Electric Transmission: Ranking Rate Bases, Growth and ROEs Across Regions

Electric Transmission Rankings Produce Unexpected Results Across RTOs/ISOs--In a recent report, Regulatory Research Associates, part of S&P Global Market Intelligence, provided an overview of the trends in ROEs and electric transmission rate base values approved by the Federal Energy Regulatory Commission, or FERC, for the major investor-owned utilities followed by RRA.

Following the 2006 implementation of the Federal Energy Regulatory Commission's incentive framework for new transmission investment with Order 679, and a declining interest rate environment providing access to inexpensive capital, the pace and magnitude of transmission investment increased nationwide, with many companies reporting compound annual growth rates, or CAGRs, in transmission rate base during the past five years in excess of 20%. During this time, many companies have been granted ROE incentive adders by FERC for specific transmission projects that have ranged from 25 to 150 basis points or more, in addition to the relatively standard 50-basis-point ROE adder for membership in a Regional Transmission Organization, or RTO, or an Independent System Operator, or ISO.

Some of the trends identified by RRA are summarized below.

Over the period 2011 through 2015, the average compound annual growth in rate base by RTO/ISO region ranged from a little over 7% to almost 25%. While the PJM Interconnection RTO is by far the largest region in terms of transmission rate base, the Southwest Power Pool, or SPP, reported the highest CAGR over the time period. The New York ISO, or NYISO, reported both the smallest rate base and the lowest growth rate.

On an operating company-specific basis, CAGR ranged from -1.41% to 122.3%, with Prarie Wind Transmission, jointly owned by Westar Energy, American Electric Power and Berkshire Hathaway, and located in the SPP, in the top slot, and New Hampshire Transmission, owned by NextEra and located in ISO-New England, or NE-ISO, in the bottom slot.

All three of the large investor owned utilities that operate in California, and belong to the California ISO, or, CAISO, were among the Top 10 in terms of total transmission rate base, with Edison International subsidiary Southern California Edison, in the top slot. Of the seven Top 10 slots not occupied by the California companies, four are located in PJM, two are in the MidContinent Independent System Operator, or MISO, and, one is in the NYISO.

Only three of the Top 10 largest operating companies by transmission rate base are also among the top 10 in rate base growth over the years 2011 through 2015. Of the remaining companies in the top 10, three are in PJM, three are in ISO-NE, two are in SPP, and one is in the CAISO.

Conversely, almost all of the companies that comprise the bottom 10, with respect to rate base growth rate, were in either PJM or ISO New England; the exception being Great Plains Energy subsidiary Kansas City Power & Light, which is part of SPP.

On a holding company specific basis, transmission rate base CAGRs for the companies included in the study ranged about 6% for Great Plains Energy to more than 16% for ITC Holdings.

Weighted average authorized returns for the individual operating companies studied that have project-specific incentives ranged from 10.58% for Southern California Edison to 12.07% for PPL Corporation subsidiary PPL Electric Utilities. Returns accorded individual projects ranged from 10.55% to 13%, and all but one of the companies authorized project-specific incentives were located in the Northeast or Mid-Atlantic region.

On a holding company basis, weighted average authorized ROEs ranged from 10.54% for Consilidated Edison to 12.38% for Entergy Corp. While Entergy continues to enjoy the MISO-wide authorized ROE of 12.38%, but could also be the most adversely affected holding company if a reduced ROE is ultimately adopted by FERC in a pending case.

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