With previously authorized transmission returns on equity (ROEs) being challenged and others coming under review in pending rate proceedings, Edison Electric Institute (EEI) has ssued a white paper that urges the Federal Energy Regulatory Commission (FERC) to provide regulatory certainty by continuing to authorize stable returns that are commensurate with the risks inherent in building transmission.

“A robust transmission network ensures reliability, supports competitive wholesale electricity markets, promotes physical and cybersecurity, and encourages the development of renewable and cleaner energy sources,” said EEI President Tom Kuhn. “The nation’s shareholder-owned electric companies have a long history of making cost-effective investments in needed and beneficial transmission infrastructure. In fact, these companies have increased their investment in transmission significantly in recent years, and are projected to spend an additional $54.6 billion on transmission infrastructure through 2015 (real $2011). The numerous consumer benefits of these investments are undisputed, including an assurance of system reliability, reduced congestion costs, and integration of new generation resources, including renewables.”

Recently, however, several parties have advocated for significant reductions, as much as two percent, to existing transmission ROEs. These parties support their requests using a narrow, mechanistic application of FERC’s preferred discounted cash flow (DCF) financial model that is distorted by current economic and financial conditions, including currently low U.S. Treasury rates. If these requests are granted, the availability of capital to utilities developing transmission to support a 21st-century digital economy will be limited.

In its white paper, Transmission Investment: Adequate Returns and Regulatory Certainty Are Key, EEI argues that to continue to attract capital for transmission development, FERC should balance the need to promote investment in long-term infrastructure assets such as transmission with the short-term, cyclical movements in the capital markets.

“The challenges being raised fail to demonstrate that the risks of developing transmission have somehow lessened,” said Kuhn. “Opposition to building new transmission facilities never seems to abate. Indeed, with more stakeholder involvement in regional decision making, the desire for robust wholesale competitive electricity markets and the challenges of cost allocation, the risks of building transmission often seem greater than ever.”

Compared to other assets, transmission investments are extremely risky and require long lead times for the planning process and stakeholder involvement. As a result, investors want predictable, sustainable and reasonable returns, or they will reallocate their capital into one of the many other sectors that offer a more favorable return and less risky investments.

In the past, FERC, like all regulatory commissions, has adjusted its regulatory methodologies to reflect changes in economic and financial realities to ensure that ROEs remain within the range of reasonableness. The EEI white paper now calls on FERC to recognize the limitations of the DCF methodology, given current conditions, and make necessary adjustments to continue to provide just and reasonable ROEs for transmission investment.