LEI shows how risks of RTO participation and deployment of innovative technology merit ROE incentives for transmission owners

BOSTON, MA, July 2, 2020 – London Economics International LLC (“LEI”) issued a whitepaper, which was submitted by WIRES along with its comments on the Federal Energy Regulatory Commission’s (“FERC”) Electric Transmission Incentives Notice of Proposed Rulemaking (“NOPR”) in Docket No. RM20-10-000. LEI’s whitepaper focuses on two return on equity (“ROE”) incentives for transmission owners (“TOs”) proposed by FERC in its NOPR: the RTO-Participation Incentive and the Transmission Technology Inventive.

According to the evidence generally recognized in the industry, RTO participation exposes TOs to risks related to the governance and operational nature of RTOs, Federal policies aimed at reforming markets and system planning, and local and state policies that pose uncertainties around operation and investment in the grid. “An ROE adder of 100 basis points is a reasonable pathway for compensating for such risks,” noted Julia Frayer, Managing Director at LEI and principal author of the whitepaper. “Moreover, the costs of this ROE adder are outweighed by the benefits created through RTO management of power systems and administration of competitive markets.”

Economic theory on the ‘public good’ problem and the risks surrounding innovation are also examined in LEI’s whitepaper. “According to the financial theory of risk and return, higher risk must be accompanied by a higher expected return in order to motivate a rational entity to employ resources to conduct research and development, bring about innovation, engage in novel use of existing technologies and deployment of new technology,” Ms. Frayer stated. The whitepaper provides examples from within the electricity sector, and also outside the electricity sector, on the benefits of technological advances. “With the support of mechanisms such as these ROE incentives,” Ms. Frayer noted, “consumers will ultimately benefit.”

LEI’s whitepaper, Economic Considerations in the Matter of Electric Transmission Incentives, is available at https://wiresgroup.com/wires-library/wires-reports.

#  #  #

London Economics International LLC (“LEI”) is a global economic, financial, and strategic advisory professional services firm specializing in energy and infrastructure. For further information on LEI, please contact Kathryn Evans by e-mail at kathryn@londoneconomics.com or visit www.londoneconomics.com.   Questions on the whitepaper can be directed to Julia Frayer by e-mail at julia@londoneconomics.com.