Dive Brief:

• In a move that could affect Ohio's utilities, the state's ratepayer advocate has asked the Federal Energy Regulatory Commission to eliminate a 0.5% return on equity (ROE) "adder" the utilities receive as an incentive for joining a regional transmission organization (RTO).

• The incentive, which totals at least $26.5 million a year for Ohio's utilities, is a windfall for shareholders of American Electric Power (AEP), Duke Energy and FirstEnergy because Ohio requires its utilities to be RTO members, the Office of the Ohio Consumers' Counsel (OCC) said in a complaint filed Feb. 24 at FERC.

• FERC appears to have a more pro-consumer stance than it did in the past, which could boost the outlook for the OCC's complaint, according to Paul Patterson, an equity analyst with Glenrock Associates.

Dive Insight:

"The transmission owners' incentive is as unnecessary a charge as it is creative ratemaking for higher profits," the OCC said in the complaint. "It has to go, and FERC should end it."

Since the mid-2000s, FERC has given utilities an extra 0.5% return on their transmission investments if they join an RTO. Critics contend the policy doesn't act as an incentive once a utility becomes an RTO member, and in some cases, states require their utilities to join transmission organizations.

The OCC complaint comes about seven months after FERC ruled Dayton Power and Light wasn't eligible for the commissions' RTO incentive because Ohio requires transmission owners to be part of transmission organizations. The commission reaffirmed that decision on Feb. 17, with a dissent from FERC Commissioner James Danly, who said there is no statutory requirement that RTO membership be voluntary.

"Expedited processing of this complaint is necessary for equitable treatment of the Ohio consumers of AEP, [FirstEnergy] and Duke, who should be protected from excessive, unjust and unreasonable rates," the OCC said, pointing to the Dayton decision.

FERC should order the transmission owners to refund their customers charges related to the RTO adder going back to the date of the complaint, according to the OCC. The utilities are PJM Interconnection members.

In a key court case, in 2018 the U.S. Court of Appeals for the Ninth Circuit overturned FERC decisions to award Pacific Gas & Electric an RTO adder without considering whether the utility's membership in the California Independent System Operator was mandatory under state law.

In its Feb. 24 complaint, the OCC noted FERC's Dayton decision was partly based on the appeals court's finding that an incentive is designed to induce voluntary behavior. In its decision, FERC said an incentive cannot be given for behavior that is legally mandated.

Meanwhile, FERC is considering sharply limiting its RTO incentive adder.

FERC in 2019 proposed doubling the ROE incentive to 1%, but in mid-April, the agency revised the proposal to a 0.5% adder that would run for three years after a transmission owner joined an RTO. Utilities that are already RTO members would be ineligible for the extra ROE. Eliminating the 0.5% ROE adder would save consumers about $350 million a year, according to agency staff.

The effect on individual utility companies of losing the extra ROE would vary, according to annual reports they filed last month at the Securities and Exchange Commission.

American Electric Power, for example, said it would reduce annual pre-tax income $55 million to $70 million if FERC scraps the RTO incentive. Public Service Enterprise Group stands to lose up to $40 million annually, followed by Ameren at $20 million, Eversource Energy at $17 million and Avangrid at $3 million.

State regulators like the California Public Utilities Commission and consumer advocates have been pressing FERC to jettison the RTO incentive, arguing it unnecessarily drives up ratepayer costs, according to Glenrock's Patterson.

Patterson said the questions around the RTO incentive arise amid a more consumer-oriented tilt at FERC since commissioners Allison Clements and Mark Christie joined the agency in late 2020 and early 2021, respectively, and Richard Glick was elevated to chairman last year.

"Four of the five commissioners seem to be markedly more pro-consumer than the FERC has been in the past," Patterson said. "They might be more sympathetic to the arguments raised by the OCC than what you've seen with earlier commissions."