, section 219's requirement 
that the Commission provide ROEs that are sufficient to attract new 
transmission investment is evidence of Congress' conclusion that the 
Commission's current ROE methodology is not producing adequate 
results. Therefore, the Commission should construe section 219(b)(2) 
as a mandate from Congress to re-examine its traditional ratemaking 
policies. Southern Companies at 5-6.
---------------------------------------------------------------------------

    Accordingly, Southern Companies request the Commission to clarify 
that it will allow the use of additional ROE estimation methodologies 
\93\ because these methodologies will better ensure that an entity is 
ensured a reasonable rate of return. Southern Companies assert that 
failure to consider the results of more than one methodology, although 
there are other sound methods, constitutes arbitrary and capricious 
decision making.\94\ Furthermore, Southern Companies consider the Final 
Rule's refusal to recognize the flaws in the current DCF analysis to be 
arbitrary and capricious and its finding that the DCF analysis yields 
just and reasonable results to be in error, particularly in light of 
the fact that the DCF analysis drives a utility's stock price to its 
book value while market values exceed book values by approximately 2.47 
to 1 as of December 31, 2005 and the constant-growth DCF model often 
produces divergent and meaningless results.\95\
---------------------------------------------------------------------------

    \93\ Such methodologies include the risk premium approach, the 
capital asset pricing model and the comparable earnings approach. 
Id. at 7.
    \94\ They state that using multiple methodologies recognizes 
that no single approach can accurately predict an appropriate ROE 
level so as to satisfy the constitutional and statutory 
requirements. Id. at 8.
    \95\ Id. at 11.
---------------------------------------------------------------------------

    56. Southern Companies also argue that ROE adders should be 
provided to all new transmission construction. They assert that section 
219 directs the Commission to promote investment of all facilities and 
therefore the Commission's determination in the Final Rule that it will 
not create specific ROE adders is contrary to EPAct 2005 and requiring 
applicants to go through a rate case prior to receiving any incentives 
would unnecessarily impede Congress' stated goal of encouraging new 
transmission investment.\96\
---------------------------------------------------------------------------

    \96\ Id. at 18.
---------------------------------------------------------------------------

    57. The California Commission claims that the Commission did not 
engage in reasoned decision making in the Final Rule because it failed 
to consider risk assessment and did not address its arguments about the 
relative low risk of transmission investment.\97\ It argues that the 
Commission failed to explain why transmission entities should be 
eligible for a higher ROE given the low risk associated with 
transmission investments. The California Commission states that 
transmission businesses have a low financial risk because they generate 
a steady revenue stream as a regulated monopoly. Also, among the three 
functions of an integrated utility's electricity business, i.e. 
generation, distribution, and transmission, the transmission business 
carries the lowest risk.\98\ Further, the California Commission argues 
that the Commission did not consider the effect the multiple incentives 
created by the Final Rule will have on lowering the risk, such as 100 
percent recovery of CWIP before a transmission project is used and 
useful. Accordingly, it contends that above-average ROEs for 
transmission are not needed to effect new transmission facilities.\99\
---------------------------------------------------------------------------

    \97\ California Commission at 7-10.
    \98\ Id. at 8.
    \99\ The California Commission states that even without the high 
ROE incentive, California IOUs have planned and constructed numerous 
transmission facilities in the last 10 years. Id. at 9.
---------------------------------------------------------------------------

    58. New England Commissions argue that the Commission arbitrarily, 
capriciously, and without a reasonable factual foundation, determined 
that ROE incentives encourage investment and make transmission projects 
attractive.\100\ They state that the New England ROE proceeding in 
Bangor Hydro-Electric \101\ demonstrated that an enhanced ROE will not 
change transmission owners' performance in any material respect, but 
will merely give them an unjust and unreasonable windfall. Accordingly, 
New England Commissions assert that the Commission's finding that 
transmission incentives are necessary is not supported by the record in 
this rulemaking or in the Bangor Hydro-Electric proceeding.\102\ 
According to the New England Commissions, it is contrary to the 
directive in section 219(d) that rates be just and reasonable to 
dispense with any showing of need before awarding ROE incentives.\103\ 
New England Commissions requests the Commission to clarify that it will 
judge the justness and reasonableness of ROE adders in New England 
based on the record in Bangor Hydro-Electric proceeding and specify in 
the rule that only a case-by-case evaluation can determine whether an 
ROE incentive will produce justifiable benefits.
---------------------------------------------------------------------------

    \100\ New England Commissions at 5.
    \101\ Bangor Hydro-Electric Co., 106 FERC ] 61,280 (2004).
    \102\ New England Commissions at 6-10.
    \103\ Id. at 12.
---------------------------------------------------------------------------

2. Commission Determination
    59. We will grant rehearing and clarification in part on certain 
issues and deny rehearing on all other issues.
    60. We reject the argument of investor-owned utilities that ROE 
incentives be applied without regard to the nature of the facility 
being constructed or the risks associated with it. Specifically, the 
Commission reaffirms that the most compelling case for incentive ROEs 
are new projects that present special risks or challenges, not routine 
investments made in the ordinary course. We therefore reject the 
arguments of EEI and Southern Companies that such routine investments 
should be treated the same, for purposes of applying the nexus test, as 
new projects that present special risks or challenges. Although we will 
consider applications for ROE incentives for all projects, we reiterate 
that not all projects will be able to meet the nexus requirement. EEI 
and Southern Companies have provided no compelling reason why a routine 
investment made in the ordinary course should, as a general matter, 
receive an incentive ROE.
    61. We also reject the argument that incentive ROEs should apply to 
existing transmission rate base that has already been built. The 
purpose of section 219 is to attract investment in transmission. 
Southern Companies have not provided any evidence that higher ROEs for 
transmission rate base that has already been built are necessary to 
ensure reliability or to reduce congestion; nor have they shown why 
such ROEs are necessary to attract new investment in transmission.
    62. We also reject the contentions of certain customer groups that 
incentive ROEs will ``destabilize'' the DCF methodology. First, as 
indicated above, all ROEs approved pursuant to section 219 will be 
within the range of reasonableness, as determined consistent with our 
precedents. Second, any incentive ROEs granted under 219 should have a 
minimal effect, if any, on the overall range of reasonableness derived 
from the appropriate proxy group. The DCF methodology uses proxy groups 
of entire companies, not individual transmission projects. In other 
words, the ``cash flows'' being measured in the DCF method are the cash 
flows of entire companies. These cash flows should not be significantly 
affected by an incentive return for any particular transmission project 
for one company within the proxy group. Moreover, to the extent there 
is any

[[Page 1163]]

small effect on the overall range of reasonableness, it will 
appropriately reflect the substantial risks associated with 
constructing new transmission, as discussed above.\104\
---------------------------------------------------------------------------

    \104\ The Commission retains the discretion to adjust ROEs if we 
find that the results of a DCF analysis do not accurately reflect 
the risk of the applicant and its ability to attract capital.
---------------------------------------------------------------------------

    63. We also reject requests to cease our utilization of the DCF 
method. Inasmuch as the DCF method yields just and reasonable rates, as 
the Commission has recognized in numerous proceedings, we see no basis 
to require other methods for the evaluation of incentive applications. 
As we stated in the Final Rule, the Commission will consider on a case-
by-case basis whether the application of the traditional DCF analysis 
should be modified.\105\
---------------------------------------------------------------------------

    \105\ We agree with TAPS that averaging each company's low and 
high DCF return would result in a single average DCF result for each 
electric company, making it like the single DCF return for gas and 
oil pipelines, from which a median return on equity for the group 
can be calculated. While this is an acceptable method, we will not 
require use of that method in the Commission's DCF analysis because 
that issue is beyond the scope of this proceeding and is more 
appropriately addressed in the individual application proceedings.
---------------------------------------------------------------------------

    64. We also do not consider the process for approving incentive 
ROEs, i.e., setting a zone of reasonableness and a DCF analysis 
requirement, to be an unnecessary impediment to encouraging 
transmission investment. Generic adders, as recommended by Southern 
Companies, would still require the Commission to make a determination 
that the proposed ROEs are just and reasonable, and its findings would 
have to be based on reasoned decision-making. Therefore, the Commission 
necessarily would be required to establish a zone of reasonableness and 
a justification for the approved ROEs.
    65. Responding to the California Commission, the Final Rule 
explained the basis for its decision to provide an incentive ROE, based 
on the need to attract investment in the context of long-term industry 
underinvestment and the need to re-evaluate the balance of investor and 
ratepayer interests, and therefore has provided the reasons for its 
decisions. The Commission is not, in this rule, setting the incentive 
ROE, but rather leaves that determination to future proceedings that 
will authorize a unique ROE appropriate to the facts and circumstances 
of each applicant. It is in those proceedings that the California 
Commission can raise its concerns regarding comparative returns within 
the energy industry and the specific characteristics of California 
utilities. However, we agree with the California Commission that 
utilities should consider the effect that certain incentives (e.g. CWIP 
in rate base, recovery of abandoned plant) may have on risk and that 
return on equity in the upper end of the zone of reasonableness may not 
be appropriate when combined with incentive rate treatments that lower 
overall risk.
    66. We do not address the issues raised by New England Commission 
with respect to the Bangor Hydro-Electric proceeding because they have 
been addressed in a recent Commission order and are now pending on 
rehearing.\106\
---------------------------------------------------------------------------

    \106\ Bangor Hydro-Electric Co., Opinion No. 489, 117 FERC ] 
61,129 (2006).
---------------------------------------------------------------------------

    67. We will, however, grant clarification in part. Several 
petitioners express the fear that the Commission will routinely grant 
ROEs at the top end of the zone of reasonableness. Although the 
Commission has broad discretion to establish returns on equity anywhere 
within the zone of reasonableness, we must be careful in the manner in 
which we exercise this discretion. The Commission clarifies that we do 
not intend to grant incentive returns ``routinely'' or that, when 
granted, they will always be at the ``top'' of the zone of 
reasonableness. Rather, each applicant will, first, be required to 
justify a higher ROE under the revised nexus test and, second, to 
justify where in the zone of reasonableness that return should lie. In 
some instances, where the risks or challenges faced by a new investment 
are substantial, we may grant an ROE at the top end of the zone of 
reasonableness. However, we have no expectation of doing so in all 
cases or even routinely.
    68. We also provide clarification on the timing of an ROE 
determination. In most instances, an ROE determination occurs in a 
hearing that considers the justness and reasonableness of the costs of 
the investment for purposes of setting rates under section 205. In that 
hearing, the overall range of reasonableness would be established, as 
well as a determination of where within that range the ROE should be 
set. If the Commission granted a request for an incentive ROE at the 
upper end of that range in a petition for declaratory order, the 
hearing would establish where in the upper end the ROE would fall--
whether at the top end or at a different point in the upper end of the 
range. The Commission would then review any determination by an 
administrative law judge on that issue.
    69. We recognize, however, that our hearing procedures for 
determining ROE can create uncertainty for investors. Under traditional 
ratemaking processes, the rates for a particular project, including the 
ROE for that project, are determined only after an investment decision 
is made and the facility is constructed. This may provide a 
disincentive to new investments that are sensitive to our ROE 
determinations. Although our processes are designed to provide a just 
and reasonable return, we recognize that there can be significant 
uncertainty as to the ultimate return because of the uncertainties 
associated with administrative determinations (e.g., selection of the 
proxy group, changes in growth rates, etc.) This can itself constitute 
a substantial disincentive to new investment.
    70. Recognizing this, we will clarify the approach adopted in the 
Final Rule. We will continue to allow applicants to request, in a 
petition for declaratory order, an ROE that is at the upper end of the 
zone of reasonableness and, in such instances, the ultimate ROE will be 
determined in the hearing process. However, if an applicant desires up-
front certainty of the ROE it will receive, we clarify that we also 
will consider requests for declaratory orders that set the ROE for a 
particular project, and that include the appropriate support for the 
ROE, including, for example, a DCF analysis. An applicant seeking to 
use this process will have to meet the required nexus requirement, such 
as by showing that an up-front ROE determination is important for its 
investment decision. An applicant seeking such an up-front ROE 
determination also may request an ROE at the upper end of the zone of 
reasonableness; however, the fact that an up-front ROE determination is 
itself an incentive that tends to reduce risk will be taken into 
account in considering any such request.

G. Incentives Available to Transcos

    71. In the Final Rule, the Commission approved incentive-based rate 
treatments applicable to Transcos to encourage Transco formation and 
attract investment.\107\ Specifically, the Commission approved an ROE 
that encourages Transco formation and is sufficient to attract 
investment and an adjustment to book value of transmission assets being 
sold to a Transco to remove the disincentive associated with the impact 
of accelerated depreciation on federal

[[Page 1164]]

capital gains tax liabilities.\108\ The Commission noted that its 
decision to approve such incentives for Transcos is based on the 
``proven and encouraging track record of Transco investment'' in 
transmission facilities.\109\
---------------------------------------------------------------------------

    \107\ Section 35.35(b)(1) defines Transcos as stand-alone 
transmission companies approved by the Commission that sell 
transmission services at wholesale and/or on an unbundled retail 
basis, regardless of whether they are affiliated with another public 
utility.
    \108\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 222-224. 
The incentive ROE does not preclude a Transco from applying for 
other incentives, including hypothetical capital structure, 
allowance for deferred income taxes (ADIT), acquisition premiums, 
formula rates or deferred cost recovery. Id. P 221.
    \109\ See id. P 221-23.
---------------------------------------------------------------------------

1. Rehearing Requests
    72. EEI argues that applicants seeking transmission incentives 
should be treated equally, without regard to their form of business. It 
argues that the incentives applicable to stand-alone transmission 
companies should be expanded to apply to all transmitting 
utilities.\110\ EEI also urges the Commission to recognize that all 
forms of transmission business models can effectively provide 
transmission facilities and to reiterate that it will evaluate each 
applicant's proposed incentives, in particular the upper range of 
reasonable ROEs, without regard to the applicant's form of business and 
without bias as between forms of business.\111 \
---------------------------------------------------------------------------

    \110\ EEI at 5, 7-9.
    \111\ Id. at 5. EEI claims that section 219(b) provides that the 
rule shall promote transmission investment ``regardless of the 
ownership of facilities'' and the Commission noted in the Final Rule 
that it will not limit incentives based on corporate structure or 
ownership. Id. at 7, citing Order No. 679, FERC Stats. & Regs. ] 
31,222 at P 4, 225.
---------------------------------------------------------------------------

    73. Southern Companies contend that additional incentives for 
Transcos are not justified on grounds that the Transcos have a good 
record of transmission investment.\112\ They state that vertically-
integrated utilities like Southern Companies have consistently invested 
significantly in transmission maintenance and expansion. Southern 
Companies also claim that special ROE incentives solely for Transcos 
would be discriminatory by favoring one corporate structure over 
another to the extent both business structures have similar 
transmission investment records \113\ and the requirements of section 
219 to promote investment regardless of the ownership of the 
facilities.
---------------------------------------------------------------------------

    \112\ Southern Companies at 16-17.
    \113\ Id. at 17, citing Order No. 679, FERC Stats. & Regs. ] 
31,222 at P 225.
---------------------------------------------------------------------------

    74. APPA/NRECA assert that because the Commission's definition of 
Transcos includes affiliated Transcos under the control of one or more 
parent public utilities, granting incentive rate treatment greater than 
that afforded to public utilities would constitute a financial 
windfall.\114\ They argue that such affiliated Transcos should not be 
eligible for special incentive rate treatment because such a payment 
would neither induce new construction nor provide any new benefit to 
the customer paying the incentive rate.\115\
---------------------------------------------------------------------------

    \114\ APPA/NRECA at 31, 34-35. In the Final Rule, the Commission 
stated that the definition of Transco does not exclude affiliated 
Transcos with active ownership by market participants, or stand-
alone transmission companies that own transmission and distribution 
facilities. The Commission said that it would consider the 
eligibility of such arrangements based on a showing of how the 
specific characteristics of a proposed Transco affect its ability 
and propensity to increase transmission investment and lead to 
increased transmission investment similar to Transcos the Commission 
already approved. See Order No. 679, FERC Stats. & Regs. ] 31,222 at 
P 202.
    \115\ APPA/NRECA at 31.
---------------------------------------------------------------------------

    75. Furthermore, TDU Systems oppose passive ownership interests in 
Transcos and contend that, if authorized, passive ownership interests 
should only be authorized upon a showing that the option of investment 
in the Transco is open to all load-serving entities (LSEs) in the 
region up to their load ratio shares.\116\ They also argue that the 
Commission must rigorously scrutinize and monitor relationships among 
the passive owners to deter the potential for abuse. TDU Systems also 
contend that the Commission should clarify that Transcos may only 
receive incentive rates if there are no interests within the Transco 
competing with transmission for capital. They recommend that the 
Commission condition the granting of incentives by imposing limits on 
business investments in other industries to avoid the dilution of 
capital funding from competing sources within the company.\117\ They 
also claim that incentives for new investment in transmission 
infrastructure should not be necessary because, as the Commission noted 
in the Final Rule, such incentives are inherent in the corporate 
business model to encourage investment.\118\ Therefore, encouraging 
additional incentives provides no incremental benefit to 
consumers.\119\
---------------------------------------------------------------------------

    \116\ TDU Systems at 39.
    \117\ Id. at 40.
    \118\ See Order No. 679, FERC Stats. & Regs. ] 31,222 at P 204.
    \119\ TDU Systems at 41.
---------------------------------------------------------------------------

2. Commission Determination
    76. We affirm the finding in the Final Rule that the Commission 
will not limit an applicant's ability to seek incentive-based rate 
treatments based on corporate structure or ownership.\120\ The 
Commission will evaluate these applications to determine if incentive 
treatment is justified based on their demonstrations that the projects 
meet the requirements of section 219 and this rule. Certain types of 
incentives, such as the ADIT incentive may be more appropriate where 
transmission is being spun off or otherwise transferred to a new 
corporate entity, such as a Transco. But we see no basis for the claim 
that the Transco incentives are unduly discriminatory or contrary to 
the goals of section 219.
---------------------------------------------------------------------------

    \120\ See Order No. 679, FERC Stats. & Regs. ] 31,222 at P 4.
---------------------------------------------------------------------------

    77. The Final Rule described at great length the very significant 
transmission investment that has been undertaken by Transcos, to 
date.\121\ There is no reason to repeat those examples again here, but 
we disagree with comments that suggest that Transcos do not have a good 
record of transmission investment. Furthermore, their singular focus on 
transmission investment by transmission-only companies, the elimination 
of competition for capital between generation and transmission 
investments, and the access to capital markets have all been cited in 
support of the value of the Transco business model for getting new 
transmission built. For all of these reasons, the Commission adopted 
incentive-based rate treatments applicable to Transcos that would both 
encourage Transco formation and attract investment.
---------------------------------------------------------------------------

    \121\ Id. P 222-23.
---------------------------------------------------------------------------

    78. As we stated in the Final Rule, the Commission will consider 
concerns regarding affiliated Transcos in specific applications for 
incentive treatment.\122\ We believe the Final Rule fulfills the 
requirements of section 219 by determining eligibility for Transco 
status and incentive-based rate treatment based on a showing of how the 
specific characteristics of a proposed Transco affect its ability and 
propensity to increase transmission investment in individual case 
proceedings. Therefore, we do not consider this proceeding to be the 
appropriate forum for adopting preconditions related to other issues, 
such as affiliation or passive ownership. Inasmuch as Transcos are 
subject to the Commission's market behavior rules, their activities 
will be monitored for any potential market abuse. Therefore, we affirm 
the availability of ROE incentives to Transcos. As stated in the Final 
Rule, we expect that the incentive ROE will be used for additional 
capital spending, and thereby provide consumer benefits, as 
demonstrated by the negative cash flow profiles of Transcos and their 
future capital spending plans.
---------------------------------------------------------------------------

    \122\ See id. P 202.

---------------------------------------------------------------------------

[[Page 1165]]

H. Transmission Organization Incentive

    79. In the Final Rule, the Commission stated that it will 
authorize, when justified, an incentive-based rate treatment for public 
utilities that join and/or continue to be a member of an ISO, RTO, or 
other Commission-approved Transmission Organization.\123\ Applicants 
for the incentive-based rate treatment must make a filing with the 
Commission under section 205 of the FPA. For purposes of section 
35.35(e), an incentive-based rate treatment means an ROE that is higher 
than the ROE the Commission might otherwise allow if the public utility 
were not a member of a Commission-approved Transmission Organization. 
The Commission stated that it will not create a generic adder for such 
membership, but instead will consider appropriate ROE incentives on a 
case-by-case basis. The Commission also stated that transmitting 
utilities or electric utilities that join a Transmission Organization 
would be eligible to apply to recover prudently-incurred costs 
associated with joining the Transmission Organization, either through 
rates charged by transmitting utilities or electric utilities or 
through transmission rates charged by the Transmission Organization 
that provides services to such utilities.\124\ Furthermore, the 
Commission stated that based on its interpretation of section 219, 
eligibility for this incentive flows to an entity that ``joins'' a 
Transmission Organization and is not tied to when the entity joined. 
Therefore, the Commission clarified that entities that have already 
joined, and that remain members of, an RTO, ISO, or other Commission-
approved Transmission Organization, are eligible to receive this 
incentive.\125\ However, as the Commission noted, any public utility 
receiving an incentive ROE for joining a Transmission Organization but 
withdraws from such organization is no longer eligible for the ROE 
incentive.
---------------------------------------------------------------------------

    \123\ Id. P 326. Transmission Organization is defined as ``a 
Regional Transmission Organization, Independent System Operator, 
independent transmission provider, or other transmission 
organization finally approved by the Commission for the operation of 
transmission facilities.'' Id. P 328.
    \124\ Id. P 329.
    \125\ Id. P 331.
---------------------------------------------------------------------------

1. Rehearing Requests
    80. Petitioners contend that public utilities should not be 
eligible for the Transmission Organization incentive if the public 
utilities are already members because the payment would neither induce 
new construction nor provide any new benefit to the customer paying the 
incentive rate.\126\ They argue that the Final Rule's determination 
that incentives may go to entities that are already members of a 
Transmission Organization is contrary to court and Commission precedent 
interpreting incentive rates as forward-looking inducements, not a 
reward for past behavior.\127\ The California Commission claims that 
the Final Rule's interpretation of section 219 exceeds the Commission's 
authority by creating an incentive that is broader than specified in 
the FPA.\128\ Furthermore, TDU Systems assert that many public 
utilities have already joined ISO or RTOs without ROE incentives and 
have benefited from such membership. Those public utilities that have 
not joined have chosen not to do so because their business interests 
would not be advanced by a reduction in transmission barriers and 
constraints. Therefore, they argue that ``recalcitrant utilities'' 
should not be awarded windfall profits for holding out on participating 
in Transmission Organizations because such action would only amount to 
rewarding the exercise of market power.\129\
---------------------------------------------------------------------------

    \126\ TDU Systems at 43; APPA/NRECA at 31-32, citing Southern 
California Edison Company, 114 FERC ] 61,018, at P 16 (2005) (``The 
rationale for this incentive is to encourage transmission owners to 
turn over the operational control of their transmission facilities 
to a regional transmission organization; therefore, it does not 
apply to transmission owners who have already done so, as they need 
no inducement to take such action'') (Southern California Edison).
    \127\ E.g., APPA/NRECA at 32; SMUD at 3-7; TDU Systems at 43. 
The California Commission argues that the courts have not permitted 
ROE adders for past conduct. California Commission at 18-19, citing 
Maine PUC v. FERC, 454 F.3d 278 (2006) and Allegheny Power Systems 
Operating Co., 111 FERC ] 61,308 (2005).
    \128\ California Commission at 14-15.
    \129\ TDU Systems at 42.
---------------------------------------------------------------------------

    81. Furthermore, the California Commission states that an incentive 
for utilities that have already joined a Transmission Organization and 
are planning to build transmission facilities provides no balancing of 
the consumer interests and represents an unjust windfall.\130\ By 
continuing its membership in an ISO/RTO, a transmission company will 
not incur any additional risks and will still remain a monopoly. The 
California Commission and TDU Systems argue that the Commission did not 
provide any evidence that current RTO/ISO members may leave a 
Transmission Organization without the incentive of higher ROEs and 
therefore such a conclusion constitutes unreasonable, unlawful decision 
making.\131\ APPA/NRECA assert that if a member leaves the Transmission 
Organization, the Commission can simply deny that utility a rate 
incentive.\132\ Further, SMUD notes that there is no assurance that 
members will be permitted to leave since such a decision is subject to 
Commission review, and expresses concern that extending incentives to 
existing members of a Transmission Organization for not leaving may 
discourage parties legitimately dissatisfied with the Transmission 
Organization's performance and thereby make these organizations less 
accountable.\133\ Finally, APPA/NRECA argue that the Commission's 
statement that it would be unduly discriminatory not to award all 
members of a Transmission Organization an incentive ROE has no basis 
because nothing in the FPA forbids different rates if these 
arrangements are necessary to carry out the provisions of the FPA and 
to serve the regulatory purposes contemplated by Congress.\134\
---------------------------------------------------------------------------

    \130\ California Commission at 16.
    \131\ Id. P 17-18; TDU Systems at 43.
    \132\ APPA/NRECA assert that the Commission rejected such a 
remedy without a reasoned explanation in the Final Rule. APPA/NRECA 
at 32.
    \133\ SMUD at 3-7.
    \134\ APPA/NRECA at 33.
---------------------------------------------------------------------------

    82. TDU Systems request clarification that the Commission will not 
consider single company entities as Transmission Organizations. They 
state that to ensure new transmission investment serves regional 
markets, a ``collaborative [and] open regional planning process'' is 
necessary. Therefore, TDU Systems claim that only entities that provide 
for, or participate in, regional planning that spans a number of public 
utility transmission systems should be eligible for incentives.\135\
---------------------------------------------------------------------------

    \135\ TDU Systems at 41-42.
---------------------------------------------------------------------------

    83. TDU Systems recommend a reduction, i.e. negative 50 basis point 
penalty, in the authorized ROE for public utilities that withdraw from 
Transmission Organizations within the first five to ten years of 
participation to recognize the costs paid by consumers in anticipation 
of long-term savings. TDU Systems also argue that the incentive should 
not be allowed for public utilities ordered to join Transmission 
Organizations by statute, merger conditions or other regulatory 
requirements because there is no nexus between the incentive rates and 
demonstrated consumer benefits.\136\ Finally, SMUD argues that the 
Final Rule offered no explanation for providing an incentive for 
utilities that are required to join Transmission Organizations as a 
merger condition.\137\
---------------------------------------------------------------------------

    \136\ Id. at 42-43.
    \137\ SMUD at 7.

---------------------------------------------------------------------------

[[Page 1166]]

    84. MISO TOs state that the Final Rule was unclear on the mechanics 
of requesting incentives by RTO members and request clarification that 
transmission owners may seek this incentive without opening up a 
Commission-accepted ROE or additional rates or formulas.\138\ 
Specifically, they state that the Commission did not clarify that such 
a single-issue filing will not open up the already Commission-accepted 
ROE.
---------------------------------------------------------------------------

    \138\ MISO TOs at 2-3.
---------------------------------------------------------------------------

    85. Finally, APPA/NRECA argues that the Final Rule does not comply 
with section 219(c) to provide incentives to each transmitting utility 
or electric utility that joins a Transmission Organization because it 
disregards incentives to non-jurisdictional utilities.\139\ The 
Commission reasoning that it does not have jurisdiction to provide 
incentives for non-public utilities joining Transmission Organizations 
is unjustified when it has asserted jurisdiction in other 
proceedings.\140\ APPA/NRECA recommend the Commission to consider 
incentives for non-public utilities such as assurances that these 
entities will fully recover all their costs of joining and 
participating in the Transmission Organization.
---------------------------------------------------------------------------

    \139\ APPA/NRECA at 53-54.
    \140\ Id. P 54, citing City of Vernon, California and CAISO, 
Opinion No. 479, 111 FERC ] 61,092, reh'g granted in part and denied 
in part, 112 FERC ] 61,207 (2005), reh'g denied, 115 FERC ] 61,297 
(2006).
---------------------------------------------------------------------------

2. Commission Determination
    86. We affirm the finding in the Final Rule that the incentive 
applies to all utilities joining transmission organizations, 
irrespective of the date they join, based on a reading of section 219 
in its entirety. Section 219 specifically provides that ``the 
Commission shall * * * provide for incentives to each transmitting 
utility or electric utility that joins a Transmission Organization.'' 
The stated purpose of section 219 is to provide incentive-based rate 
treatments that benefit consumers by ensuring reliability and reducing 
the cost of delivered power. We consider an inducement for utilities to 
join, and remain in, Transmission Organizations to be entirely 
consistent with those purposes. The consumer benefits, including 
reliability and cost benefits, provided by Transmission Organizations 
are well documented,\141\ and the best way to ensure those benefits are 
spread to as many consumers as possible is to provide an incentive that 
is widely available to member utilities of Transmission Organizations 
and is effective for the entire duration of a utility's membership in 
the Transmission Organization. To limit the incentive to only utilities 
yet to join Transmission Organizations offers no inducement to stay in 
these organizations for members with the option to withdraw, and hence 
risks reducing Transmission Organization membership and its attendant 
benefits to consumers. Because the incentive is applicable to utilities 
that join Transmission Organizations and is consistent with the 
requirements of section 219 of the FPA, the incentive complies with 
EPAct 2005 and the FPA.\142\
---------------------------------------------------------------------------

    \141\ In Order No. 2000, in which the Commission's goal was to 
promote efficiency in wholesale electricity markets and to ensure 
that electricity consumers pay the lowest price possible for 
reliable service, the Commission stated that:
    These benefits [of RTOs] will include: Increased efficiency 
through regional transmission pricing and the elimination of rate 
pancaking; improved congestion management; more accurate estimates 
of ATC; more effective management of parallel path flows; more 
efficient planning for transmission and generation investments; 
increased coordination among state regulatory agencies; reduced 
transaction costs; facilitation of the success of state retail 
access programs; facilitation of the development of environmentally 
preferred generation in states with retail access programs; improved 
grid reliability; and fewer opportunities for discriminatory 
transmission practices. All of these improvements to the 
efficiencies in the transmission grid will help improve power market 
performance, which will ultimately result in lower prices to the 
Nation's electricity consumers.
    Order No. 2000, FERC Stats. & Regs. ] 31,089 at 31,024.
    \142\ In light of our determination here, we reverse the policy 
adopted in our decision in Southern California Edison. Our decision 
in Southern California Edison failed to recognize that incentives 
are equally important in inducing utilities to join and remain in 
Transmission Organizations. Southern California Edison Co., 114 FERC 
] 61,018, at P 16 (2005).
---------------------------------------------------------------------------

    87. We consider the claim of APPA/NRECA that the incentive is 
inappropriate because it does not induce construction to be misplaced. 
Section 219(c), applicable to the Transmission Organization incentive, 
is separate from the construction incentives in subsection (b), and 
therefore was not intended to directly encourage construction.\143\ 
However, we note that regional transmission organizations provide a 
platform for regional planning and cost allocation associated with 
transmission expansion and planning \144\ and therefore can help 
support the identification and construction of transmission needed to 
ensure reliability and to reduce congestion.
---------------------------------------------------------------------------

    \143\ We note that a more accurate interpretation of section 
219(c) must recognize that an important component of section 219(c) 
is ensuring cost recovery, and therefore this section differs from 
the rest of section 219 that only address incentive-based rate 
treatments. We note that the Midwest ISO tariff provisions governing 
pass-through of transmission costs are consistent with this section, 
and this section would provide the basis for approval of pass-
through of costs in other ISOs.
    \144\ PJM Interconnection, L.L.C., 117 FERC ] 61,218 (2006); 
Midwest Independent Transmission System Operator, Inc., 114 FERC ] 
61,106 (2006), order denying reh'g, 117 FERC ] 61,241, (2006); 
Midwest Independent Transmission System Operator, Inc., et al., 113 
FERC ] 61,194 (2005); Midwest Independent Transmission System 
Operator, Inc., 109 FERC ] 61,168, order granting clarification, 109 
FERC ] 61,243 (2004), reh'g pending.
---------------------------------------------------------------------------

    88. We will not specify a particular method for establishing the 
appropriate ROE for entities that join and/or continue to be a member 
of an ISO, RTO, or other Commission-approved Transmission Organization 
in this generic proceeding. For example, the mechanics of setting an 
incentive ROE is an issue best addressed in a proceeding evaluating the 
Transmission Organization incentive for transmission owners that belong 
to the particular Transmission Organization. We recognize that the 
issue was remanded to the Commission with respect to Midwest ISO.\145\ 
In the order on remand, the Commission observed that Midwest ISO or the 
MISO TOs can make a filing under section 205 to include an incentive 
adder.\146\
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    \145\ Midwest Independent Transmission System Operator, Inc., 
100 FERC ] 61,292 (2002), order on reh'g, 102 FERC ] 61,143 (2003), 
order on remand, 106 FERC ] 61,302 (2004), aff'd in part and 
reversed in part, 397 F.3d 1004 (D.C. Cir. 2005).
    \146\ Midwest Independent Transmission System Operator, Inc., 
111 FERC ] 61,355, at P 5 (2005).
---------------------------------------------------------------------------

    89. We affirm the Final Rule finding that this incentive applies to 
public utilities, as required by section 219, and therefore does not 
apply to non-public utilities and that non-public utilities may be 
permitted incentive-based rate treatments under section 211(a) of the 
FPA.
    90. We will not make determinations on acceptable Transmission 
Organization structures and affiliations in this proceeding. The 
Commission will consider applications to form Transmission 
Organizations, based on the requirements of Sec.  35.35(b), and make 
its determinations on the facts and circumstances of each filing.

I. Hypothetical Capital Structure

    91. In the Final Rule, the Commission found that hypothetical 
capital structures can be an effective tool available to public 
utilities to foster transmission investment in appropriate 
circumstances. The Commission stated that it has allowed the use of 
hypothetical structures to improve access to capital markets for 
transmission investment and for specific projects when shown to be 
necessary for

[[Page 1167]]

project financing.\147\ To encourage the development of new 
transmission investment, the Commission noted that it will evaluate 
each proposal on a case-by-case basis and will not prescribe specific 
criteria or set target debt/equity ratios for evaluating hypothetical 
capital structures. As with other incentives, the applicant is required 
to demonstrate the required nexus between its proposed incentive and 
the facts of its particular case.\148\
---------------------------------------------------------------------------

    \147\ The Commission noted that American Transmission and Trans-
Elect are examples of the use of hypothetical capital structure to 
foster the development of transmission investment. Order No. 679, 
FERC Stats. & Regs. ] 31,222 at P 131.
    \148\ Id. P 133.
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1. Rehearing Requests
    92. The California Commission considers the hypothetical capital 
structure incentive-based rate treatment unnecessary for regulated 
utilities. According to the California Commission, when a company 
increases its actual debt ratio to a level higher than its optimal 
capital structure, the company will expose itself to financial risks at 
the expense of ratepayers, or will unnecessarily increase ratepayer 
costs. The California Commission also faults the Commission for not 
mandating the degree of rigorous scrutiny necessary for all cases 
before they are approved.\149\ TDU Systems urge the Commission to 
adhere to Allegheny Power precedent that rejected hypothetical capital 
structures unless the utility's actual capital structure was so far out 
of line with the market-driven capital structures of representative 
proxy companies so as to be anomalous.\150\
---------------------------------------------------------------------------

    \149\ California Commission at 11-14.
    \150\ TDU Systems at 35-36, citing Allegheny Power Co. 103 FERC 
] 63,001, at P 28 (2003), aff'd, 106 FERC ] 61,241, at P 27 (2004) 
(Allegheny Power).
---------------------------------------------------------------------------

2. Commission Determination
    93. We repeat our finding in the Final Rule that hypothetical 
capital structures can be an appropriate ratemaking tool for fostering 
new transmission in certain relatively narrow circumstances. 
Historically, those circumstances have been somewhat unique, such as 
consortiums that require a special capital structure or projects that 
need project financing. As with other incentive ratemaking treatments, 
the Commission will require any applicant to demonstrate the required 
nexus between the need for a hypothetical capital structure and the 
proposed investment project. We would not normally expect traditional 
regulated utilities to propose incentives based on hypothetical capital 
structures (as was suggested by the California Commission) and we note 
that the Commission and state commissions have the ability to prevent 
any regulated company from increasing its debt ratio to a level that 
unnecessarily exposes wholesale or retail customers to unnecessary 
risk.

J. Single-Issue Ratemaking

    94. The Commission concluded in the Final Rule that single-issue 
ratemaking can provide a significant incentive for new investment in 
transmission infrastructure because it can provide assurance that the 
decision to construct new infrastructure is evaluated on the basis of 
the risks and returns of that decision, rather than the additional 
uncertainty associated with re-opening the applicant's entire base 
rates to review and litigation.\151\ The Commission stated that single-
issue ratemaking applicants are only required to address cost and rate 
issues associated with the investment in the section 205 proceeding to 
approve rates. The applicant, however, is still required to fully 
develop and support any transmission rate design to recover the costs 
of a particular transmission system facility or upgrade, including cost 
allocation and rate design.\152\ Further, the Commission noted that 
each application will be evaluated by balancing the need for new 
infrastructure, and the importance of permitting single-issue 
ratemaking in support of that infrastructure, with the concerns over 
whether a specific mechanism is required to re-open existing rates or 
whether the traditional complaint processes are sufficient for that 
purpose.\153\
---------------------------------------------------------------------------

    \151\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 191.
    \152\ Id. P 192.
    \153\ Id.
---------------------------------------------------------------------------

1. Rehearing Requests
    95. Petitioners claim that single-issue ratemaking, as described in 
the Final Rule fails to balance shareholders' and consumers' interests 
and permits transmission owners to earn an unjust and unreasonable 
return on their overall transmission assets. They also assert that the 
Commission ignored its long-standing policy of rejecting single-issue 
ratemaking based on precedent that shows that single-issue ratemaking 
can lead to transmission providers earning super-normal returns while 
using single-issue rate filings to shield that fact from Commission 
scrutiny.\154\ They argue that the Final Rule allows public utilities 
to increase their transmission rates on a piecemeal basis without 
providing procedures, short of section 206 complaints, to ensure that 
the public utility's steadily increasing rates do not become unlawful. 
They also contend that the Commission failed to consider reasonable 
alternatives such as a mandatory full transmission rate case every 
three years or allowing utilities to use formula rates that ensure a 
balance between risks borne by shareholders and ratepayers.\155\
---------------------------------------------------------------------------

    \154\ APPA/NRECA argue that, if a public utility has experienced 
load growth but has not invested in new transmission facilities, the 
public utility will have a strong disincentive not to file a section 
205 rate case, because it will be earning a high rate of return on 
its highly depreciated rate base. They further assert that it has 
been their members' general experience that when public utility 
transmission providers believe they are undercollecting their 
transmission revenue requirements, they are quick to address the 
situation through a section 205 filing. APPA/NRECA at 41.
    \155\ Id. at 40-43; TDU Systems at 21-23.
---------------------------------------------------------------------------

    96. Xcel states that the Final Rule anticipates the possibility of 
placing the applicant at risk for being ordered to file a section 205 
rate case for its existing investments and contend that this potential 
risk will have the practical effect of discouraging limited section 205 
incentive proposals. Accordingly, Xcel recommends that the Final Rule 
be modified so that it can achieve its stated purpose of providing 
assurance that the decision to construct new infrastructure is 
evaluated on the basis of the risks and returns of that decision, 
rather than the additional uncertainty associated with re-opening the 
applicant's entire base rates to review and litigation.\156\ According 
to Xcel, to the extent the Commission believes the new single-issue 
rate must be harmonized with existing rates, the burden of proof should 
remain on the Commission, or the utility's customers, to show the 
existing filed rates are unjust and unreasonable and not shift the 
burden to the public utility.\157\
---------------------------------------------------------------------------

    \156\ 156 Xcel at 4-5.
    \157\ Id. at 5.
---------------------------------------------------------------------------

2. Commission Determination
    97. The Final Rule recognized that requiring transmission owners to 
open up their existing rates for review and litigation anytime they 
sought recovery of costs associated with a new transmission project 
could discourage new investment. Accordingly, the Final Rule permits an 
applicant to propose transmission rates associated with a particular 
project without proposing any changes to its existing transmission 
rates under section 205. We disagree with TDU Systems and APPA/NRECA 
that single-issue ratemaking will permit transmission owners to earn an 
unjust and unreasonable return on their overall

[[Page 1168]]

transmission investment and we specifically committed that the 
Commission would consider the need to combine or reconcile any project-
specific transmission rate proposal with any existing transmission 
rate, where necessary.
    98. Indeed, the Final Rule specifies that the Commission may 
require the applicant to file a full rate case for existing 
transmission rates when evaluating a single-issue rate application, and 
therefore provides a procedure for additional rate review. However, we 
agree with Xcel that further clarification is necessary.\158\ As 
indicated in the Final Rule, applicants for single-issue ratemaking are 
only required to address cost and rate issues associated with the new 
investment and therefore are not obligated to justify the 
reasonableness of unchanged rates.\159\ As PSC of N.Y. and Winnfield 
make clear, if intervenors or the Commission seek to challenge the 
applications beyond the limited issues raised in their applications, 
the intervenors or the Commission bear the burden of proof under 
section 206 in establishing that the existing, unchanged components of 
the rate are unjust and unreasonable. We further clarify that 
Commission review of the single-rate application will not be delayed in 
the event a separate section 206 investigation is initiated, thereby 
ensuring that new investments are not impeded because of existing-
system rate issues.\160\
---------------------------------------------------------------------------

    \158\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 192.
    \159\ Public Service Comm'n of New York v. FERC, 642 F.2d 1335 
(D.C. Cir. 1980) (``we cannot accept the proposition that because a 
company files for higher rates, it bears the burden of proof on 
those portions of its filing that represent no departure from the 
status quo* * *. The emphasis is on making the petitioner justify 
the changes in rates, not the constant elements'') (PSC of N.Y.); 
City of Winnfield, La. v. FERC, 744 F.2d 871 (D.C. Cir. 1984) (``The 
statutory obligation of the utility * * * is not to prove the 
continued reasonableness of unchanged rates or unchanged attributes 
of its rate structure'') (Winnfield).
    \160\ This clarification is also consistent with Commission 
precedent:
    Protesters object to this option because of a concern that it 
may permit certain transmission owners to continue to overrecover 
their cost-of-service. However, this option provides just and 
reasonable cost recovery for the RTEP upgrades, and provide the 
necessary incentive for TOs to complete quickly the construction of 
RTEP projects that are essential to the efficient operation of PJM. 
As we said in the NYISO proceeding, if a concern arises regarding 
over-recovery of transmission costs, such parties are free to seek 
relief by filing a complaint with the Commission pursuant to section 
206 of the FPA Allegheny Power System Operating Co., 111 FERC ] 
61,308, at P 46 (2005), order on reh'g and clarification, 115 FERC ] 
61,156 (2006).
---------------------------------------------------------------------------

    99. Based on the precedent cited above, we disagree with the 
conclusion that acceptance of single-issue rate filings would represent 
a dramatic shift in the historic balance between interests, and we 
therefore see no need to require additional consumer protections such 
as mandatory rate cases.

K. Public Power

    100. In the Final Rule, the Commission noted that ratemaking 
incentives are generally not directly available to non-jurisdictional 
entities, i.e. public power entities, because they do not file their 
rates with the Commission.\161\ However, the Commission recognized that 
public power participation can play an important role in the expansion 
of the transmission system and stated that public power participation 
in new transmission projects are encouraged. The Commission stated that 
the Commission will review appropriate requests for incentive 
ratemaking for investment in new transmission projects when public 
power participates with jurisdictional entities as part of a proposal 
for incentives for a particular joint project.\162\
---------------------------------------------------------------------------

    \161\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 354.
    \162\ Id. The Commission did not require a consortium approach 
that includes public power and other entities for new investment 
because it would be more appropriate for applicants to fashion 
proposals tailored to the specific circumstances and needs of a 
particular project. Id. P 356-57.
---------------------------------------------------------------------------

1. Rehearing Requests
    101. TAPS requests the Commission to clarify that any approved 
incentive will be equally available to all owners of facilities that 
are found to merit incentives, regardless of the entity's form or 
business model and that the Commission will look with disfavor on 
incentive rate treatment applications by vertically-integrated 
utilities that exclude other utilities from co-owning a facility 
located in their common footprint.\163\ TAPS contends that it is unduly 
discriminatory to allow large utilities to veto transmission incentives 
by refusing to participate in inclusive ownership arrangements. TDU 
Systems request the Commission to clarify that the option to 
participate in planning, financing and construction of new investment 
belongs to the public power system and that public utilities should not 
be allowed to use the availability of this option to avoid their 
obligation to construct needed network upgrades. TDU Systems urge the 
Commission to reconsider its determination that the Commission will not 
require public power or other joint participation in a transmission 
project in order for investment in a project to be eligible for 
incentives. They assert that conditioning a grant of any incentive rate 
treatments upon a robust, collaborative and open joint and regional 
planning process with all LSEs in the region and mandating compensation 
or credits for public power systems transmission facilities would 
better promote the Commission's goal under section 219.\164\ Similarly, 
APPA/NRECA state that public power participation ensures that the 
lowest cost facilities are built, provide cash flow, and reduce 
uncertainty, thereby reducing the overall need for incentive rate 
treatments.\165\ NECOE and APPA/NRECA also argue that public utilities 
should be required to offer joint ownership opportunities as a 
condition to receiving incentives. NECOE asserts that merely 
encouraging transmission owners to seek participation by public power 
has not worked in New England, thereby denying ratepayers the low cost 
benefits of public power. NECOE further contends that the exclusion of 
non-transmission owner investment from network upgrades violates Order 
No. 2000's open-architecture principles.\166\ At a minimum, NECOE 
recommends that the Commission should require incentive applicants to 
state whether they have sought potential LSE co-investors, including 
public and consumer-owned utilities and where co-investors were sought 
but not permitted to participate, the proponent of an incentive should 
be required to explain why this was the case.\167\
---------------------------------------------------------------------------

    \163\ TAPS at 22.
    \164\ TDU Systems at 34-35.
    \165\ APPA/NRECA at 51.
    \166\ NECOE at 9, citing Carolina Power and Light Cos., 95 FERC 
] 61,282 at 61,995 (2001).
    \167\ NECOE at 5.
---------------------------------------------------------------------------

2. Commission Determination
    102. The Final Rule determined that the Commission would not 
condition recovery of incentives on the type of business structure and 
stated that the Commission will entertain appropriate requests for 
incentive ratemaking for investment in new transmission projects when 
public power participates as part of a proposal for incentives for a 
particular joint project.\168\ While the Commission encourages public 
power participation, we will not require such participation as a 
condition of any proposed incentive rate treatment. As we state 
elsewhere in this order, the Commission cannot compel investment or 
certain types of investment. Our focus in this rule is to provide 
incentives that will facilitate voluntary investments by utilities. 
However, the Commission will look favorably on an

[[Page 1169]]

incentive request that includes public power joint ownership. A wide 
variety of entities, such as merchant companies, private equity 
participants, and pool administrators can potentially build 
transmission infrastructure. In the context of a rule to provide rate 
incentives for the construction of new transmission and to encourage 
deployment of technologies to increase the capacity and efficiency of 
existing transmission facilities, we do not believe that mandating an 
opportunity for public power participation is necessary nor do we 
believe that failure to do so would be unduly discriminatory. However, 
we note that the Commission has initiated a rulemaking in Docket Nos. 
RM05-17-000 and RM05-25-000 to investigate necessary reforms to its 
existing pro forma OATT.\169\ Among the reforms under consideration is 
to require all jurisdictional public utilities to establish regional 
transmission planning open to all participants in a region--including 
public entities. We believe that the OATT reform rulemaking is a more 
appropriate forum to consider any issues or allegations regarding undue 
discrimination with regard to public power participation in 
transmission expansion decisions. Accordingly, we will not restrict 
eligibility for incentive rate treatment to projects that allow public 
power participation.
---------------------------------------------------------------------------

    \168\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 354.
    \169\ See OATT Reform NOPR, supra note 63.
---------------------------------------------------------------------------

L. Other Issues

    103. Parties request rehearing on a number of other issues 
discussed below.
1. Recovery of Costs of Abandoned Facilities
    104. In the Final Rule, the Commission allowed applicants to seek 
recovery of 100 percent of prudently-incurred costs associated with 
abandoned transmission projects due to factors beyond the control of 
the public utility. The purpose of the incentive was to reduce the risk 
associated with potential upgrades or other improvements to the 
transmission system.
    105. TDU Systems assert that the Commission should clarify that it 
would allow prudently incurred abandoned plant costs under limited 
circumstances. They contend that applicants for the incentive rate 
treatment that allows recovery of prudently-incurred abandoned plant 
costs should be required to demonstrate that, as a precondition to 
receiving the incentive, they will suffer cash flow problems if such a 
recovery was not allowed.\170\ APPA/NRECA argue that the Commission 
should allow the incentive of abandoned cost recovery only on the 
condition that the public utility has engaged in open, regional 
transmission planning process to ensure some balance between the 
interests of shareholders and ratepayers. They claim that the 
Commission wrongly relied on its granting of incentive rate treatment 
to American Transmission Company as a basis for this incentive without 
recognizing that the project was the result of joint planning.\171\ 
Therefore, they assert that the Commission should not ask customers to 
pay for abandoned projects that they never had an opportunity to 
consider in the first instance.
---------------------------------------------------------------------------

    \170\ TDU Systems at 38.
    \171\ APPA/NRECA, 44-45. See Order No. 679, FERC Stats. & Regs. 
] 31,222 at P 1, 116, 122, 131; American Transmission Co., LLC, 105 
FERC ] 61,388 (2003).
---------------------------------------------------------------------------

    106. We decline to specify any particular demonstration that an 
applicant must make to justify recovery of abandoned plant cost beyond 
the required nexus test described earlier. Also, as discussed in the 
prior section on public power participation, we do not intend to 
mandate public power participation as a pre-requisite for any 
particular transmission rate treatment in this rule--including recovery 
of abandoned plant costs. We note that in a recent case involving 
incentives,\172\ the Commission expressly conditioned its approval of 
incentives (including a request for recovery of costs associated with 
any abandonment of the project) upon the project being included in the 
PJM regional transmission expansion plan.\173\ For these reasons, we 
deny rehearing on this issue.
---------------------------------------------------------------------------

    \172\ Allegheny Energy, Inc., 116 FERC ] 61,059 (2006), reh'g 
pending.
    \173\ American Electric Power Service Corp., 116 FERC ] 61,059 
(2006), reh'g pending.
---------------------------------------------------------------------------

    107. According to TDU Systems, the Commission must ensure that 
there is no double recovery of costs in instances in which other 
incentives are allowed for an abandoned project. In the event the 
applicant receives the ROE incentive and the abandoned plant incentive 
rate treatment, TDU Systems argue there should be an offset of the rate 
impacts of these incentives to avoid over-recovery of costs so that the 
incentive can be provided at the least reasonable cost to 
consumers.\174\ As described earlier in this order, we intend to 
evaluate any incentives requested as a package. To the extent that 
certain requested rate treatments have the effect of lowering the risk 
of a particular project, the Commission will take that into account in 
establishing an appropriate equity return for the project.
---------------------------------------------------------------------------

    \174\ TDU Systems at 38.
---------------------------------------------------------------------------

2. Prudently Incurred Costs
    108. MISO TOs request clarification that limited section 205 
filings are permissible for the recovery of costs of prudently-incurred 
costs necessary to comply with mandatory reliability standards in 
section 215.\175\ MISO TOs argue that these costs may be imposed on 
transmission owners pursuant to statutory requirements and that without 
this clarification, they may be subject to extensive and expensive 
litigated cases, thereby discouraging utilities from recovering these 
costs that Congress authorized them to recover.
---------------------------------------------------------------------------

    \175\ MISO TOs at 4-5.
---------------------------------------------------------------------------

    109. We agree that rapid processing of the recovery of mandatory 
reliability costs will facilitate more timely investment in these 
important projects. Therefore, we clarify that applicants may file to 
recover these costs in limited section 205 filings.
3. Regional Planning
    110. Parties contend that any public utility seeking incentive 
rates for its new transmission project should be required to 
demonstrate that the project was formulated through an open, regional 
planning process. Industrial Consumers assert that conditioning the 
granting of incentives upon the inclusion of a proposed transmission 
project in a regional planning process is critical to satisfying 
section 219's requirements to demonstrate customer benefit and promote 
economically efficient transmission. They claim that a coordinated 
regional planning process that considers the relative costs and 
benefits of multiple projects provides an optimal forum for determining 
least-cost solutions and avoiding unnecessary duplication of 
expenditures.\176\ Similarly, NARUC and TAPS argue that no incentive 
should be available for projects that are to be sited in regions that 
plan regionally but which bypass the regional planning processes, 
noting that the Commission is proposing to require all jurisdictional 
public utilities to engage in regional planning in other Commission 
proceedings.\177\ Further, TDU Systems argue that nothing in section 
219 suggests that the Commission may not impose a regional planning 
requirement and that making regional planning process a threshold 
requirement for incentive applications would be congruent with the 
mandate of section 219 to promote reliable and economically efficient 
transmission and

[[Page 1170]]

generation of electricity.\178\ APPA/NRECA also contend that the 
Commission has broad discretion in deciding particular incentives and 
that a regional planning requirement would harmonize section 219 with 
the objectives of section 217(b) to facilitate the planning and 
expansion of transmission facilities to meet the reasonable needs of 
LSEs. They also argue that the imposition of regional planning as a 
threshold requirement for incentive applicants is required by the 
mandate of section 219.\179\
---------------------------------------------------------------------------

    \176\ Industrial Consumers at 11.
    \177\ NARUC at 6; TAPS at 7.
    \178\ TDU Systems at 9-10.
    \179\ APPA/NRECA at 16-19.
---------------------------------------------------------------------------

    111. The Final Rule grants a rebuttable presumption that projects 
resulting from regional planning qualify for incentive rate treatments, 
and we affirm that finding as discussed above. We will not, however, 
limit incentive rate treatments to projects that result from regional 
planning processes. While the Commission agrees that there are 
substantial benefits to be derived from regional planning, there may be 
transmission projects that arise outside of the context of a regional 
plan that help to ensure reliability or reduce the costs of delivered 
power and which deserve incentive rate treatment. Although the 
Commission has proposed to require regional planning as part of its 
OATT reform effort,\180\ we note that many utilities are in regions in 
which no formal regional planning process exists at this time. However, 
as we stated in the Final Rule, and as modified by this order, projects 
are not entitled to a rebuttable presumption if they have not gone 
through a regional planning process, or have not received construction 
approval from an appropriate state commission or siting authority.\181\ 
Applicants seeking incentives for such projects must independently 
demonstrate that the project will maintain reliability or reduce 
congestion.
---------------------------------------------------------------------------

    \180\ OATT Reform NOPR, supra note 63.
    \181\ In addition, and as modified by this order, an applicant 
may also rely upon the Commission's siting authority for meeting the 
requirements of section 219(a).
---------------------------------------------------------------------------

4. CWIP
    112. Because the long lead times required to plan and construct new 
transmission can negatively affect cash flow and the ability of a 
utility to attract capital at reasonable prices, the Final Rule allows 
public utilities to propose including 100 percent CWIP in rate base and 
expensing pre-commercial operations costs associated with new 
transmission investment.\182\
---------------------------------------------------------------------------

    \182\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 115-22.
---------------------------------------------------------------------------

    113. TDU Systems assert that the Commission should only allow 100 
percent recovery CWIP and pre-commercial operations costs in the event 
the applicant shows that the transmission project will take more than 
four years to complete and that the applicant should have to 
demonstrate a regional need for the project to ensure that consumers 
receive measurable benefits.\183\ In addition, TDU Systems contend 
that, with respect to pre-commercial expenses, the Commission should: 
(1) Ensure that these costs are not later capitalized in subsequent 
rate filings; and (2) limit the pre-commercial costs to be expensed to 
planning, siting and environmental costs so that costs that raise 
inter-generational equity concerns, such as the design and construction 
of facilities, are not included.\184\
---------------------------------------------------------------------------

    \183\ TDU Systems at 9-10.
    \184\ Id. at 37.
---------------------------------------------------------------------------

    114. We decline to establish any generic restrictions on the types 
of transmission projects or construction periods in order for a project 
to qualify for CWIP treatment under this rule. We leave to the 
applicant's discretion whether the construction project is of 
sufficient size to merit making a rate request to the Commission 
seeking to include CWIP in rate base or to expense pre-commercial 
operations costs. There may be reasons that justify seeking CWIP for 
projects with relatively short construction schedules e.g., a project 
may take only a few years to build but rates will not go into effect 
for a number of additional years because the project can not recover 
costs until other projects are built, and therefore CWIP recovery is 
justified. We clarify that the Commission's review process under 
section 205 will include a review to determine that the applicant does 
not double recover these costs. The Final Rule's definition of costs 
approved by the Commission to be recoverable as pre-certification costs 
in account 183, i.e., preliminary survey and investigation costs,\185\ 
does not include facility costs and therefore should not raise the 
inter-generational issues of concern to TDU Systems.
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    \185\ See Order No. 679, FERC Stats. & Regs. ] 31,222 at P 122 
and n 82.
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    115. Finally, while CWIP and abandoned plant are characterized as 
``incentive-based rate treatments'' in the Final Rule, we clarify that 
both of these rate mechanisms have been found previously to be just and 
reasonable under the Commission's authority pursuant to section 
205.\186\ More importantly, these are rate treatments which may be 
needed (and requested) in advance of a project being approved through a 
regional planning process or receiving any necessary siting approvals. 
To the extent an applicant demonstrates that the incentives sought 
(i.e., CWIP and abandoned plant) are tailored to address the 
demonstrable risks and challenges of the applicant, we will permit 
recovery of such prudently-incurred costs.
---------------------------------------------------------------------------

    \186\ See, e.g., American Electric Power Service Corp., 116 FERC 
] 61,059, at P 55 (2006), reh'g pending (allowing recovery of 100 
percent CWIP); Allegheny Energy, Inc., 116 FERC ] 61,058, at P 74 
(2006), reh'g pending; American Transmission Co., L.L.C., 105 FERC ] 
61,388, at P 27 (order establishing hearing and settlement judge 
procedures concerning, inter alia, the company's proposal for 
recovery of 100 percent CWIP), order dismissing reh'g and approving 
settlement, 107 FERC ] 61,117 (2004); Boston Edison Co., 109 FERC ] 
61,300 (2004), order on reh'g, 111 FERC ] 61,266 (2005) (recovery of 
50 percent CWIP); Southern California Edison Co., 112 FERC ] 61,014, 
at P 58-61, reh'g denied, 113 FERC ] 61,143, at P 9-15 (2005) 
(granting recovery of 100 percent of prudently incurred abandoned or 
cancelled plant costs); New England Power Co., Opinion No. 295, 42 
FERC ] 61,016, at 61,068, 61,081-83 (recovery of 50 percent of 
prudently incurred cancelled plant costs), order on reh'g, 43 FERC ] 
61,285 (1988); Public Service Co. of New Mexico, 75 FERC ] 61,266, 
at 61,859 (1996), order approving settlement, 87 FERC ] 61,040 
(1999) (50 percent recovery of cancelled plant costs).
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    116. For example, where an applicant has satisfied our nexus 
requirement and has been granted authority to recover CWIP or abandoned 
plant, and subsequently the applicant's project is, for example, unable 
to obtain state or federal siting authority (and thus no showing is 
made with respect to ensuring reliability or reducing the cost of 
delivered power by reducing congestion because the applicant was 
relying upon those processes) we would not require refunds for the 
costs already prudently-incurred by the applicant. To require refunds 
in such circumstances would be contrary to our long-standing policy, 
which permits recovery of all prudently-incurred costs.\187\
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    \187\ The Commission ``has applied the `prudence' test to 
determine the recoverability of a utility's expenses. Under this 
test [a utility] is entitled to recover its costs from consumers if 
it acted `prudently' in incurring those costs, or stated conversely, 
[a utility] may not recover its costs if those costs were incurred 
`imprudently.' '' Connecticut Yankee Atomic Power Co., 108 FERC ] 
61,212, at P 42 (2004), quoting Violet v. FERC, 800 F.2d 280, 282 
(1st Cir. 1986). See also, e.g., City of New Orleans v. FERC, 67 
F.3d 947 (D.C. Cir. 1995) (citing Violet v. FERC)).
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5. Reporting Requirement: FERC-730
    117. The Final Rule adopted an annual reporting requirement, FERC-
730, for utilities that receive incentive rate treatment for specific 
transmission projects. The annual reporting requirement includes 
projections and

[[Page 1171]]

related information that detail the level of transmission 
investment.\188\
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    \188\ Order No. 679, FERC Stats. & Regs. ] 31,222 at P 367-76.
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    118. TAPS argues that FERC-730's tracking of capital spending is 
misdirected by failing to identify how much consumers are spending as 
incentive rate treatments and what they are getting in return. TAPS 
recommends that the Commission expand FERC-730 to include budgeted 
amounts by project on an annual basis, segregation of generation or 
distribution investments, a listing of which network service customers 
are predominantly paying for the project costs and the expected 
differential cost to consumers of each project's approved above-cost 
incentives.\189\
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    \189\ TAPS at 29-31.
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    119. As the Commission explained in the Final Rule, the purpose of 
the FERC-730 reporting requirement is not to provide a quantitative 
measure of the consumer benefits that result from transmission 
infrastructure investments. In the proceeding approving incentives and 
recovery of the costs of incentives in rates, the Commission will 
determine whether proposed projects meet the requirements of section 
219 and thereby provide consumer benefits and also set metrics to 
ensure those benefits are justified on an on-going basis. Therefore no 
further quantitative tracking of consumer benefits or expected 
differential costs to consumers is necessary. We repeat and affirm the 
Final Rule's statement that year-by-year capital spending estimates are 
not necessary for each individual project listed since the goal of the 
rule is not to ensure the achievement of annual capital spending 
targets but rather to ensure the overall projects are completed, and if 
not, the reasons for delay.
    120. We will not limit the capital spending information requested 
from account numbers 350 through 359 \190\ to only investment in the 
transmission function, and exclude transmission investment in the 
generation or distribution functions. Capital investment in 
transmission facilities that interconnect generation facilities are 
ensuring reliability, and therefore are meeting the requirements of 
section 219. Accordingly, it is appropriate to include these amounts in 
transmission investment. Likewise, capital investment in lower voltage 
transmission facilities that are classified as part of the distribution 
function also accomplish the reliability and congestion reduction 
requirements of section 219 and therefore should be included in the 
survey of transmission investment. We see no need to require additional 
information on which customers pay for investment projects and the 
differential cost impact of the incentives. The purpose of FERC-730 is 
restricted to information on progress toward meeting the requirements 
of section 219. Customer allocation of cost responsibility is beyond 
the scope of that provision, and therefore that information does not 
need to be collected.
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    \190\ 18 CFR part 101.
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6. Miscellaneous
    121. TDU Systems and APPA/NRECA argue that no incentives should be 
approved for projects that already have a binding commitment to build, 
including commitments under RTO arrangements, or for which applicants 
are obligated to build by statute, regulation or order.\191\
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    \191\ APPA/NRECA at 4; TAPS at 35.
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    122. In general, we do not consider that contractual commitments or 
mandatory projects, such as section 215 reliability projects, 
disqualify a request for incentive-based rate treatment. Provided 
applicants are able to demonstrate they meet the requirements of 
section 219, including establishing the required nexus between the 
requested incentive and the investment, they may qualify for incentive-
based rate treatments. A prior contractual commitment or statute may 
have a bearing on our nexus evaluation of individual applications.
    123. EEI requests clarification that an applicant or group of 
applicants may propose rate incentives for a group of interrelated 
projects rather than for each single project individually, and thereby 
reduce the Commission burden.\192\
---------------------------------------------------------------------------

    \192\ EEI at 6.
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    124. We clarify that applicants may propose incentives as a group, 
and note that such a group application process has been used by groups 
of transmission owners that are members of RTOs. With this 
clarification, we believe that revision of Sec.  35.35(d) is 
unnecessary.
    125. TAPS asserts that the Final Rule failed to explicitly provide 
that applicants' proposed incentives will be modified when doing so 
will advance the customer-benefiting objectives of section 219. For 
example, TAPS argues that in order to modify the investment to which 
incentives will apply, an applicant may propose an incentive-worthy, 
congestion-reducing, new line packaged with mundane existing facility 
replacements that have already been committed to and do not advance the 
objectives of section 219.\193\ In such a case, TAPS argues that the 
Commission should be able to modify the proposal to target incentives 
to the new line alone.
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    \193\ TAPS at 12.
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    126. We do not consider this rulemaking to be the proper forum to 
assess whether a hypothetical application would meet the requirements 
of section 219 and Order No. 679. The Commission will determine whether 
incentive applications are just and reasonable based on the specific 
facts and circumstances of each proposal.
    127. TDU Systems request clarification that metrics are required 
because certain statements in the Final Rule imply metrics are 
optional.\194\ To the extent the use of metrics determines that a 
project does not provide the anticipated benefits, ratepayers should 
receive refunds based on the monetary value of the incentive, according 
to TDU Systems.
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    \194\ See Order No. 679, FERC Stats. & Regs. ] 31,222 at P 36 
(``an applicant may propose periodic progress assessments * * *'').
---------------------------------------------------------------------------

    128. We clarify that applicants are required to propose metrics in 
their incentive applications. However, it is not the Commission's 
intention to approve incentive rate treatments ``subject to refund.'' 
To the extent that a customer has a reason to believe that any rate 
that has been approved by the Commission is no longer just, reasonable, 
and not unduly discriminatory or preferential, they will need to file 
an appropriate complaint under section 206.
    129. TAPS contends that the Commission is not statutorily free to 
rule out symmetrical, i.e. performance-based approaches to setting an 
appropriate return regardless of whether they are sponsored by 
incentive applicants or recommended with appropriate support by 
intervenors. TAPS states that section 219 expressly provides that 
incentive programs may be performance-based and has long been a 
foundation for Commission incentive rate policy.\195\ SMUD asserts that 
the Commission failed to explain its departure from the 1992 Policy 
Statement that symmetry is an inherent part of all incentive 
ratemaking.\196\
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    \195\ TAPS at 28.
    \196\ SMUD at 9-10.
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    130. The purpose of this rule is to provide incentive-based rate 
treatments that benefit consumers by ensuring reliability and reducing 
the cost of delivered power by reducing transmission congestion. The 
primary focus of the rule is necessarily on

[[Page 1172]]

investment. However, while the Final Rule declined to adopt generic 
performance-based ratemaking measures, we did encourage the industry to 
work on developing performance-based ratemaking proposals. While we 
agree that section 219 does not rule out symmetrical approaches to 
return, to the extent applicants or intervenors propose performance-
based rate treatments under section 219, they must justify their 
proposals in terms of their capability to attract investment and either 
ensure reliability or reduce the cost of delivered power by reducing 
congestion.
    131. TAPS asserts that the Commission cannot determine if an 
incentive will be non-discriminatory, as required under section 219(d), 
unless it ascertains what ratepayer classes are subject to paying for 
the incentive. TAPS also claims the Commission needs to consider 
whether an incentive request should be conditioned on geographically 
broadened cost spreading in order to determine whether the requested 
incentives can be better formulated to advance the consumer benefits of 
section 219. TAPS further argues that the Commission should state its 
willingness to consider in declaratory petition proceedings how costs 
will be allocated for the subject facilities and whether altering that 
treatment should be part of the incentive program.\197\ TDU Systems 
assert that the Commission must require roll-in of new and existing 
rates to encourage investment.
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    \197\ TAPS at 17-18.
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    132. We repeat the finding in the Final Rule that the section 205 
proceedings addressing recovery of the costs of incentive-based rate 
treatments are the appropriate forum for determining whether the 
resulting rates are just, reasonable and non-discriminatory, and 
therefore are the appropriate proceedings to consider cost allocation 
and rate design issues.\198\ The primary purpose of the declaratory 
petition proceeding is to determine if the proposed incentives meet the 
requirements of section 219, and therefore cost allocation and rate 
design issues will not be considered. Finally, we consider rate design 
issues, such as roll-in of rates to beyond the scope of this 
proceeding, and therefore affirm the Final Rule's determination to not 
require roll-in of rates.\199\
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    \198\ E.g., Order No. 679, FERC Stats. & Regs. ] 31,622 at P 81.
    \199\ Id. P 192.
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    133. Southern Companies assert that the Commission's routine 
imposition of a five-month suspension of rates is a disincentive to the 
construction of new transmission infrastructure, claiming that delaying 
the effective date of a rate change forces the utility to absorb costs 
associated with new facilities and reduces the utility ROE.\200\
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    \200\ Southern Companies at 19-20.
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    134. The Commission addressed this concern in the Final Rule by 
stating that we will not revise our suspension policy in this 
proceeding. We affirm the Final Rule's finding that utilities should 
raise concerns with the Commission's suspension policy in our pre-
filing process.
    135. Energy Financing requests clarification that its proposed 
performance-based financing option for transmission investment is not 
excluded as an alternative method of achieving the Commission's and 
Congress' goal of encouraging more transmission investment, or in the 
alternative, it seeks rehearing arguing that alternative financing 
methodologies are viable vehicles to increase transmission investment, 
in lieu of or in addition to the incentives identified in the Final 
Rule.\201\ Energy Financing's proposal concerns how a project is 
financed rather than an incentive-based rate treatment. We do not 
consider it an alternative to the incentive-based rate treatments 
specified in Sec.  35.35. Also, we can not make a determination as to 
whether the option will increase transmission investment because Energy 
Financing has not provided any information to indicate that its option 
is having the purported effect on investment. For these reasons, we 
deny rehearing on this issue.
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    \201\ Energy Financing at 4-5.
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    136. Finally, the introductory text in Sec.  35.35(d)(1) is revised 
to delete redundant language.

IV. Information Collection Statement

    137. Order No. 679 contains information collection requirements for 
which the Commission obtained approval from the Office of Management 
and Budget (OMB). The OMB Control Number for this collection of 
information is 1902-0203. This order denies most rehearing requests, 
clarifies the provisions of Order No. 679, and grants rehearing on only 
three minor issues. This order does not make substantive modifications 
to the Commission's information collection requirements and, 
accordingly, OMB approval for this order is not necessary. However, the 
Commission will send a copy of this order to OMB for informational 
purposes.

V. Document Availability

    138. In addition to publishing the full text of this document in 
the Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through FERC's Home Page (http://www.ferc.gov) and in FERC's 

Public Reference Room during normal business hours (8:30 a.m. to 5 p.m. 
Eastern time) at 888 First Street, NE., Room 2A, Washington DC 20426.
    139. From FERC's Home Page on the Internet, this information is 
available on eLibrary. The full text of this document is available on 
eLibrary in PDF and Microsoft Word format for viewing, printing, and/or 
downloading. To access this document in eLibrary, type the docket 
number excluding the last three digits of this document in the docket 
number field.
    140. User assistance is available for eLibrary and the FERC's Web 
site during normal business hours from our Help line at (202) 502-8222 
or the Public Reference Room at (202) 502-8371 Press 0, TTY (202) 502-
8659. E-Mail the Public Reference Room at 
public.referenceroom@ferc.gov.

VI. Effective Date

    141. Changes to Order No. 679 made in this order on rehearing will 
become effective on February 9, 2007.

List of Subjects in 18 CFR Part 35

    Electric power rates, Electric utilities, Reporting and 
recordkeeping requirements.

    By the Commission.
Magalie R. Salas,
Secretary.

0
In consideration of the foregoing, the Commission amends part 35 of 
Chapter I, Title 18, Code of Federal Regulations, as follows:

PART 35--FILING OF RATE SCHEDULES AND TARIFFS

0
1. The authority citation for part 35 continues to read as follows:

    Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42 
U.S.C. 7101-7352.

0
2. Section 35.35 is amended by:
0
a. Revising the third sentence in paragraph (d) introductory text ,
0
b. Revising paragraph (d)(1) introductory text;
0
c. Revising paragraph (i); and
0
d. Adding a new paragraph (j) to read as follows:

Sec.  35.35  Transmission infrastructure investment.

* * * * *

[[Page 1173]]

    (d) Incentive-based rate treatments for transmission infrastructure 
investment. * * * The applicant must demonstrate that the facilities 
for which it seeks incentives either ensure reliability or reduce the 
cost of delivered power by reducing transmission congestion consistent 
with the requirements of section 219, that the total package of 
incentives is tailored to address the demonstrable risks or challenges 
faced by the applicant in undertaking the project, and that resulting 
rates are just and reasonable. * * *
    (1) For purposes of this paragraph (d), incentive-based rate 
treatment means any of the following:
* * * * *
    (i) Rebuttable presumption. (1) The Commission will apply a 
rebuttable presumption that an applicant has demonstrated that its 
project is needed to ensure reliability or reduces the cost of 
delivered power by reducing congestion for:
    (i) A transmission project that results from a fair and open 
regional planning process that considers and evaluates projects for 
reliability and/or congestion and is found to be acceptable to the 
Commission; or
    (ii) A project that has received construction approval from an 
appropriate state commission or state siting authority.
    (2) To the extent these approval processes do not require that a 
project ensures reliability or reduce the cost of delivered power by 
reducing congestion, the applicant bears the burden of demonstrating 
that its project satisfies these criteria.
    (j) Commission authorization to site electric transmission 
facilities in interstate commerce. If the Commission pursuant to its 
authority under section 216 of the Federal Power Act and its 
regulations thereunder has issued one or more permits for the 
construction or modification of transmission facilities in a national 
interest electric transmission corridor designated by the Secretary, 
such facilities shall be deemed to either ensure reliability or reduce 
the cost of delivered power by reducing congestion for purposes of 
section 219(a).

    Note: The following appendix will not appear in the Code of 
Federal Regulations.

Appendix A

Requests for Rehearing

American Public Power Association and National Rural Electric 
Cooperative Association (together, APPA/NRECA)
Coalition of Midwest Transmission Customers, PJM Industrial Customer 
Coalition, NEPOOL Industrial Customer Coalition, Southeast 
Electricity Consumers Association, and Southwest Industrial Customer 
Coalition (collectively, Industrial Consumers).
Connecticut Department of Public Utility Control, the Massachusetts 
Municipal Wholesale Electric Company, the Connecticut Municipal 
Electric Energy Cooperative, the New Hampshire Electric Cooperative, 
the Maine Public Utility Commission, and the New England Conference 
of Public Utility Commissioners (collectively, New England 
Commissions).
Edison Electric Institute (EEI).
Energy Financing, Inc. (Energy Financing).
Midwest ISO Transmission Owners (MISO TOs).
National Association of Regulatory Utility Commissioners (NARUC).
New England Consumer-Owned Entities (NECOE).
Public Utilities Commission of the State of California (California 
Commission).
Sacramento Municipal Utility District (SMUD).
Southern California Edison Company (SoCal Edison).
Southern Company Services, Inc., on behalf of Alabama Power Company, 
Georgia Power Company, Gulf Power Company, and Mississippi Power 
Company (collectively, Southern Companies).
Transmission Access Policy Study Group (TAPS).
Transmission Dependent Utility Systems (TDU Systems).
Xcel Energy Services, Inc. (Xcel).

[FR Doc. E6-22693 Filed 1-9-07; 8:45 am]

BILLING CODE 6717-01-P