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Post-Election Update: Electric Transmission

November 13, 2012

President Obama's re-election is a positive development for supporters of and investors in renewable energy and therefore a significant development for the transmission policies that will be required to implement clean energy. Of course, a robust transmission policy impacts all electricity generation and will benefit all consumers and regions with more reliable power, and eventually, lower overall costs. With the current challenges facing the Northeast following the recent storms, transmission infrastructure's importance becomes a more essential priority each day.  

We have an aging U.S. electric transmission system in need of upgrade and expansion to meet the demands of a new economy. Investments in repairing, upgrading, and expanding the electric transmission grid creates jobs, improves electric reliability, promotes competitive markets, fuel diversity, and supports economic growth.

Some progress was made in 2005 when legislation was passed to study and develop a plan to improve transmission siting though national corridors of importance. In 2007, two National Interest Electric Transmission Corridors were designated, but they were invalidated by a federal appeals court in 2011. Since then, we have also had seven projects designated under the Administration's Interagency Rapid Response Team for advancement of transmission. Already, this process has allowed transmission developers to receive fast track treatment which has allowed new projects to move forward more efficiently and effectively. The President's re-election will help this process continue for the current and future projects.

It is important to remember that we have been looking for a way to better improve our transmission siting/development process for a long time, including even legislative efforts like the national corridors that have been ineffective though the political and legal process. The bottom line is, no matter what these efforts are or entail, they are looking for solutions to a major problem which dogs us to today: how can we more effectively build a much-needed transmission infrastructure to best accommodate our ever-growing needs.

One key issue to watch is whether FERC can be consistent in granting or denying transmission incentives. Under Chairman Wellinghoff, FERC has already issued a Notice of Inquiry to examine its transmission incentives policy and industry will watch closely to see whether a new policy emerges that is more consistent region to region. For example, since 2008, we have seen smaller ROE adders for proposed transmission projects. In New England, there has been major transmission investment and healthy ROEs (including adders) have been part of the story. The ISO-NE market has benefitted from reduced congestion. New England is in contrast to New York where there has not yet been transmission investment (for a variety of reasons) and significant congestion still remains.

As to the abandonment incentive, we are watching FERC's treatment of companies seeking recovery for prudently incurred costs for abandoned projects relying on the abandonment authority FERC granted in earlier transmission incentives proceedings. One notable case is the Potomac-Appalachian Transmission Highline (PATH) project's recent FERC filing seeking recovery of $121 million (costs plus a return). PATH expects that amount might decrease as it sells some of its existing assets - such as land acquired in anticipation of the project.  

Third, as to base ROE for transmission, it is important to watch a number of complaints pending against transmission owners. The New England Transmission Owners are scheduled to have a hearing on their base ROE in 2013 and there are complaints pending against Southwestern Public Service, Florida Progress, and National Grid (Niagara Mohawk) with complainants seeking to lower the company's base transmission returns. The investment community currently views FERC's ROEs very favorably, reflecting reliance that project will be granted favorable returns (relative to those ROEs typically set by state commissions). If FERC were to lower base ROEs, counter to investors' expectations in any of these cases, it could send the wrong message to the market. There are also a number of other ROE cases in the settlement context that are not initiated by complaints and when considering these ROEs, FERC's actions could surprise the investment community or diminish investors' confidence in FERC investments in transmission.

Finally, FERC will likely continue with its efforts to implement Order No. 1000's requirements. Although a number of issues still need to be worked out, Order 1000 provides directional certainty for planning and investing in transmission projects. Its reforms should lead to more opportunities for transmission investment, especially in transmission projects designed to bring renewable energy resources onto the grid.

One last key item has gotten much-needed attention over the last two years. In order to stand up a new offshore wind energy industry in the U.S., but especially off of the Atlantic Coast, the Administration has been very aggressive at working with private companies to invest in a transmission network that can support such a massive effort.  

Already, the Atlantic Wind Connection (AWC) backbone transmission project, an essential foundation to the new industry, has made strong progress toward enabling the production of thousands of megawatts of clean power with strong support from FERC, the Department of Energy, and the Department of the Interior. In May 2012, Interior's Bureau of Ocean Energy Management (BOEM), which oversees the industrial development of offshore US waters, decided to move ahead with an environmental review of a corridor in the Atlantic Ocean where the transmission line would be laid.

The Administration faces many political, technical, and policy challenges on transmission policy: from security to siting to reliability. Already, they have established strong momentum that will present the framework for continuing recent progress.  

Congress will likely continue to play a strong oversight and advisory role as well. After having previous legislation designating national corridors rejected by courts, it is likely they will revisit transmission infrastructure issues, alongside an ongoing effort to beef up grid security. Additionally, House Republicans are widely expected to remain vigilant in their effort to protect reliability though a secure grid, but also though protecting sources of generation like coal, which seem to be facing significant market challenges and the Administration's regulatory crosshairs.  In addition to protecting more pieces of an "all of the above" energy approach to generation and infrastructure, the Republican House has focused on making sure any federal action to support the development of transmission infrastructure should strike the appropriate balance between the various stakeholders, including preserving the proper roles of state and local governments. This approach is likely to continue to be an important part of its agenda.