FERC Commissioner Kelly: The Purpose of the Federal Power Act is to Protect Consumers

At a recent meeting FERC adopted rules to implement a new statutory provision, Section 219 of the Federal Power Act, which authorizes, in certain situations, extra financial incentives, through higher rates, for utilities building transmission lines needed to ease congestion that limits the availability of lower cost power in some areas.

Prior to the enactment of Section 219, FERC had proposed generous "incentive ratemaking" measures to encourage construction of new transmission lines with significantly higher returns on equity allowed as part of rate computations. The National Association of State Utility Consumer Advocates (NASUCA) vigorously opposed this in its 2003 comments to FERC. Also, NASUCA opposed a proposal for broader statutory authorization of higher transmission rates than the new FPA Section 219 allows, in testimony to Congress, stating that the proposal being considered "would authorize unnecessary and costly new federal financial incentives to encourage investment in transmission facilities, beyond the level of return on investors’ equity normally sufficient to achieve reliable service and just and reasonable rates."

In New York, utilities have built more than 10,000 miles of high voltage transmission lines without the need for "incentive" rates that are higher than rates would be to provide normal rates of return on private utility investors' equity. Also, the New York Power Authority has more than 1,000 miles of transmission lines which it built at cost, without providing any return to investors, because NYPA is publicly owned. With the "restructuring" of New York's electric industry under PSC orders, however, little has been done in recent years to construct new transmission lines, with the exception of lines built to serve the Long Island Power Authority.

Commissioner Suedeen Kelly, in her talking points at the FERC meeting which adopted rules to implement new FPA Section 219 pointed out that the statutory amendment which now allows higher than normal rates specifically requires that "ultimately it is the consumer that must benefit from the rule."

She noted that "the Final Rule does not require applicants to provide a cost-benefit analysis for incentive-based rate treatment," but still cautioned that "applicants will not receive incentives simply by asking for them, or by merely stating that incentives are needed to attract capital. Nor will applicants be rewarded just for the sake of building new transmission."

In recent years FERC has focused its efforts on deregulation and substitution of market mechanisms for its traditional mission of enforcing the Federal Power Act and reviewing rates for reasonableness. No credible study has found these measures to have lowered rates or otherwise to have benefited consumers.

In a refreshing statement, Commissioner Kelly said "we must always relate our action “to the primary aim of the [Federal Power] Act to guard the consumer against excessive rates.” Commissioner Kelly's rhetoric is in harmony with the Supreme Court's interpretation of the purpose of the Natural Gas Act (which has parallel provisions with the Federal Power Act): Congress intended the law and implementation of it by regulators to “The Act was so framed as to afford consumers a complete, permanent and effective bond of protection from excessive rates and charges.” Atlantic Refining Co. v. Publ. Serv. Com’n, 360 U.S. 378, 388 (1959).

Without a cost-benefit analysis, however, and no yardstick of reasonableness, it is difficult to imagine how FERC will know whether higher rates requested for a transmission project are reasonable or will benefit consumers.