FERC’s Order No. 679 Transmission Incentive Policy
The Abandoned Plant Incentive is a regulatory mechanism that permits utilities to request pre-approval from FERC to recover 100 percent of costs for certain transmission projects that are canceled or abandoned due to factors beyond the control of the utility.
The Abandoned Plant Incentive was adopted by FERC in 2006 in response to directives in the Energy Policy Act of 2005 (EPAct 2005) to incentivize transmission that ensures reliability and reduces the cost of delivered power. The Incentive reduces a regulatory barrier to capital intensive, long-lead infrastructure development by providing developers with an opportunity to recover prudently incurred costs if the project is canceled for reasons beyond their control. These circumstances largely arise in RTO/ISO regions, where the RTO/ISO may both direct transmission developers to build and determine if a project should be canceled due to changed circumstances. This incentive approach balances customer and shareholder interests and aligns with FERC’s policies by encouraging large scale transmission development consistent with Congress’s intent in EPAct 2005.
How It Works
To receive a grant of the Abandonment Incentive from FERC, a transmission developer must first demonstrate that the project is needed to ensure reliability and/or reduces the cost of transmission. If a project is canceled, the developer must make a further filing at FERC to recover specific costs by demonstrating the cancellation is beyond its control. All filings are subject to notice and comment. Requests for cost recovery frequently are set for settlement procedures. Only after FERC grants approval in the later docket may any costs be recovered from customers.
By the Numbers
- Since 2006, FERC has granted transmission developers the Abandonment Incentive in over 190 cases.
- Those projects receiving Abandonment Incentives amounted to more than $70B of transmission infrastructure to serve customers.
- Of the projects pre-approved for the Abandonment Incentives, about 10 projects were canceled and successfully sought Abandonment Cost Recovery.
- FERC allowed Abandonment Cost Recovery for those projects amounting to approximately $290M recovered from customers, representing roughly 0.4% of the cost of the projects for which the Incentive was granted.
A Fair & Effective Risk Reducer
For nearly two decades, the Abandonment Incentive has been an effective ratemaking tool to help transmission utilities participating in RTOs/ISOs manage risk associated with building transmission planned through FERC-approved regional planning processes. The Abandonment Incentive policy has recognized that transmission developers should not be financially responsible for cancellation of a project beyond their control. Absent the Abandonment Incentive, risks would be greater, translating into higher borrowing and capital costs and rates for customers. In providing this risk management tool, FERC has facilitated low-cost financing of considerable transmission infrastructure. Continuing the Abandonment Incentive as a risk management tool will be critical in enabling the significant amount of transmission infrastructure needed in the coming years to ensure reliable service, facilitate new customer interconnection, and support national economic competitiveness.
The Abandonment Incentive as Insurance
The Abandonment Incentive has been described as a form of insurance provided to transmission developers by customers through rates. In this frame, the numbers show it is a low-cost insurance policy that offers great value to customers by keeping financing costs down for transmission development, very rarely leading to a “claim.” And those few claims likely cost customers less than alternatives like actual insurance or accounting for risk through higher rates, which would lead to higher costs regardless of whether any projects are canceled.
Download a PDF file of the policy brief: The Abandoned Plant Incentive is a Critical Enabler of Transmission [PDF, 102.72 KB]