Fine Print: Special Incentives for Transmission Lines

Tom Johnson | September 20, 2011 | Energy & Environment
Big utilities collect on projects intended to increase the reliability of the power grid

What’s at stake: The Federal Energy Regulatory Commission (FERC) has approved special incentive rates to build transmission lines to help promote reliability of the electric power grid, a policy that increases costs to consumers to make sure the lights stay on, especially during the times when the grid is straining to deliver electricity to customers, which is when electricity costs traditionally spike.

Why New Jersey doesn’t like it: Several big transmission upgrades in New Jersey have won the special incentive rates, which allow big electric utilities to collect rates while the lines are being pulled, but not yet in service. It also allows the utilities to recover all costs they expend in developing the lines, even if the projects are later cancelled for reasons other than the utilities’ faults. The projects to earn the special incentive rates include the Susquehanna-Roseland line, a controversial expansion of transmission lines through the heart of the New Jersey Highlands and the Delaware Water Gap

The costs could add up: According to a filing with FERC by the New Jersey BPU, the federal agency has received 75 applications with a total estimated cost of $50 billion seeking special incentive rates. The BPU claims the projects will earn a Return on Equity (ROE) of $650 million each year, if approved by the federal agency. Another big project earning special incentive rates from FERC is a proposal from the Atlantic Wind Connection, a project sponsored by Google and others to build a backbone transmission system for offshore wind developers from Virginia to New Jersey.

Why the incentive rates are attracting investment: The Return on Equity can be bit higher than traditional utility infrastructure improvements. For instance, the ROE for the Atlantic Wind Connection project, a proposal that has never been built in the United States, has been set by the federal agency at 12.59 percent, higher than what state regulatory agencies traditionally hand out to utilities for routine infrastructure improvements, which usually run slightly above 10 percent.

Another reason why New Jersey is unhappy: The state fears new transmission lines will deliver coal-powered electricity into the state at the costs of increased air pollution, as well as greenhouse gas emissions, which contribute to global climate change. In its filing, the state says New Jersey will no longer accept “dirty coal” as a new source of power for its electricity needs.

It also aggravates state officials: While the federal agency has approved special incentives to encourage development and construction of new transmission lines, it has frustrated New Jersey in its efforts to build “state-of-the-art, environmentally friendly” gas-fired plants. The new generation, state officials claim, would help lower sky-high energy bills for resident and businesses. That view is questioned by power suppliers, who wonder how saddling customers with new subsidies to foster these plant developments would actually lower energy bills.