A new primer from WIRES on Transmission Formula Rates (TFRs). This comprehensive overview prepared by London Economics International explores what TFRs are, describes how FERC applies such rates; and assesses in an objective manner the positive ratemaking characteristics inherent in the use of TFRs for customers, regulators, transmission owners, and other industry stakeholders. The primer also provides a brief history of the inception and use of formula rates, as well as a high-level comparison of the use of the traditional stated rates approach and formula rates.
Under the TFR approach, after the utility files an initial application under the Federal Power Act (“FPA”) Section 205, the Commission approves a formula for the utility to calculate its costs of service and derive its rates, and in subsequent years, the utility uses the approved formula and updated input data to calculate its new rates each year. The utility submits its annual updates and supporting documentation to the Commission on an informational basis only, and shares the updates with interested parties, who can review, verify, and challenge the inputs used in the calculations pursuant to approved protocols. In contrast, under the stated rates approach, the utility must file an application under FPA Section 205 each time it seeks to change its rates.
TFR use has become widespread across electric utilities under Commission jurisdiction, with recent estimates (as of November 2019) reporting approximately 106 utilities using TFRs, compared to only 31 utilities using transmission stated rates.1 Based on LEI’s analysis, transmission owners using TFRs have service territories encompassing every state in the continental United States.2
TFRs gained traction because of their characteristics that advance multiple ratemaking objectives and balance the interests of customers, regulators, transmission owners, and other stakeholders.
1 FERC. Order No. 864. November 21, 2019. P. 68-69. These numbers reflect only entities that are under Commission jurisdiction. Non-jurisdictional entities, such as many cooperatives and municipal power providers, are not included in these figures.
2 Drawn from various sources, including tariffs filed with the Commission, utility service maps, and state regulators.