Following the August 14, 2003, electric grid blackout which affected large portions of the Northeast United States and Ontario, Canada, Congress acted to promote investment in the nation's electrical grid to increase the system's capacity and efficiency. Inadequacies of an antiquated transmission system were blamed for the 2003 blackout, as a simple fault led to a cascading, widespread outage. At that time, investment in new U.S. electricity transmission infrastructure had been declining for decades, and the task force report investigating the blackout's causes made 46 recommendations to correct system deficiencies. Prominently mentioned in the report was the following recommendation: Clarify that prudent expenditures and investments for bulk system reliability (including investments in new technologies) will be recoverable through transmission rates. Thus, upgrading the reliability and modernization of the grid was a clear priority. The Energy Policy Act of 2005 ( P.L. 109-58 ) (EPACT) directed the Federal Energy Regulatory Commission (FERC) to hold a rulemaking on incentive rates for construction of critical electric transmission infrastructure "for the purpose of benefitting consumers by ensuring reliability and reducing the cost of delivered power by reducing transmission congestion." The Final Rule was issued in July 2006 with FERC Order No. 679, "Promoting Transmission Investment through Pricing Reform." Citing what it describes as "significant changes in the electric industry," FERC recently opened an investigation into the "scope and implementation of its transmission incentives regulations and policies" in Order No. 679. As of May 2011, FERC reported it received 75 applications for incentive rate treatment of transmission projects with over $50 billion in proposed investments. Concerns have been raised as to the impact of the magnitude of these transmission incentives on consumer rates in various regions, especially incentives granting higher returns on equity to applicants. This report will focus on issues related to the need for transmission incentives, and consumer cost concerns related to these incentives. Given the changes that FERC cites in the electric industry, the question arises as to whether the need for transmission incentives continues. FERC is bound by EPACT to make incentives available, and is not proposing to end the incentives. However, with concerns raised over the effects of transmission incentives on consumer rates, implications of related federal policies on the electric power sector, additional FERC regulatory policies for transmission, and the aging of electricity infrastructure among key issues, the need for continuing transmission incentives may be a matter for Congress to consider. In August 2003, the biggest electrical blackout to yet hit the United States occurred in northeastern and Midwestern states, and stretched into Canada. This was a cascading failure, whereby power plants shut down to avoid sending power into the grid when it has nowhere to go. The failure of one high-voltage line overloaded other power lines causing them to overheat. The power grid in the Northeast United States especially was beset with inadequate transmission capacity and bottlenecks which limited how much power could be shifted across the grid. Power plants which have shut down can take hours to return to service as they must be checked to ensure the plant's equipment is functioning properly before going back on line. It was widely believed that additional, modernized transmission capacity could have absorbed the load and prevented the failure from spreading. However, obtaining financing for a major transmission line was considered very difficult at the time. Reacting to the 2003 electricity blackout and influenced by an earlier 1965 regional power failure, Congress acted to promote investment in the nation's electrical grid with the intention of increasing the system's capacity and efficiency. Figure 1 illustrates the long relative decline in transmission investment (in 2003 dollars) from 1975 to 1998, and is taken from a survey developed by the Edison Electric Institute (EEI) after the 2003 blackout. EEI used company-specific information to augment data from public sources to determine "historical capital investment" in transmission infrastructure. At the same time as this decline in infrastructure investment, the electric load using the nation's electric grid more than doubled. While EEI's data in Figure 1 shows an increase in transmission investment was beginning to occur before the 2003 blackout, EPACT added Section 219 to the Federal Power Act of 1935 (FPA) to cause the Federal Energy Regulatory Commission to establish incentive-based (including performance-based) rates for electric power transmission investment. Accordingly, FERC opened a rulemaking on incentive rates to promote construction of critical electric transmission infrastructure. The Final Rule, Order No. 679, "Promoting Transmission Investment through Pricing Reform," was issued in 2006. FERC states in the order that the "issue of whether there is a need for new transmission investment that is sufficient to justify transmission incentives was put to rest by Section 219." FERC's Final Rule for Order No. 679 does not grant incentives to any public utility but permits an applicant for incentive rates 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. FERC states in the docket that it will permit incentives only if the incentive package as a whole results in a just and reasonable rate. FERC also states in the Final Rule that the incentives are for the construction of new transmission infrastructure, and that Section 219(a) intends for consumers to benefit from added reliability and reduced costs of delivered power resulting from reduced transmission congestion. The Final Rule recognizes that a balance would need to be struck between incentive levels ensuring that investors are "properly compensated" to encourage new transmission construction, and to ensure that consumers are protected against "excessive" rates. Specifically, the potential incentives are as follows (emphasis added): (d) Incentive-based rate treatments for transmission infrastructure investment. The Commission will authorize any incentive-based rate treatment, as discussed in this paragraph (d), for transmission infrastructure investment, provided that the proposed incentive-based rate treatment is just and reasonable and not unduly discriminatory or preferential. A public utility's request for one or more incentive-based rate treatments, to be made in a filing pursuant to section 205 of the Federal Power Act, or in a petition for a declaratory order that precedes a filing pursuant to section 205, must include a detailed explanation of how the proposed rate treatment complies with the requirements of section 219 of the Federal Power Act and a demonstration that the proposed rate treatment is just, reasonable, and not unduly discriminatory or preferential. 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. For purposes of this paragraph (d), incentive-based rate treatment means any of the following: (1) For purposes of this paragraph (d), incentive-based rate treatment means any of the following: (i) A rate of return on equity sufficient to attract new investment in transmission facilities; (ii) 100 percent of prudently incurred Construction Work in Progress in rate base; (iii) Recovery of prudently incurred pre-commercial operations costs; (iv) Hypothetical capital structure; (v) Accelerated depreciation used for rate recovery; (vi) Recovery of 100 percent of prudently incurred costs of transmission facilities that are cancelled or abandoned due to factors beyond the control of the public utility; (vii) Deferred cost recovery; and (viii) Any other incentives approved by the Commission, pursuant to the requirements of this paragraph, that are determined to be just and reasonable and not unduly discriminatory or preferential. Thus, at least seven different types of incentives are available, and can be packaged together in an application for incentive rate treatment of a project.. Not every incentive would necessarily be available for a project. The actual incentives approved would be decided by FERC on a case-by-case basis, according to the type of project and the associated risks of the project. A FERC-approved stand-alone transmission company (i.e., a Transco) is eligible for additional incentives, and incentives are added for public utilities that join a transmission organization. However, it should be noted that FERC's codification of Section 219 changes EPACT's language to " either ensure reliability or reduce the cost of delivered power." Under Order No. 679, FERC requires applicants for incentive rates to pass two tests. The applicant must first satisfy the threshold requirement of FPA Section 219(a) by proving the project will ensure reliability or reduce the cost of power. Then, the project must next demonstrate that there is a "nexus" between the incentive(s) requested, and the investment being made. FERC states in the Order that each incentive "will be applied in a manner that is rationally tailored to the risks and challenges faced in constructing new transmission." In Order No. 679, FERC has established "rebuttable presumptions" to help determine if the proposed facilities either ensure reliability or reduce the cost of delivered power by reducing congestion. To qualify, the transmission project must meet either of two criteria: the project resulted 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 the project received construction approval from an appropriate state commission or state siting authority. If a proposed project does not meet the criteria for either rebuttable presumption, the applicant must then show how the project is eligible for incentives under the section. FERC states in Order No. 679 that the rebuttable presumptions and the nexus test are intended to be applied on a case-by-case basis, and that the best candidates for incentives are new transmission projects with special risks or challenges, and not routine investments made to expand the system to provide safe and reliable transmission service. On May 19, 2011, FERC released a Notice of Inquiry (NOI) on the "scope and implementation of its transmission incentives regulations and policies" in Order No. 679.