(FERC Docket No. RM20-10-000)
Prepared by the London Economics Institute (LEI)
In March 2020, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) issued its Electric Transmission Incentives Notice of Proposed Rulemaking (“Electric Transmission Incentives NOPR”). This paper examines two of the return on equity (“ROE”) incentives being proposed therein, from the perspective of a transmission owner or investor in transmission assets (who is taking on the risks), and the beneficiary of transmission, namely the electric consumer (who will be paying for the incentives and compensating the investor for the risks taken).
According to the financial theory of risk and return, higher risk must be accompanied by a higher expected return in order to motivate a rational entity to engage in an economic activity.1 This paper examines how the theory relates to the justification for ROE incentives for:
- transmission owners (“TOs”) operating within a regional transmission organization (“RTO”) or independent system operator (“ISO”) (the RTO-Participation Incentive); and
- TOs looking to deploy advanced technologies2 (the Transmission Technology Incentive).
1. Modigliani, Franco and Gerald A. Pogue. “An Introduction to Risk and Return: Concepts and Evidence.” 646-73 (March 1973).