With the approval of Congress, the Federal Energy Regulatory Commission (FERC) issued an order in 2006 providing an array of incentives for building new transmission.

FERC’s Order 679 seemed like a good idea at the time. Congress had just passed the landmark Energy Policy Act of 2005 that opened the door to a lot of new generation capacity -- renewable as well as traditional.

And, as the FERC order noted at the time, the U.S. load had doubled between 1975 and 1998 while its investment in transmission dropped significantly. Though transmission infrastructure investment increased after 1998, the FERC order added, it was still less in 2003 than it had been in 1975.

Order 679 was “intended to encourage transmission infrastructure investment.” It created “incentive-based (including performance-based) rate treatments for the transmission of electric energy in interstate commerce by public utilities.” New transmission, the order said, would benefit consumers “by ensuring reliability and reducing the cost of delivered power by reducing transmission congestion.”

It worked. Transmission infrastructure spending, according to the Edison Electric Institute (EEI), grew from $7.5 billion in 2005 to $10.2 billion in 2010. In its 2011 report, the EEI projected spending of $54 billion from 2011 to 2014, a 43 percent increase over spending from 2007 to 2010.

TransmissionHub just reported that spending for the 2012 to 2016 period of close to $23 billion has been applied for under the Order 679 “incentive rate treatment.” That, the report said, would bring 2008 to 2016 total investment to $36.2 billion.

The 2012 incentive rate treatment is estimated at $4.2 billion. The peak of spending for incentive rate treatment infrastructure investment through 2016 is expected to come in 2013 at $5.4 billion, followed by $5.2 billion in 2014, $4.5 billion in 2015 and $3.6 billion in 2016.

Total spending for the new North American transmission infrastructure that will come on line between 2012 and 2016, the TransmissionHub report estimated, will be $68.6 billion. The 2012 to 2020 total investment was estimated at $169.7 billion.

Total spending in 2012, for some 3,100 miles of mostly 230-kilovolt lines, was projected to approach $7 billion.

Spending was projected to be twice that for both 2013 ($15.4 billion for 5,600 miles of lines) and 2014 ($15.3 billion for 6,100 miles of lines).

Spending in 2015 will double again, TransmissionHub projected, to $31 billion for 9,700 miles of lines.

North American transmission investment from 2016 to 2020 was projected to be $101.2 billion, with $74.3 billion of the spending coming from 2016 to 2018.

The leading builders of transmission projects scheduled to go into service between 2012 and 2016, according to TransmissionHub, are Edison International (NYSE:EIX) subsidiary Southern California Edison ($4.9 billion), Dominion Resources subsidiary Virginia Electric Power ($2.9 billion for 30 projects), PacificCorp ($2.9 billion), and Exelon (NYSE:EXC)($2.1 billion).

The success of the Order 679 incentives has raised questions. Representative Edward Markey (D-MA), as Chair of the House Subcommittee on Energy and Environment in 2009, asked then FERC Chair Jon Wellinghoff if the program was too big.

More recently regulators have characterized the incentives as excessive and questioned the lucrative compensation building transmission infrastructure.

In response, FERC issued a notice of inquiry (NOI) in May 2011 which asked for reform proposals.

Order 679 allowed incentives in the forms of (1) an incentive-based return on equity (ROE), (2) construction work in progress (CWIP), (3) a hypothetical capital structure, (4) accelerated depreciation, (5) recovery of prudently incurred costs, (6) deferred cost recovery or (7) single-issue ratemaking.

Massachusetts Attorney General Martha Coakley filed a complaint with FERC in September 2011 arguing that the base ROE for New England transmission should be lowered from 11.14 percent to 9.2 percent. Representative Markey supported her filing.

Transmission builders like Northeast Utilities (NYSE:NU), National Grid, and United Illuminating, responded that the New England base ROE meets FERC's “just and reasonable” standard.

Other NOI comments from utilities, government and non-governmental organizations have noted aspects of Order 679 that could be reconsidered. The use of CWIP, which allows transmission builders to bill ratepayers while the infrastructure is under construction, is an especially controversial type of incentive. Opponents say it shifts risk to rate payers. Advocates say it facilitates new transmission and lower rates by improving cash flows, debt ratings and capital costs for builders.

Tags: accelerated depreciation, builders, capital structure, congress, construction work in progress, cwip, deferred cost recovery, delivered power, dominion resources, edison electric institute, edison international, eei, eix, electric energy, energy policy act of 2005