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Is the US Building
Transmission Fast Enough
or Too Fast?
The 2006
federal order
679 giving
incentives for
new lines
may be out
of control.
Herman K. Trabish
July 23, 2012

With the approval of Congress, the Federal Energy Regulatory

Commission (FERC) issued an order in 2006 providing an array
of incentives for building new transmission.
FERCs Order 679 seemed like a good idea at the time. Congress
had just passed the landmark Energy Policy Act of 2005 that
opened the door to a lot of new generation capacity -renewable as well as traditional.
And, as the FERC order noted at the time, the U.S. load had
doubled between 1975 and 1998 while its investment in
transmission dropped significantly. Though transmission
infrastructure investment increased after 1998, the FERC order
added, it was still less in 2003 than it had been in 1975.

Order 679 was intended to encourage transmission

infrastructure investment. It createdincentive-based
(including performance-based) rate treatments for the
transmission of electric energy in interstate commerce by
public utilities. New transmission, the order said, would benefit
consumers by ensuring reliability and reducing the cost of
delivered power by reducing transmission congestion.
It worked. Transmission infrastructure spending, according to
the Edison Electric Institute (EEI), grew from $7.5 billion in 2005
to $10.2 billion in 2010. In its 2011 report, the EEI projected
spending of $54 billion from 2011 to 2014, a 43 percent
increase over spending from 2007 to 2010.
TransmissionHub just reported that spending for the 2012 to
2016 period of close to $23 billion has been applied for under
the Order 679 incentive rate treatment. That, the report said,
would bring 2008 to 2016 total investment to $36.2 billion.

The 2012 incentive rate treatment is estimated at $4.2 billion.

The peak of spending for incentive rate treatment infrastructure
investment through 2016 is expected to come in 2013 at $5.4
billion, followed by $5.2 billion in 2014, $4.5 billion in 2015 and
$3.6 billion in 2016.
Total spending for the new North American transmission
infrastructure that will come on line between 2012 and 2016,
the TransmissionHub report estimated, will be $68.6 billion. The
2012 to 2020 total investment was estimated at $169.7 billion.
Total spending in 2012, for some 3,100 miles of mostly 230kilovolt lines, was projected to approach $7 billion.
Spending was projected to be twice that for both 2013 ($15.4
billion for 5,600 miles of lines) and 2014 ($15.3 billion for 6,100
miles of lines).
Spending in 2015 will double again, TransmissionHub projected,
to $31 billion for 9,700 miles of lines.
North American transmission investment from 2016 to 2020
was projected to be $101.2 billion, with $74.3 billion of the
spending coming from 2016 to 2018.
The leading builders of transmission projects scheduled to go
into service between 2012 and 2016, according to
TransmissionHub, are Edison International (NYSE:EIX) subsidiary
Southern California Edison ($4.9 billion), Dominion Resources
subsidiary Virginia Electric Power ($2.9 billion for 30 projects),
PacificCorp ($2.9 billion), and Exelon (NYSE:EXC)($2.1 billion).

The success of the Order 679 incentives has raised questions.

Representative Edward Markey (D-MA), as Chair of the House
Subcommittee on Energy and Environment in 2009, asked then
FERC Chair Jon Wellinghoff if the program was too big.
More recently regulators have characterized the incentives as
excessive and questioned the lucrative compensation building
transmission infrastructure.
In response, FERC issued a notice of inquiry (NOI) in May 2011
which asked for reform proposals.
Order 679 allowed incentives in the forms of (1) an incentivebased return on equity (ROE), (2) construction work in progress
(CWIP), (3) a hypothetical capital structure, (4) accelerated
depreciation, (5) recovery of prudently incurred costs, (6)
deferred cost recovery or (7) single-issue ratemaking.
Massachusetts Attorney General Martha Coakley filed a
complaint with FERC in September 2011 arguing that the base
ROE for New England transmission should be lowered from

11.14 percent to 9.2 percent. Representative Markey supported

her filing.
Transmission builders like Northeast
Utilities(NYSE:NU),National Grid, andUnited Illuminating,
responded that the New England base ROE meets FERC's just
and reasonable standard.
Other NOI comments from utilities, government and nongovernmental organizations have noted aspects of Order 679
that could be reconsidered. The use of CWIP, which allows
transmission builders to bill ratepayers while the infrastructure
is under construction, is an especially controversial type of
incentive. Opponents say it shifts risk to rate payers. Advocates
say it facilitates new transmission and lower rates by improving
cash flows, debt ratings and capital costs for builders.
TAGS: accelerated depreciation, builders, capital structure, congress,
construction work in progress, cwip, deferred cost recovery, delivered
power, dominion resources, edison electric institute, edison
international, eei, eix, electric energy, energy policy act of 2005