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January 18, 2016

Fed. regulator probes electric transmission rates amid rising costs

PHOTO | Contributed Transmission costs haven risen in New England as policies have incentivized grid reliability investments by utility companies.
PHOTO | Contributed FERC has also scrutinized transmission ratemaking in the Midwest.

A federal energy regulatory agency has determined that the ratemaking process for New England's electricity transmission prices lacks adequate transparency and is “unjust,” and is working on changes that could ultimately lower energy costs for Connecticut consumers and businesses.

The Federal Energy Regulatory Commission (FERC) launched a proceeding last month to develop protocols and formulas to ensure the transmission ratemaking process is fair.

Experts say the proceeding is somewhat rare and could lead to lower transmission costs, which are ultimately paid by Connecticut businesses and residents on their electricity bills. It could also result in refunds to wholesale transmission purchasers.

The rates in question are charged by the owners of high-voltage, interstate transmission towers — mainly electric utilities — and paid by electricity distributors. The rate formula is complex, but in general it includes costs related to facilities, operations and maintenance, salaries and taxes.

Transmission rates are just one component of electricity costs. For example, transmission accounts for $18.70 out of $145 billed to an average Eversource residential customer each month.

But across New England, average transmission costs are disproportionately higher than in some other regions of the country, accounting for nearly 15 percent of total electricity costs, according an October FERC filing, which shows the rates grew 37 percent between 2010 and 2014.

FERC's order doesn't mention the region's high transmission prices, but concludes that the rate formulas lack detail that would help transmission customers and others determine how certain costs are derived and whether they are “reasonably and prudently incurred.”

The agency also says the current ratemaking process has left open the possibility that transmission owners are recovering more costs than formulas allow, and that it lacks adequate procedures for stakeholders to challenge the rates when they are submitted to FERC.

The FERC action has drawn the interest of official consumer advocates from Connecticut and other New England states eager for more insight into the region's quickly rising transmission costs.

Joe Rosenthal, a principal attorney at the Connecticut Office of Consumer Counsel, said he hopes FERC's action will give OCC and other consumer advocates the means to carefully examine the ratemaking process.

“We want to get closer to the real numbers of what [transmission owners'] real cost is,” Rosenthal said, adding that he thought FERC's order was “appropriately aggressive.”

FERC's scrutiny of transmission rate protocols in the ISO-New England region follows several similar actions in recent years in the Midwest and central southern U.S.

“They already have initiated similar proceedings in other parts of the country — now it's simply New England's turn,” said Jackie Barry, spokeswoman for National Grid, a major transmission owner.

One reason for rising costs is that transmission investments have ramped up in New England and elsewhere over the past decade, largely in response to a 2005 federal law guaranteeing utilities a return on equity of 11 percent or more for grid-reliability improvements.

“Transmission is the most lucrative thing utilities can own,” said Amy Boyd, a senior attorney with the Acadia Center in Boston, a clean-energy advocate that has studied New England's rising transmission rates.

Acadia, OCC and Attorney General George Jepsen were all involved in various FERC complaints, originating in 2011, arguing that the guaranteed returns were too generous. They had some success, but Boyd believes the recent FERC review could have more significant impacts on transmission costs.

Eversource, another major transmission owner, completed three transmission projects in late 2014 and 2015 with a combined price tag of $1.26 billion.

The company has approximately $1.75 billion worth of major ongoing transmission projects, though the largest — the $1.3 billion Northern Pass project — won't impact rates because it's a “merchant line” being funded by private developers, said Eversource spokesman Frank Poirot.

Commenting on FERC's recent order, Poirot said: “Eversource is participating in the process. Our shared objective with the FERC is to emerge from the current docket with appropriate formula rate protocols and processes that provide assurance to our customers that the transmission charges they pay are fair and reasonable.”

While major transmission projects have led to higher charges on utility customer bills, Poirot defended them as good investments, reducing congestion charges and boosting reliability for ratepayers.

“We think what we provide in transmission is a very good value for the dollar,” he said.

National Grid's Barry said the region's congestion charges fell 86 percent, to $38 million, between 2005 and 2010.

Transmission owners have also been impacted by a surge in power plant closures in recent years, Poirot said.

“Transmission is the link between our customers and those generating plants,” he said. “So as those plants go off and their regions no longer become a source for generating power, then we have to find other areas.”

Boyd said her organization has advocated for other ways to create a more reliable grid, rather than expensive transmission projects, including renewable energy and distributed generation.

Such alternatives are potentially cheaper, but she said they are at a disadvantage because current rules do not allow costs to be spread across the New England region like the costs of transmission projects.

Acadia also contends that ISO-New England understates the impact of such alternatives in its forecasting of future electricity demand, which could lead to the construction of unneeded transmission projects.

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