Energy Regulation April 2008 Updates

FERC Affirms And Clarifies New Market-Based Rate

Policy

FERC, acting on rehearing of its market-based rate

rulemaking proceeding Order No. 697, largely affirmed its

earlierrulings, including its decision to utilize a

regional approach for the triennial market power analysis

(separating the nation into six geographic regions); the

adoption of horizontal and vertical power analyses; the use of

a balancing authority area or the regional transmission

organization/independent system operator market as the default

relevant geographic market; and the codification of

restrictions on affiliate abuse in the regulations. FERC stated

that this will strengthen wholesale power markets and protect

customers from exploitation in those market.

The rehearing order also clarifies the horizontal market

power analysis. While FERC affirmed its continued use of

historical data and a "snapshot in time" approach, it

stated that it also will consider case-specific sensitivity

studies that present compelling evidence that certain changes

in a market should be considered as part of the market power

analysis. Finally, FERC will allow mitigated sellers to

demonstrate on a case-by-case basis that they do not have

market power with respect to long-term contracts.

Transmission Owners Can Choose To Pay 100 Percent Of

Network Upgrade Costs In Midwest Independent System Operator

(ISO)

FERC has denied rehearing of an order that allowed three

transmission owners: International Transmission Company,

Michigan Electric Transmission Company, and American

Transmission Company, to pay 100 percent of network upgrade

costs needed to interconnect a new generation facility to their

transmission facilities. These costs can be received through

transmission rates under the Midwest ISO tariff.

The Midwest ISO's tariff generally requires the

interconnection customer itself to pay 100 percent of the

upgrade costs, with possible recovery of 50 percent of those

costs. In this docket, FERC accepted tariff changes that also

allow transmission owners to choose to pay 100 percent of the

network upgrade costs, rather than the generator. Of the 100

percent paid by the transmission owners, 50 percent is eligible

for recovery through tariffed regional cost-sharing measures

and 50 percent can be recovered automatically through zonal

transmission rates.

Several Michigan utilities, consumer groups, and the

Michigan Public Service Commission requested rehearing of

FERC's order accepting these tariff changes. They argued

that transmission companies have incentives to over-invest in

transmission infrastructure, which subjects existing

transmission customers to unnecessary rate increases. They also

argued that customers will be forced to pay for network

upgrades that provide no benefit if the interconnection

customer decides to serve load outside the Midwest ISO region

after its one-year minimum term of service is met. FERC

rejected these arguments as well as the request that a cap be

imposed on interconnection costs eligible for reimbursement,

finding that network upgrades benefit all customers by

providing a more competitive generation market.

Incentive Rate Treatment For Transmission Projects Varies

In Recent Cases

In the past two months, FERC has issued a series of orders

implementing Order No. 679's policy of allowing public

utilities to obtain incentive rate treatment for transmission

infrastructure investments that meet certain criteria. The

applicant must be able to demonstrate a nexus between the rate

incentive requested and the particular risks of the

project.

In a recent case applying the incentive rate policy

involving a 130-mile, 500 kV transmission line (Susquehanna

Line) of PPL Electric Utilities Corporation and Public Service

Electric & Gas Company, FERC approved with two

partial dissents a 1.25 percent return on equity adder,

a 0.5 percent adder to each utility's base return on equity

for continued membership in PJM, full recovery of prudently

incurred Construction Work in Progress (CWIP) expenses in rate

base, abandonment incentives if the project does not go forward

to completion, and authority to transfer certain incentives to

affiliates in the future.

FERC action in other incentive rate cases:

On PG&E's proposed 1,000-mile transmission

project from...