PATH RoE “Incentive” Lowered to 12.4%

Just in case anyone cares about this dead power line project, AEP/FE filed the settlement agreement in FERC case ER-08-386-000.  Here is a link to the agreement.

This case has been going on for a while.  In 2008, a number of PSCs in the PJM region (not WV’s PSC) and several utilities filed a petition stating that PATH’s original 14.3% incentive rate violated FERC’s rules.  Unfortunately, the case started long before PATH died, so the parties were not able to raise the issue that zombie transmission projects should not have incentives at all.

So, today we have this settlement which lowers PATH’s 14.3% incentive rate to 12.4%.  This rate applies to the return on equity that FERC forces rate payers to pay for unnecessary new transmission projects.  In FERC’s system, the agency applies a hypothetical calculation to the incentive calculation assuming that a company finances its power line one-half from borrowing and one-half from the equity of its shareholders or partners.  The return on equity then applies only to half of the amount of investment the company makes in the project.  They still get to collect all of the other half of their costs from rate payers, but they can’t collect the incentive on that half.

Keryn posted a comment expanding on my explanation of the incentive rate calculation.  Here is what she wrote:

The “other half” of the 50-50 hypothetical capital structure is debt, which earns at about 6%. The new 12.4% is averaged with the 6% debt and the result is the rate of return on the total in the rate base (currently 10.47%). Clear as mud, right?

Keryn has tangled with AEP/FE for the last two years about their outrageous claims for cost recovery.  She knows this stuff inside and out.  It turns out that Keryn’s initial reaction to the new RoE calculation may not be right.  She has discovered more details of the calculation for this “12.4%” (which turns out not to be 12.4%) incentive rate in one of the exhibits attached to the settlement agreement.  Take a look at Keryn’s most recent comment to this post for details.

What does this mean for us rate payers in PJM?  Starting from Jan. 1, 2011, PATH is collecting 1.9% less from every electric bill for its incentive rate.  Big deal.  When will FERC terminate the PATH zombie incentive completely?  That’s the real question.

3 thoughts on “PATH RoE “Incentive” Lowered to 12.4%

  1. The “other half” of the 50-50 hypothetical capital structure is debt, which earns at about 6%. The new 12.4% is averaged with the 6% debt and the result is the rate of return on the total in the rate base (currently 10.47%). Clear as mud, right? No BFD, but the ratepayers are getting a $2.7M refund. Yeah, a $2.7M refund when PATH is earning $14.7M in the 2012 PTRR they filed on Sept. 1. How very generous. Those memberships in the Duquesne Club don’t come cheap, ya know 😉

  2. If you look at the attachment rate templates you can see how it’s done mathematically (at the bottom of the page with all the calculations on it, not the ones with all the notes). That 10.47% number will change because it is no longer correct. I don’t have a calculator handy to figure it out right now… in fact I don’t even have a reliable computer to call my own right now and I’m so sick of doing everything my blackberry I think I’m developing defensive blindness. More on this next week when I get home.

    This ROE only applies to the capitalized costs in the rate base. Separately, PATH is also collecting their other, non-capitalized, expensed costs dollar for dollar — administrative, marketing and all kinds of other fun stuff.

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