[Federal Register Volume 70, Number 228 (Tuesday, November 29, 2005)]
[Proposed Rules]
[Pages 71409-71421]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-23404]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / 
Proposed Rules  

[[Page 71409]]



DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM06-4-000]


Promoting Transmission Investment Through Pricing Reform

Issued November 18, 2005.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Notice of Proposed Rulemaking.

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SUMMARY: Pursuant to the requirements of the Transmission 
Infrastructure Investment provisions in section 1241 of the Energy 
Policy Act of 2005, which adds a new section 219 to the Federal Power 
Act, the Federal Energy Regulatory Commission is proposing to amend its 
regulations to establish incentive-based (including performance-based) 
rate treatments for the transmission of electric energy in interstate 
commerce by public utilities for the purpose of benefiting consumers by 
ensuring reliability and reducing the cost of delivered power by 
reducing transmission congestion.

DATES: Comments are due on or before January 11, 2006.

ADDRESSES: Comments may be filed electronically via the eFiling link on 
the Commission's Web site at http://www.ferc.gov. Commenters unable to 
file comments electronically must send an original and 14 copies of 
their comments to: Federal Energy Regulatory Commission, Office of the 
Secretary, 888 First Street, NE., Washington, DC, 20426. Refer to the 
Comment Procedures section of the preamble for additional information 
on how to file comments.

FOR FURTHER INFORMATION CONTACT:
Jeffrey Hitchings (Technical Information), Office of Markets, Tariffs 
and Rates, Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426. 202-502-6042.
Sebastian Tiger (Technical Information), Office of Market Oversight and 
Investigations, Federal Energy Regulatory Commission, 888 First Street, 
NE., Washington, DC 20426. 202-502-6079.
Andre Goodson (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426. 202-502-8560.
Tina Ham (Legal Information), Office of the General Counsel, Federal 
Energy Regulatory Commission, 888 First Street, NE., Washington, DC 
20426. 202-502-6224.

SUPPLEMENTARY INFORMATION:

Issued November 17, 2005.

I. Introduction

    1. On August 8, 2005, the Energy Policy Act of 2005 (EPAct 2005 or 
the Act)\1\ became law. Section 1241 of the Act (Transmission 
Infrastructure Investment) adds a new section 219 to the Federal Power 
Act (FPA) which mandates that not later than one year after enactment 
of section 219, the Commission establish, by rule, incentive-based 
(including performance-based) rate treatments for the transmission of 
electric energy in interstate commerce by public utilities for the 
purpose of benefiting consumers by ensuring reliability and reducing 
the cost of delivered power by reducing transmission congestion. FPA 
section 219 was implemented against the backdrop of declining 
investment in transmission infrastructure and increasing electric load. 
Transmission investment declined in real dollar terms for 23 years, 
from 1975 to 1998, before increasing again, although investment for the 
most recent year available, 2003, is still below 1975 levels.\2\ Over 
the same time period, electric load more than doubled, resulting in a 
significant decrease in transmission capacity relative to load in every 
North American Electric Reliability Council region.\3\ Edison Electric 
Institute (EEI) estimates that capital spending must increase by 25 
percent, from $4 billion annually to $5 billion annually, to assure 
system reliability and to accommodate wholesale electric markets, and 
that the 2.5 percent growth rate in transmission mileage since 1999 is 
insufficient to meet the expected 50 percent growth in consumer demand 
for electricity over the next two decades.\4\ The Secretary of Energy's 
Advisory Board at the Department of Energy determined that investment 
in the transmission grid will only occur when regulatory policy: (a) 
Provides reasonably certain cost recovery; (b) provides regulatory 
certainty, in terms of who can operate the system and under what rules; 
and (c) provides a return that makes investment in transmission a 
reasonable option, considering other available investment options.\5\
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    \1\ Public Law No. 109-58, 119 Stat. 594 (2005).
    \2\ EEI Survey of Transmission Investment: Historical and 
Planned Capital Expenditures (1999-2008) at 3 (2005).
    \3\ Barriers to Transmission Investment, Presentation by Brendan 
Kirby (U.S. Department of Energy, Oak Ridge National Laboratory), 
April 22, 2005 Technical Conference, Transmission Independence and 
Investment, Docket No. AD05-5-000 (April 22, 2005 Technical 
Conference).
    \4\ Energy Policy Act of 2005: Hearings before the House 
Subcommittee on Energy and Commerce, 109th Congress, First Sess. 
(2005) (Prepared statement of Thomas R. Kuhn, President of EEI).
    \5\ Comprehensive National Energy Policy: Hearings before the 
House Subcommittee on Energy and Commerce, 108th Congress, First 
Sess. (Prepared statement of Glenn English, Chief Executive Officer 
of National Rural Electric Cooperatives Association).
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    2. The purpose of the proposed rulemaking is to promote greater 
capital investment in new transmission capacity. As the foregoing 
analysis indicates, the need for capital investment in energy 
infrastructure is a national problem that requires a national solution. 
Inadequate transmission infrastructure results in transmission 
congestion that impedes competitive wholesale markets and impairs the 
reliability of the electric grid. To address the need for transmission 
capacity, the proposed rulemaking provides price reforms applicable to 
the entire electric grid, in both organized and in other markets and to 
both vertically-integrated utilities and transcos.\6\ We note that the 
Commission has been active in responding to the need for new 
transmission capacity for several years prior to the enactment of EPAct 
2005, as evidenced by its issuance of a proposed policy statement to 
promote the efficient operation and expansion of the transmission grid 
\7\ and

[[Page 71410]]

a policy statement on transco independence.\8\
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    \6\ Transcos are stand-alone transmission companies that have 
been approved by the Commission.
    \7\ Proposed Pricing Policy for Efficient Operation and 
Expansion of Transmission Grid, 102 FERC ] 61,032 (2003). That 
proposed policy statement, which was issued in Docket No. PL03-1-
000, has been superseded by this proposed rulemaking. Accordingly, 
the Commission will take no further action in Docket No. PL03-1-000.
    \8\ Policy Statement Regarding Evaluation of Independent 
Ownership and Operation of Transmission, 111 FERC ] 61,473 (2005) 
(Transco Independence Policy Statement).
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    3. To address the need for new transmission infrastructure and to 
encourage necessary investment, the new section 219 specifically 
charges the Commission with the responsibility to establish, by rule, 
incentive-based (including performance-based) rate treatments for the 
transmission of electric energy in interstate commerce that:
    a. Promote reliable and economically efficient transmission and 
generation of electricity by promoting capital investment in the 
enlargement, improvement, maintenance, and operation of all facilities 
for the transmission of electric energy in interstate commerce, 
regardless of the ownership of the facilities;
    b. Provide a return on equity that attracts new investment in 
transmission facilities (including related transmission technologies);
    c. Encourage deployment of transmission technologies and other 
measures to increase the capacity and efficiency of existing 
transmission facilities and improve the operation of the facilities; 
and
    d. Allow the recovery of all prudently incurred costs necessary to 
comply with mandatory reliability standards established pursuant to 
section 215 of the FPA, and all prudently-incurred costs related to 
transmission infrastructure development, pursuant to section 216 of the 
FPA (transmission national interest corridors).
    4. Section 219 also requires the Commission to issue a rule to 
provide for incentives to each transmitting utility or electric utility 
that joins a Transmission Organization \9\ and to ensure that any 
recoverable costs associated with joining may be recovered through 
transmission rates charged by the utility or through the transmission 
rates charged by the Transmission Organization that provides 
transmission service to the utility. Finally, section 219 provides that 
all rates approved under these rules are subject to the requirements of 
sections 205 and 206 of the FPA,\10\ which provides that all rates, 
charges, terms and conditions be just and reasonable and not unduly 
discriminatory or preferential.
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    \9\ Section 3(29) of the FPA (as added by section 1291(b)(29) of 
EPAct 2005) defines a Transmission Organization as a regional 
transmission organization, independent system operator, independent 
transmission provider, or other transmission organization finally 
approved by the Commission for the operation of transmission 
facilities.
    \10\ 16 U.S.C. 824(d) and 824(e) (2000).
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    5. As discussed in detail below, consistent with the above 
provisions of FPA section 219, in this proposed rulemaking the 
Commission seeks to provide incentives and regulatory certainty 
sufficient to support expanded and improved transmission infrastructure 
(including advanced technologies) while at the same time ensuring that 
transmission rates remain just, reasonable, and not unduly 
discriminatory or preferential. We recognize that there may be other 
incentives or regulatory steps that could be taken (for example, 
ensuring that incentive rates, once approved, cannot be reopened for a 
period of time absent compelling circumstances) to provide greater 
incentive for needed investment. We seek comments not only on the 
proposals herein but also on other incentives or regulatory steps that 
would help fulfill the purposes of FPA section 219.

II. Summary of Proposed Regulations

    6. Pursuant to new section 219 of the FPA, the proposed amendments 
to the existing regulations are intended to promote reliable and 
economically efficient transmission and generation of electricity by 
providing incentives for increased capital investment by providing a 
rate of return that attracts new investment in transmission facilities, 
and by providing incentives to utilities that join Transmission 
Organizations. The Commission proposes to amend part 35 of Chapter I, 
Title18, of the Code of Federal Regulations. First, section 35.34(e) 
(innovative transmission rate treatments for regional transmission 
organizations) in subpart F of the Commission's regulations \11\ will 
be removed in its entirety. Second, a new section 35.35 under subpart 
G, titled Transmission Infrastructure Investment Provisions, will be 
added and will supersede section 35.34(e).
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    \11\ Subpart F of the Commission's regulations consists of Sec.  
35.34 (procedures and requirements regarding regional transmission 
organizations).
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    7. As proposed, new section 35.35 under subpart G would establish 
the regulation's purpose, definitions, general rules, and incentive-
based rate treatments for transmission infrastructure investment.
    8. The proposed new paragraph (a) would outline the purpose of the 
regulation, stating that section 35.35 establishes rules for incentive-
based (including performance-based) rate treatments for transmission of 
electric energy in interstate commerce by public utilities for the 
purpose of benefiting consumers by ensuring reliability, and reducing 
the cost of delivered power by reducing transmission congestion.
    9. The proposed new paragraph (b) would define the terms, 
``transco'' and ``transmission organization,'' as used in the 
regulation:

    For purposes of this rulemaking, ``transco'' means a stand-alone 
transmission company that has been approved by the Commission. As 
used herein, ``stand-alone transmission company'' refers to a 
company engaged solely in selling transmission at wholesale or on an 
unbundled retail basis. For purposes of the proposed rule, transcos 
may be independent or they may have some passive ownership interests 
by affiliated traditional vertically-integrated public utilities 
(traditional public utilities).\12\``Transmission Organization,'' as 
defined in new section 3(29) of the FPA, means a regional 
transmission organization (RTO), independent system operator (ISO), 
independent transmission provider, or other transmission 
organization finally approved by the Commission for the operation of 
transmission facilities.

    \12\ A transco is also a public utility under the FPA unless it 
is wholly owned and operated by entities that fall within section 
201(f) of the FPA (e.g., governmental and certain electric 
cooperative entities). So, in order to distinguish traditional 
vertically-integrated public utilities from transcos for purposes of 
this notice of proposed rulemaking, we refer to traditional 
vertically-integrated public utilities as ``traditional public 
utilities.''
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    10. The proposed new paragraph (c) would establish the general rule 
that all rates approved under the rules of this section 35.35, 
including any revisions to the rules, are subject to the requirements 
of sections 205 and 206 of the FPA that all rates, charges, terms and 
conditions be just and reasonable and not unduly discriminatory or 
preferential. The proposed new paragraph (d) would describe the 
incentive-based rate treatments for transmission infrastructure 
investments that the Commission would authorize. For all jurisdictional 
public utilities, including transcos, the Commission encourages 
incentive-based rate proposals, including proposals to: (1) Provide a 
rate of return on equity (ROE), within the zone of reasonableness, that 
is sufficient to attract new investment in transmission facilities; (2) 
recover 100 percent of prudently incurred transmission-related 
Construction Work in Progress (CWIP) in rate base; (3) recover 
prudently incurred pre-commercial operations costs by expensing these 
costs instead of capitalizing them; (4) adopt a hypothetical capital 
structure; (5)

[[Page 71411]]

accelerate the recovery of depreciation expense; (6) recover all 
prudently-incurred development costs in cases where construction of 
facilities may subsequently be abandoned as a result of factors beyond 
the public utility's control; (7) provide deferred cost recovery; and 
(8) provide any other incentives approved by the Commission that are 
determined to be just and reasonable and not unduly discriminatory or 
preferential.
    11. For transcos only, the Commission would authorize the following 
additional incentives, subject to the requirements of sections 205 and 
206 of the FPA that all rates, charges, terms and conditions be just 
and reasonable and not unduly discriminatory or preferential: (1) A 
higher ROE which is both sufficient to encourage Transco formation as 
well as to attract new investment in transmission facilities; and (2) 
an adjustment to the book value of transmission assets being sold to a 
Transco to remove the disincentive associated with the impact of 
accelerated depreciation on Federal capital gains tax liabilities.
    12. The proposed new paragraph (e) would describe the incentive-
based rate treatment for public utilities that join a Transmission 
Organization. The Commission will consider authorizing an ROE for a 
public utility that joins a Transmission Organization that is higher 
than the return on equity that the Commission might otherwise allow if 
the public utility did not join a Transmission Organization (but still 
within the zone of reasonableness). The Commission will also allow 
public utilities that join a Transmission Organization to recover 
prudently incurred costs associated with joining the Transmission 
Organization, either through transmission rates charged by public 
utilities or through transmission rates charged by the Transmission 
Organization that provides services to the public utilities.
    13. The proposed new paragraph (f) would state that the Commission 
will approve prudently-incurred costs necessary to comply with the 
mandatory reliability standards pursuant to section 215 of the FPA.
    14. The proposed new paragraph (g) would state that Commission will 
approve prudently-incurred costs related to transmission infrastructure 
development pursuant to section 216 of the FPA.
    15. The proposed new paragraph (h) would require that 
jurisdictional public utilities file an annual report with the 
Commission specifying current and projected transmission investment 
activity.
    16. The Commission does not propose to require applicants for 
incentive ratemaking treatment under section 35.35 to support their 
applications with cost-benefit analyses. Customers will be protected by 
the Commission's review of applications pursuant to sections 205, 206 
and 219 of the FPA, which require that all rates be just and reasonable 
and not unduly discriminatory or preferential.

III. Proposed Incentives and Issues for Comment

    17. Public comments on this notice of proposed rulemaking (NOPR) 
are due on January 11, 2006. The Commission will carefully weigh and 
consider all public comments received.
    18. The following sections detailing the proposed incentives are 
organized as follows:
    (1) Provisions applicable to all public utilities;
    (2) Provisions applicable to transcos; and
    (3) Provisions applicable to public utilities that join 
Transmission Organizations.
    These explanations are intended to clarify certain aspects of the 
proposed regulations in this NOPR in terms of their role in fulfilling 
the goals of EPAct 2005 and thereby allow for more informed comments. 
Public utilities would be required to file for approval of any 
incentives under section 205 of the FPA and include an explanation of 
the proposed accounting for these incentives.

A. Incentives Available to All Jurisdictional Public Utilities

    19. As mentioned earlier, EEI reports that transmission capital 
spending must increase an estimated 25 percent annually to assure 
system reliability and accommodate wholesale markets. Undertaking 
significant new transmission investment can present cash flow, revenue 
recovery and financing issues, regardless of corporate structure. This 
section proposes incentives applicable to all public utilities, 
consistent with section 219 of the FPA, that would foster transmission 
investment and thereby help to ensure reliability and reduce 
transmission congestion.
1. Providing an ROE That Attracts New Investment in Transmission 
Facilities
    20. Public utilities investing in transmission capacity will not 
invest unless they can earn a return they consider to be sufficiently 
attractive. The Commission's historical approach to developing an 
allowed rate of return on equity begins with developing a proxy group 
of similar risk companies. Next, a discounted cash flow (DCF) analysis 
is performed on the applicant, if possible, and on the companies in the 
proxy group, and a zone of reasonableness is typically developed based 
on the proxy group. A DCF return within the zone of reasonableness is 
then typically specified for the applicant based on a comparison of 
risk factors between the applicant and the proxy group. While the 
Commission has typically utilized a DCF analysis, we seek comment on 
whether the Commission should consider alternatives to the DCF analysis 
as a way to incent investment in new transmission capacity.
    21. As we recognized in Order No. 2000, the risk profile of the 
transmission business is changing and the historical data typically 
used to evaluate returns on equity may not be reliable since it 
reflects a different industry structure from the one that currently 
exists. A sufficient return that reflects the current industry 
environment is fundamental to a public utility's decision to invest in 
new capacity. Therefore, the Commission will continue to consider and 
approve ROE levels that attract investment for new transmission 
projects, thereby fulfilling a requirement of section 219.\13\ For 
example, the Commission approved an ROE adder for Pacific Gas and 
Electric Company, and a 13.5 percent ROE for the recently completed 
Path 15 project in California.\14\ Similarly, Sierra Pacific Power 
Company received a ROE of 12.5 to 13.5 percent for certain new 
facilities it proposed that were designed to relieve congestion, 
increase the transfer capability of electricity to other markets, 
enhance regional reliability and connect new merchant generation supply 
throughout the region.\15\ We seek comment on whether ROE adders are an 
appropriate mechanism for requesting and receiving approval for an 
acceptable ROE.
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    \13\ FPA section 219(b)(2).
    \14\ See Western Area Power Administration, 99 FERC ] 61,306 
(2002), reh'g denied, 100 FERC ] 61,331 (2002), aff'd sub nom. 
Public Utilities Commission of the State of California v. FERC, 367 
F.3d 925 (D.C. Cir. 2004) (Western Area Power Administration). The 
District of Columbia Circuit held that ``using price incentives to 
increase the supply of energy available to customers is a valid, 
non-cost consideration in setting rates.''
    \15\ Sierra Pacific Resources Operating Companies, 105 FERC ] 
61,178 (2003), order on reh'g, 106 FERC ] 61,096 (2004).
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    22. Specifically, the Commission will consider granting an 
incentive-based ROE to all public utilities (i.e., traditional public 
utilities and Transcos) that build new transmission facilities that 
benefit consumers by ensuring

[[Page 71412]]

reliability and reducing the cost of delivered power by reducing 
transmission congestion. To receive an incentive-based ROE, a public 
utility must submit a request in an application under section 205 of 
the FPA and must support the ROE request by demonstrating how the new 
facilities will improve regional reliability and reduce transmission 
congestion. In addition, the application must explain if the facilities 
are part of an independent regional planning process, such as that 
administered by an RTO or ISO or another independent regional planning 
process recognized by the Commission and how the proposed ROE was 
derived and why it is appropriate to encourage new investment. We also 
seek comment on whether the final rule should establish a definition of 
``independent regional planning process'' or if the Commission should 
consider them on a case-by-case basis.
2. Prudently Incurred Construction Work in Progress and Prudently 
Incurred Pre-Commercial Operations Costs
    23. The long lead times required to plan and construct new 
transmission can impact utility cash flow, in turn affecting the 
overall financial health of a company and its ability to attract 
capital at reasonable prices. For example, during the initial phases of 
a transmission construction project, a utility may have significant 
expenses associated with planning and siting that typically are not 100 
percent recovered in rate base until commercial operation. The 
Commission believes that there are at least two ways it can further the 
goals of section 219 by relieving the pressures on utility cash flows 
associated with transmission investment programs: (1) Including 100 
percent of CWIP in rate base; and (2) expensing rather than 
capitalizing pre-commercial operations costs associated with new 
transmission investment.
    24. The inclusion of CWIP in rate base rather than the accrual of 
allowance for funds used during construction (AFUDC) on new 
construction expenditures is one way to increase cash flow. Since 1987, 
the Commission's general policy has been to allow only 50 percent of 
the non-pollution control/fuel conversion construction costs as CWIP in 
rate base.\16\ The remaining construction costs (including an AFUDC 
which provides a return on those expenditures) generally would have 
been capitalized and included in rate base only when the plant went 
into commercial operation, i.e., when the plant became used and useful. 
Allowing some portion of the costs in rate base prior to commercial 
operation provides utilities with additional cash flow in the form of 
an immediate earned return.
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    \16\ See 18 CFR 35.25(c)(3).
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    25. The second way to improve utility cash flows, as mentioned 
above, is to allow utilities to expense pre-commercial operations costs 
related to new transmission investment rather than capitalize these 
costs. Expensing the costs provides immediate cash flow that the 
utility can then use as and where needed, whereas capitalizing the 
costs would produce cash flow over the life of the asset.\17\
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    \17\ The Commission recognizes that not all corporate models 
ascribe to the philosophy of early cash returns; some prefer the 
stable long-term returns resulting from the higher rate base.
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    26. In 2004, the Commission accepted a proposal by American 
Transmission Company (American Transmission) to include 100 percent of 
CWIP in the calculation of transmission rates and to expense pre-
commercial operations costs for new transmission investment, instead of 
capitalizing those costs and earning a return.\18\ American 
Transmission stated that these incentives would help maintain adequate 
cash flow during the construction process and that without these 
incentives it could face a downgrade of its fixed income rating over 
the next several years due to inadequate cash flow, thereby increasing 
its capital costs by $176 million over a twenty-year horizon.
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    \18\ The Commission conditionally accepted the proposal for 
filing, set it for hearing, subject to refund. Subsequently, the 
Commission accepted a settlement that allowed American Transmission 
to recover transmission-related CWIP and pre-certification costs in 
rate base. See American Transmission Company, LLC, 105 FERC ] 61,388 
(2003), order approving settlement, 107 FERC ] 61,117 (2004).
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    27. The Commission believes that allowing public utilities to 
include up to 100 percent of prudently incurred transmission-related 
CWIP in rate base and permitting them to expense prudently incurred 
pre-commercial operations costs will further the goals of section 219 
by relieving the pressures on utility cash flows associated with their 
transmission investment programs and providing up-front regulatory 
certainty. We propose to evaluate the applicability of these incentives 
to transmission investment applications on a case-by-case basis.
    28. In addition to inviting comment on this provision, we 
specifically request comment on (1) the types of costs that should be 
considered ``pre-commercial operation costs''; and (2) whether there 
should be a presumption that these incentives meet the requirements of 
FPA section 219 that investments ensure reliability and reduce the cost 
of delivered power.
3. Hypothetical Capital Structure
    29. The Commission has largely relied on the actual capitalization 
of a utility in setting its rate of return, but we recognize that an 
overly rigid approach to evaluating a proposed capital structure could 
be a disincentive to investment in new transmission projects. Each 
project may have unique financial and cash flow requirements, and a 
rigid approach to acceptable capital structures could threaten the 
viability of some projects. Accordingly, we propose that applicants be 
permitted to propose an overall rate of return based on a hypothetical 
capital structure, and have the flexibility to refinance or employ 
different capitalizations as may be needed to maintain the viability of 
new capacity additions. We expect that applicants will develop their 
proposals based on the specific requirements and circumstances of their 
projects, and that the Commission will evaluate proposals for this 
incentive on a case-by-case basis. In their applications for incentive 
treatment, public utilities should provide support for why the 
hypothetical capital structure incentive is needed to promote 
investment consistent with the goals of section 219. The applicant must 
also provide its transmission investment plan and explain the specific 
projects to which the proposed return will apply. We seek comment on 
this proposal.
4. Accelerated Depreciation
    30. Accelerated depreciation is another way to increase cash flow 
to utilities, thereby removing a potential disincentive to investing. 
The Commission has determined in some circumstances that allowing 
accelerated depreciation is warranted as an incentive to encourage 
investment in transmission infrastructure because it provides improved 
cash-flow and better positions public utilities for longer-term 
transmission investments.\19\ While the Commission has allowed 
accelerated depreciation for emergency conditions or special 
projects,\20\ we believe that permitting accelerated depreciation

[[Page 71413]]

more broadly may further the goals of section 219 by providing 
incentives to undertake transmission projects that have the potential 
to reduce the cost of delivered power and ensure reliability. We 
therefore propose to allow transmission facilities to be depreciated 
over a period of 15 years,\21\ in place of the typical Commission 
practice to allow depreciation over the useful life of the facilities, 
and seek comment on whether 15 years is an appropriate time period for 
cost recovery or whether the Commission should establish a presumption 
of a shorter or longer depreciable life for new transmission 
facilities.\22\ We also seek comment on whether accelerated 
depreciation has any longer-term negative impacts that would undermine 
the goals of the Act.
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    \19\ See Removing Obstacles to Increased Electric Generation and 
Natural Gas Supply in the Western United States, 94 FERC ] 61,272, 
further order on removing obstacles to increased energy supply and 
reduced demand in the Western United States and dismissing reh'g, 95 
FERC ] 61,225, order on reh'g, 96 FERC ] 61,155, order on reh'g, 97 
FERC ] 61,024 (2001) (Removing Obstacles). See also Western Area 
Power Administration, supra note 14.
    \20\ Id.
    \21\ Removing Obstacles, 94 FERC at 61,968-69.
    \22\ For example, in Removing Obstacles, Id., the Commission 
permitted a 10-year depreciable life for facilities that will 
increase transmission capacity to relieve existing constraints and 
could be in service within a few months.
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5. Recovery of Costs of Abandoned Facilities
    31. Public utilities, in considering investments that fulfill the 
requirements of FPA section 219, may encounter investment opportunities 
with significant risk associated with factors beyond their control, 
such as generation developers' decisions to develop or terminate the 
development of potential resources or state or local siting decision 
problems. In these circumstances, it may be appropriate to consider 
ways to reduce the risk associated with potential upgrades or other 
improvements to the transmission system. By providing for recovery of 
the costs of facilities that may be later cancelled or abandoned due to 
factors beyond the control of the public utility, the Commission could 
reduce the uncertainty associated with higher risk projects, thereby 
facilitating investment in these projects.
    32. Until recently, the Commission's abandoned plant policy was 
based on a 50/50 sharing.\23\ The intent of this policy was to 
equitably balance the interests of ratepayers and investors. The 
Commission noted that the competing standards of ``used and useful to 
the ratepayer'' and ``recovery of prudent investment'' were both 
relevant and determined that 50 percent of the prudently incurred costs 
of a cancelled generating plant should be amortized as an expense over 
a period reflecting the life of the plant if it had been completed and 
that the remaining 50 percent of the prudently incurred costs of the 
cancelled plant should be written off as a loss.\24\ The Commission in 
Public Service Company of New Mexico,\25\ extended its abandoned plant 
policy to include transmission projects, finding that the policy was 
not limited to generation facilities only, or to facilities that had no 
customer support or involvement or to cancellations that were the 
result of economics.
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    \23\ See New England Power Co., Opinion No. 295, 42 FERC ] 
61,016 at 61,068, 61,081-83, order on reh'g, 43 FERC ] 61,285 
(1988).
    \24\ Under this policy, ratepayers are entitled to the income 
tax deduction associated with that portion of the loss for which 
they are paying. In addition, they are entitled to a rate base 
reduction to reflect the accumulated deferred income tax amounts 
associated with 50 percent of the abandonment loss
    \25\ 75 FERC ] 61,266 at 61,859 (1996).
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    33. The policy was further expanded in a recent decision by the 
Commission to allow Southern California Edison Company (SoCal Edison) 
to recover all prudently incurred costs related to certain proposed 
transmission facilities if those facilities were later cancelled or 
abandoned.\26\ The Commission noted that the company's management did 
not control the decision to develop or cancel the wind farm generation 
project and that the company's shareholders did not share in the 
earnings associated with the generation project. The Commission further 
determined that the company might be at a higher risk in developing the 
project because of factors beyond its control, such as a developer's 
decision to develop or terminate development of the project. It also 
noted that SoCal Edison was not a wind farm developer and therefore 
would not directly benefit from the facilities. Thus, the Commission 
concluded that SoCal Edison should not shoulder the risk of the 
project.\27\
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    \26\ Southern California Edison Co., 112 FERC ] 61,014 at P 58-
61, reh'g denied, 113 FERC ] 61,143 at P 9-15 (2005) (SoCal Edison).
    \27\ Id. at P 61.
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    34. We believe that extension of the recent precedent on abandoned 
plant cost recovery is warranted in light of the need to attract new 
transmission investment. We propose to permit recovery of 100 percent 
of the prudently incurred costs of transmission facilities that are 
cancelled or abandoned due to factors beyond the control of the public 
utility because it will reduce regulatory uncertainty associated with 
investments in new transmission capacity and therefore meet the 
objectives of FPA section 219. We seek comment on this proposal.
6. Deferred Cost Recovery
    35. Public utilities with a retail rate moratorium may have less 
incentive to build transmission facilities that could reduce congestion 
or ensure reliability because of concerns about cost recovery for those 
facilities. Accordingly, the Commission proposes to permit such 
utilities to use a deferred cost recovery mechanism which allows them 
to commence recovery of new facility costs in FERC-jurisdictional rates 
at the end of a retail rate moratorium. By providing a mechanism to 
facilitate cost recovery by public utilities that build transmission 
facilities during a retail rate moratorium, we will meet the goals of 
FPA section 219 by providing certainty to investors that costs can be 
recovered as quickly as possible.\28\ We seek comment on whether there 
are other mechanisms that the Commission could institute to provide 
regulatory certainty of the recovery of the costs of transmission 
facilities both through retail as well as wholesale rates.
---------------------------------------------------------------------------

    \28\ The Commission has approved for Trans-Elect, Inc. (Trans-
Elect) a proposal for a deferred cost recovery provision that 
allowed Trans-Elect to commence recovery of the cost of new 
facilities upon the end of the retail rate moratorium. See Trans 
Elect, Inc., 98 FERC ] 61,142, reh'g denied, 98 FERC ] 61,368 
(2002).
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B. Incentives for Transco Formation and Transco Investment

    36. While the incentives we are proposing in this rule should 
facilitate transmission expansion for all jurisdictional entities in 
furtherance of the goals of section 219, we recognize that for any 
transmission rate incentive that is approved by the Commission, 
utilities whose rates are 100 percent FERC jurisdictional may derive 
more benefit. Consequently, incentives may be more effective in 
fostering new transmission investment for transcos than for traditional 
public utilities that are dependent upon retail regulators for some 
portion of their transmission rate recovery.
    37. In this NOPR, the Commission proposes to define a transco as a 
stand-alone transmission company, approved by the Commission, which 
sells transmission service at wholesale and/or on an unbundled retail 
basis, regardless of whether it is affiliated with another public 
utility. We invite comments on this proposed definition of transcos.
    38. We believe that transcos are an important part of the 
Commission's mandate to support transmission capacity investments that 
reduce the cost of delivered power by reducing transmission congestion 
and that ensure reliability. This is because they have demonstrated the 
capability to invest, on a timely basis, significant amounts of capital 
in transmission projects and in efforts to reduce congestion. For 
example, Michigan Electric Transmission Company (METC) is doubling the 
net book value of its

[[Page 71414]]

transmission system over seven years.\29\ Similarly, since launching 
its capital program in 2001, American Transmission has more than 
doubled the net book value of its system, much of which is in a highly 
congested area in the Midwest Independent Transmission System Operator 
(Midwest ISO),\30\ and plans to invest $3.4 billion over the next 10 
years.\31\ In addition, International Transmission Company 
(International Transmission) made transmission investments of $81 
million in 2004 and plans to invest $100 million in 2005.\32\
---------------------------------------------------------------------------

    \29\ April 22, 2005 Technical Conference, Tr. 187 (statement of 
Paul McCoy, Trans-Elect, Inc.).
    \30\ April 22, 2005 Technical Conference, Tr. 192 (statement of 
Dan Langren, American Transmission).
    \31\ See American Transmission's 10-Year Transmission System 
Assessment Summary Report 2005 at p. 12, which is available on ATC's 
Web site at http://www.atc10yearplan.com.
    \32\ April 22, 2005 Technical Conference, Tr. 79 (statement of 
Joe Welch, International Transmission).
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1. ROE-Based Incentive for Transcos
    39. The positive record of transco investment in transmission 
facilities is, we believe, related to the stand-alone nature of these 
entities. For instance, transcos may be better situated to meet the 
transmission infrastructure goals of the FPA section 219 because they 
eliminate the competition for capital between the generation and 
transmission functions within corporations. In addition, transcos, 
unlike some traditional public utilities, do not face a potential 
decrease in value to their generation assets as a result of additional 
transmission. Further, by their structure, transcos have incentives to 
better manage transmission assets, have incentives to develop 
innovative services, and may have better access to capital markets 
given a more focused business model.\33\ Also, because transcos' sole 
focus is on the business of transmission, they may be in a better 
position to respond to market signals that indicate when and where 
transmission investment is needed, and, therefore, are more likely to 
yield additional capital investment in transmission. Unlike investments 
by traditional public utilities subject to company-wide state-level 
rate case risks that can undermine incentive ratemaking at the Federal 
level,\34\ ratemaking for transcos is entirely subject to Federal 
jurisdiction. Thus, unlike many traditional public utilities, transcos 
avoid potential uncertainty associated with the need for additional 
rate recovery approval by state regulatory agencies.
---------------------------------------------------------------------------

    \33\ See, e.g., ITC Holdings Corp., 102 FERC ] 61,182 at P 62, 
reh'g denied, 104 FERC ] 61,033 (2003) (ITC Holdings Corp.) 
(``Moreover, we believe that International Transmission's for-
profit, stand-alone transmission business will bring significant 
benefits through, among other things, improved asset management, 
development of innovative services, and improved access to capital 
markets given a more focused business model than that of vertically-
integrated utilities.''); TRANSLink Transmission Co., L.L.C., 99 
FERC ] 61,106 at 61,455 (2002), order on reh'g, 101 FERC ] 61,140 
(2003) (``We have recognized that the ITC business model can bring 
significant benefits to the industry. Their for-profit nature with a 
focus on the transmission business is ideally suited to bring about: 
(1) Improved asset management including increased investment; (2) 
improved access to capital markets given a more focused business 
model than that of vertically-integrated utilities; (3) development 
of innovative services; and (4) additional independence from market 
participants.'').
    \34\ See April 22, 2005 Technical Conference, Tr. 44 (statement 
of Jon Larson, Trimaran Capital Partners).
---------------------------------------------------------------------------

    40. Given the positive contribution to transmission investment made 
by transcos in the relatively short period since their creation, we 
believe the formation of additional transcos will promote needed 
investment in transmission facilities and we therefore want to 
encourage their formation.\35\ As part of this encouragement of transco 
formation, we will permit properly structured transcos to receive an 
ROE that both encourages transco formation and is sufficient to attract 
investment. For example, the Commission approved equity returns for 
METC and International Transmission that reflect the significant 
benefits that their status as transcos provide, and are higher than 
those approved for integrated entities.\36\ Continuing to allow a 
higher ROE (that falls within a zone of reasonableness) in recognition 
of the benefits transcos provide, we believe, is an appropriate way to 
ensure that the objectives of new FPA section 219 are achieved. 
Therefore, the Commission will consider the positive impact transcos 
have on transmission investment and in turn on the reliable and 
economically efficient transmission and generation of electricity when 
it evaluates ROEs proposed by properly structured transcos.
---------------------------------------------------------------------------

    \35\ We also note that, as entities that do not own or control 
generation assets, transcos further ensure non-discriminatory 
transmission service.
    \36\ Michigan Electric Transmission Co., LLC, 105 FERC ] 61,214 
(2003); ITC Holdings Corp., supra note 33.
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    41. We recognize that transcos can be structured with varying 
degrees of independence, ranging from entities where some measure of 
control and/or ownership continues to be exercised by market 
participants \37\ to total structural independence, such as 
International Transmission and METC. The Commission's Transco 
Independence Policy Statement recognized the range of independence that 
would be acceptable for Commission approval, including passive 
ownership subject to the evaluation of factors that affect the 
independent operation, planning and construction of transmission 
systems.
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    \37\ Section 35.34(b)(2) of the Commission's RTO regulations 
defines a market participant as:
    (i) Any entity that, either directly or through an affiliate, 
sells or brokers electric energy, or provides ancillary services to 
the [RTO], unless the Commission finds that the entity does not have 
economic or commercial interests that would be significantly 
affected by the [RTO's] actions or decisions; and
    (ii) Any other entity that the Commission finds has economic or 
commercial interests that would be significantly affected by the 
[RTO's] actions or decisions.
---------------------------------------------------------------------------

    42. Furthermore, the Commission believes that the expansion and 
investment objectives of section 219 are best met by a definition of 
transcos that does not restrict the formation of transcos to only 
certain organized markets. Therefore, the Commission proposes to 
clarify and broaden the definition of transcos to be stand-alone 
transmission companies approved by the Commission, without a condition 
of membership in a RTO or ISO. We request comment on how to factor the 
level of independence into any request for ROE-based incentives for 
transcos. We seek comment on whether the Commission should specify 
additional incentive levels, that remain within the zone of 
reasonableness, to correspond to certain levels of independence and if 
so, what those amounts should be. We also seek comments concerning 
whether membership in an RTO or ISO should be considered in setting 
incentive-based ROEs approved by the Commission for a transco. We also 
seek comment on whether the Commission should reconsider how it 
establishes a zone of reasonableness associated with stand-alone 
transmission companies.
2. Recovery of Accumulated Deferred Income Taxes (ADIT)
    43. In order to encourage transco formation, we must also remove 
disincentives that might prevent the sale or purchase of transmission 
assets. For example, transmission owners are unlikely to sell 
transmission assets at book value if they are not held harmless from 
capital gains taxes on such sales by including an adjustment for taxes 
associated with those sales. At the same time, buyers of transmission 
assets may be unwilling to pay such an adjustment without some 
assurance that they will be able to recover the adjustment in their 
rate base.\38\ The Commission

[[Page 71415]]

addressed those concerns in two orders in which it allowed two Transcos 
(International Transmission and METC) to include in their rates an 
adjustment to recover ADIT.\39\ To remove any disincentive, the 
Commission will continue to consider proposals to include adjustments 
for ADIT in rates when a transco is purchasing transmission facilities. 
In addition, we clarify that a transco that requests an incentive ROE 
would not be precluded from also requesting the ADIT adjustment
---------------------------------------------------------------------------

    \38\ See, e.g., International Transmission Co., 92 FERC ] 61,276 
at 61,915-16 (2000) (explaining potential disincentives to sellers 
and buyers of transmission assets if the ADIT adjustment is not 
granted).
    \39\ See ITC Holdings Corp., 102 FERC ] 61,182 at P 62 (with 
regard to International Transmission Company); Trans-Elect, Inc., 98 
FERC ] 61,368 at 62,590 (2002) (with regard to METC).
---------------------------------------------------------------------------

3. Other Potential Incentives for Transcos
    44. We seek comments on whether there are other potential rate 
treatments that would provide incentives to form transcos and promote 
capital investment or reduce disincentives to the divestiture of 
transmission facilities. Do any of the incentives we are proposing need 
to be modified or adapted to recognize the inherent regulatory 
differences between transcos and traditional public utilities?

C. ROE Incentive for Joining a Transmission Organization

    45. FPA section 219 requires that the Commission issue a rule to 
provide incentives to transmitting or electric utilities that join a 
Transmission Organization and to ensure that any recoverable costs 
associated with joining may be recovered through transmission rates 
charged by the utility or through the rates charged by the Transmission 
Organization. For certain RTOs, such as the Midwest ISO and the 
Pennsylvania-New Jersey-Maryland Interconnection (PJM), the Commission 
has considered incentives for public utilities that join an RTO by 
allowing a public utility that joins an RTO to receive an ROE within 
the zone of reasonableness that is higher than it would have received 
had it not joined. We will continue to consider requests for ROE-based 
incentives for utilities that join an RTO, in recognition of the 
benefits such organizations bring to customers, as outlined in detail 
in Order No. 2000.\40\ In addition, we will consider similar requests 
by utilities that join an ISO for an incentive ROE that, while still in 
the zone of reasonableness, is higher than the ROE the Commission might 
otherwise allow if the utility did not join. We will require a public 
utility to make a request for the incentive by making a filing with the 
Commission under section 205 of the FPA.
---------------------------------------------------------------------------

    \40\ Regional Transmission Organizations, Order No. 2000, 65 FR 
809 (Jan. 6, 2000), FERC Stats. & Regs., Regulations Preambles July 
1996-December 2000 ] 31,089 (1999), order on reh'g, Order No. 2000-
A, 65 FR 12088 (Mar. 8, 2000), FERC Stats. & Regs., Regulations 
Preambles July 1996-December 2000 ] 31,092 (2000), aff'd sub nom. 
Public Utility District. No. 1 of Snohomish County, Washington v. 
FERC, 272 F.3d 607 (D.C. Cir. 2001).
---------------------------------------------------------------------------

    46. We also seek comment on whether the Commission should consider 
incentive-based ROE requests for public utilities that are not in an 
RTO but that join a Commission-approved regional planning organization.

D. Approval of All Prudently Incurred Costs Associated With Reliability 
Standards and Transmission Infrastructure Development

    47. Under new FPA section 215 (Electric Reliability), an Electric 
Reliability Organization may propose, and the Commission may approve by 
rule or order, reliability standards.\41\ New FPA section 219(b)(4)(A) 
requires that the Commission allow recovery of all prudently incurred 
costs necessary to comply with these mandatory reliability standards. 
Proposed new section 35.35(f) allows for such recovery.
---------------------------------------------------------------------------

    \41\ An Electric Reliability Organization is the organization 
certified by the Commission to establish and enforce reliability 
standards for the bulk power system, subject to Commission review.
---------------------------------------------------------------------------

    48. New FPA section 216 (siting of interstate electric transmission 
facilities) gives the Commission certain backstop siting authority for 
transmission facilities when the Secretary of Energy designates a 
geographic area experiencing electric transmission capacity constraints 
or congestion that adversely affects consumers as a National Interest 
Electric Transmission Corridor. New FPA section 219(b)(4)(B) requires 
that the Commission allow recovery of all prudently incurred costs 
related to infrastructure development pursuant to new section 216. 
Proposed new section 35.35(g) allows for recovery of such prudently 
incurred costs.

E. Commission Reporting Requirement

    49. To provide a basis for determining the effectiveness of the 
proposed rules and to provide the Commission with an accurate 
assessment of the state of the industry with respect to transmission 
investment, proposed section 35.35(h) would require that jurisdictional 
public utilities provide information annually on their current and 
projected transmission investment activity. This information would be 
reported to the Commission on a proposed new form which would consist 
of a basic spreadsheet. For purposes of this NOPR, the proposed form is 
designated as ``Form X.'' It is an appendix to this NOPR.

F. Proposal To Remove 18 CFR 35.34(e) Concerning Innovative 
Transmission Rate Treatments for RTOs

    50. Section 35.34(e) of the Commission's regulations provides that 
the Commission will consider authorizing certain innovative 
transmission rate treatments for an approved RTO, including: A 
transmission rate moratorium; innovative treatment of rates of return; 
non-traditional depreciation schedules for new transmission investment; 
transmission rates based on levelized recovery of capital costs; 
transmission rates that combine elements of incremental cost pricing 
for new transmission facilities with an embedded-cost access fee for 
existing transmission facilities; and performance-based transmission 
rates.
    51. Unless otherwise ordered by the Commission, the authorization 
for RTOs to include innovative rate treatments in their rates expired 
after January 1, 2005, with respect to transmission rate moratoriums 
and rates of return that do not vary with capital structure.\42\
---------------------------------------------------------------------------

    \42\ See 18 CFR 35.34(e)(4) (2005).
---------------------------------------------------------------------------

    52. In view of section 219's mandate to provide incentives to the 
entities identified therein and in order to avoid confusion that could 
arise from potential conflicts between innovative rate treatments 
available under section 35.34(e) and the proposed incentives discussed 
in this proposed rule, the Commission proposes to remove section 
35.34(e) from the regulations.

G. Other Options

    53. To fully meet the requirements of section 219, the Commission 
must consider all incentives that will encourage capital spending that 
reduces congestion and ensures reliability, including incentives that 
have not been fully evaluated by the Commission, or may require 
additional modifications to past Commission policy. Accordingly, the 
Commission is proposing that eligible incentives not be limited to the 
list of proposed incentives, but also include any potential incentives 
proposed by public utilities and ultimately approved by the Commission 
that are determined to be just and reasonable, and not unduly 
discriminatory or preferential. To facilitate comments on the full 
range of eligible incentives, we identify several potential incentives 
and their applicability to FPA section 219. We request comments on 
these potential

[[Page 71416]]

incentives and invite commenters to propose any other potential 
incentives.
1. Single Issue Ratemaking
    54. We recognize that transmission pricing issues are some of the 
most difficult issues facing the industry and that the Commission's 
policy of not allowing selective adjustments to a cost-of-service may 
serve as a disincentive to transmission investment.\43\ Certain 
applicants for incentive rate-making treatment will be making 
investments potentially affecting currently effective transmission 
rates on file at the Commission. Potential applicants may consider the 
time requirements and the uncertainties associated with rate 
proceedings that encompass their entire transmission systems to be 
disincentives to making incentive filings, as specified in this NOPR. 
To ensure that the approval process for incentive treatment is as 
streamlined as possible, thereby ensuring timely infrastructure 
investments, the Commission is willing to consider incentive filings 
that propose rates applicable only to the new transmission project.\44\ 
Such an incentive would be applicable to both Transcos and traditional 
public utilities. We invite comments on this option.
---------------------------------------------------------------------------

    \43\ See, e.g., City of Westerville, Ohio v. Columbus Southern 
Power Co., 111 FERC ] 61,307 at P 18 & n.11 (2005).
    \44\ See Removing Obstacles, supra note 20, for one type of 
approach utilizing a limited section 205 filing.
---------------------------------------------------------------------------

2. Acquisition Premiums for Transco Creation
    55. The Commission has historically allowed acquisition adjustments 
(the premium paid above net book value) in rates only upon a specific 
showing of ratepayer benefit.\45\ However, given the positive 
contributions of transcos on transmission investment noted above, it 
may be appropriate to adopt a new policy regarding the recovery in 
rates of an acquisition premium for purchases of transmission 
facilities by a transco.\46\ We request comments on whether the 
Commission should make a generic determination that general benefits 
would accrue to ratepayers as a result of transco formation. We also 
seek comment on whether any change in the acquisition premium/ratepayer 
benefits review at the Federal level would risk increased resistance to 
such acquisitions at the state level. And, we seek comment on whether 
there are other mechanisms that the Commission could institute to 
provide regulatory certainty of the recovery of the acquisition premium 
both through retail as well as wholesale rates. Also, we seek comment 
on what measure the Commission might use in evaluating the 
appropriateness of such premiums as measured against, for example, the 
size of the premium, the location of the assets, the level of 
independence of the transco, and other relevant factors.
---------------------------------------------------------------------------

    \45\ See, e.g., UtiliCorp United Inc. and Centel Corp., 56 FERC 
] 61,031 at 61,120 & nn. 26-28, reh'g denied, 56 FERC ] 61,427 at 
62,528-29 (1991); Minnesota Power & Light Co., 43 FERC ] 61,104 at 
61,341-42, reh'g denied, 43 FERC ] 61,502 (1989), appeal dismissed, 
No. 88-2234 (8th Cir. Sept. 14, 1989). While the proposed ADIT 
incentive discussed above would adjust book value and therefore may 
be considered a premium on net book value, we note that the 
acquisition premium discussed here is separate and distinct from the 
proposed ADIT incentive.
    \46\ See April 22, 2005 Technical Conference, Docket No. AD05-5-
000, Tr. 44-45 (statement of Jon Larsen, Trimaran Capital Partners); 
Tr. 215 (statement of Christopher Leslie, MacQuarie Securities 
(USA), Inc.).
---------------------------------------------------------------------------

H. Other Issues for Comment

    56. In addition to seeking comments on the proposed rules and 
options contained herein, the Commission seeks comments on the 
following issues:
1. Performance-Based Ratemaking
    57. Because it is difficult to observe directly the level of effort 
a utility, transmission company, ISO or RTO expends on cutting costs 
and improving efficiency, performance-based regulation may provide a 
valuable tool to motivate transmission entities to maintain and operate 
their systems reliably and efficiently. In addition to incentive 
regulation proposed in this NOPR to encourage expansion of the electric 
transmission system generally, performance-based regulation would 
establish rewards for cost saving measures or specific performance 
(apart from transmission expansions). Common performance-based models 
include: (1) Price-cap regulation which places ceilings on the average 
price that a regulated company can charge, allowing the company rate 
flexibility;\47\ (2) targeted incentives, which give a regulated 
company incentives to improve specific components of its operation; and 
(3) benchmark incentives which establish rewards based on the 
performance of a reference group performing similar activities. The 
Commission seeks comment on specific methods to incent efficiency in 
the maintenance and operation of existing transmission facilities, 
including rate moratoria as well as sophisticated methods of 
performance based ratemaking based on specific performance metrics.
---------------------------------------------------------------------------

    \47\ The Commission has approved performance-based rates for oil 
pipelines based on this model. See Revisions To Oil Pipeline 
Regulation Pursuant to the Energy Policy Act of 1992, Order No. 561, 
FERC Stats. & Regs. ] 30,985 (1993), 58 FR 58753 (Nov. 4, 1993), 
order on reh'g, Order No. 561-A, FERC Stats. & Regs. ] 31,000 
(1994), 59 FR 40243 (Aug. 8, 1994), aff'd, Association of Oil 
Pipelines v. FERC, 83 F.3d 1424 (D.C. Cir. 1996).
---------------------------------------------------------------------------

    58. We seek comment on ways performance-based regulation might 
apply to for-profit transcos and traditional public utilities, and not-
for-profit public utility ISOs and RTOs. In the case of for-profit 
entities, we seek comment on specific transmission performance metrics 
and other relevant quality-of-service measures that should be subject 
to a performance standard. The Commission seeks comment on whether 
there should be mechanisms for sharing gains with ratepayers and, if 
so, what those mechanisms should be. In the case of not-for-profit 
public utility ISOs and RTOs, we seek comment on whether and how 
performance-based regulation developed for for-profit entities might be 
applied to not-for-profit entities. For example, we are interested in 
comments on whether and how executive performance measures might be 
relevant, and whether and how performance might be benchmarked to that 
of for-profit entities or other not-for-profit entities. Further, in 
the discussion of advanced technologies, infra, we seek comment on 
whether performance-based benchmarks for transmission costs would 
provide incentives for the deployment of advanced technologies.
2. The Role of Public Power
    59. Although the transmission infrastructure provisions of section 
219 apply only to public utilities, it is important that the Commission 
encourage needed transmission expansion from all sectors of the 
industry, including public power.\48\ Public power has demonstrated its 
ability to provide capital and build transmission capacity in some of 
the most critical transmission projects. For example, public power 
participates as an equity owner in the American Transmission transco, 
providing capital to fund transmission construction in a highly 
congested market. In addition to equity ownership, public power 
entities have shown that they can participate in, and benefit from, 
grid expansion opportunities as counterparties to long-term contracts 
such as the long-term commitment to purchase capacity from transmission 
projects that are needed to allow such projects to go forward. The Long 
Island Power Authority's (LIPA)

[[Page 71417]]

success in the Cross Sound Cable project's open season resulted in LIPA 
securing long-term rights to schedule power between nodes in two RTOs. 
LIPA also obtained rights for 20 years to all 660 megawatts on the 
Neptune merchant transmission project, a 67-mile-long cable capable of 
transporting electricity to Long Island, and in conjunction with the 
Cross Sound Cable between New Haven, Connecticut, and Shoreham, will, 
according to LIPA, open up an energy corridor from the Mid-Atlantic 
states through Long Island into New England and Canada.\49\
---------------------------------------------------------------------------

    \48\ The term ``public power'' as used in this NOPR refers to 
such traditional entities as municipal and cooperatively owned 
utilities, state power authorities, Federal power marketing 
administrations and power authorities, and others that do not fall 
within the Commission's FPA sections 205 and 206 ratemaking 
jurisdiction as public utilities.
    \49\ See LIPA's description at http://www.lipower.org/projects/neptune.html.
---------------------------------------------------------------------------

    60. Another option is for public power to participate in specific 
transmission projects along with developers with other business models. 
For example, Western Area Power Administration helped the Path 15 
project to move forward by serving as project manager, acquiring needed 
land rights, and owning the transmission line and the land. When public 
power entities voluntarily participate in grid investments with 
entities that are under the Commission's rate jurisdiction, those non-
jurisdictional public power entities can benefit from the rate policies 
described in this NOPR that provide for improved certainty and possibly 
enhanced revenues.
    61. New forms of public power entities may also be formed to 
address infrastructure challenges. For example, the western states 
spearheading the development of the Frontier transmission line project 
(Frontier Line) are identifying potential business models to complete 
the project. Participants in the planning of the Frontier Line are 
looking to the Commission to, among other things, provide the necessary 
certainty to attract investment to this type of project,\50\ and 
incentives in this proposed rule may encourage interest in this type of 
regional partnership, which involve both public and private entities 
across several states.
---------------------------------------------------------------------------

    \50\ See April 22, 2005 Technical Conference, Tr. 166 (statement 
of Joe Desmond, Deputy Secretary of Energy for the State of 
California).
---------------------------------------------------------------------------

    62. A consortium approach to building new transmission may also 
provide an avenue for public power to participate in new transmission 
projects. Under a consortium approach, as described by PJM,\51\ the RTO 
planning process becomes the platform to facilitate development of 
transmission business solutions--solutions in which all parties can 
participate. For example, should public power wish to lend its access 
to lower cost financing to help fund such a project, the planning 
process would become the forum for such discussions.
---------------------------------------------------------------------------

    \51\ See April 22, 2005 Technical Conference, Tr. 75-76, Tr. 
123-124 (statement of Audrey Zibelman, PJM Interconnection); 
Supplemental Comments of PJM Interconnection at p. 4 (submitted May 
2, 2005, Docket No. PL03-1-000).
---------------------------------------------------------------------------

    63. Given the importance of public power participation and the 
requirements of section 219, we request comments on what actions the 
Commission should take in this rulemaking to encourage public power 
participation in new transmission projects. For example, would the 
consortium approach help to promote expansion of the transmission grid? 
If so, should consortia receive incentives similar to those proposed 
for Transcos, and what, if any, additional incentives could the 
Commission provide to encourage such consortia?
3. Advanced Technology
    64. We also want to encourage the use of advanced technology in new 
transmission projects.\52\ Advanced transmission technologies are 
defined in section 1223 of EPAct 2005 to be technologies that increase 
the capacity, efficiency, or reliability of an existing or new 
transmission facility, including:
---------------------------------------------------------------------------

    \52\ New FPA section 219(b)(3), added by EPAct 2005, requires 
that the rule established pursuant to section 219 ``encourage 
deployment of transmission technologies and other measures to 
increase the capacity and efficiency of existing transmission 
facilities and improve the operation of the facilities.''
---------------------------------------------------------------------------

    (1) High-temperature lines (including superconducting cables);
    (2) Underground cables;
    (3) Advanced conductor technology (including advanced composite 
conductors, high temperature low-sag conductors, and fiber optic 
temperature sensing conductors);
    (4) High-capacity ceramic electric wire, connectors, and 
insulators;
    (5) Optimized transmission line configurations (including multiple 
phased transmission lines);
    (6) Modular equipment;
    (7) Wireless power transmission;
    (8) Ultra-high voltage lines;
    (9) High-voltage DC technology;
    (10) Flexible AC transmission systems;
    (11) Energy storage devices (including pumped hydro, compressed 
air, superconducting magnetic energy storage, flywheels, and 
batteries);
    (12) Controllable load;
    (13) Distributed generation (including PV, fuel cells, and 
microturbines);
    (14) Enhanced power device monitoring;
    (15) Direct system state sensors;
    (16) Fiber optic technologies;
    (17) Power electronics and related software (including real time 
monitoring and analytical software);
    (18) Mobile transformers and mobile substations; and
    (19) Any other technologies the Commission considers appropriate.
    65. Generally, we expect that the proposed incentives discussed in 
this NOPR, including the ROE-based incentives, will stimulate 
investment in new transmission facilities, which will, in turn, provide 
opportunities for the deployment of innovative technologies for those 
new transmission facilities. Consequently, providing the proposed 
incentives will fulfill the requirement of section 219(b)(3) to 
encourage deployment of transmission technologies and other measures to 
increase the capacity and efficiency of existing transmission 
facilities and improve the operation of facilities. We ask for comments 
on whether, in applications for incentive-based treatment, we should 
require a technology statement. This technology statement could, for 
example, describe what advanced transmission technologies were 
considered and, if those technologies were not employed, why not. We 
also seek comment on any other incentives that the Commission could 
offer to fulfill the goals of section 219(b)(3) regarding transmission 
technologies.
    66. We seek comment on whether performance-based benchmarks for 
transmission costs would provide incentives for the deployment of 
advanced technologies. In this risk-sharing approach, the project 
sponsor would be allowed to recover costs up to a benchmark level and 
ratepayers would be protected from costs above the benchmark level. If 
the new technology is adopted and fails to live up to expectations, how 
are those costs shared with ratepayers? And, if the new technology is 
successful, how are the gains shared with ratepayers?
    67. In addition to the comments invited above, the Commission 
welcomes comments on additional provisions that commenters believe 
would accomplish the transmission infrastructure objectives of the Act.

IV. Information Collection Statement

    68. The Office of Management and Budget (OMB) regulations require 
approval of certain information collection requirements imposed by 
agency rules.\53\ Upon approval of a collection(s) of information, OMB 
will assign an OMB control number and an expiration date. Respondents 
subject to

[[Page 71418]]

the filing requirements of this rule will not be penalized for failing 
to respond to these collections of information unless the collections 
of information display a valid OMB control number. The NOPR amends the 
Commission's regulations to implement the statutory provisions of 
section 1241 of EPAct 2005. The Act directs the Commission to establish 
incentive-based (including performance-based) rate treatments for the 
transmission of electric energy in interstate commerce by public 
utilities in order to benefit consumers by ensuring reliability and 
reducing the cost of delivered power by relieving transmission 
congestion. Entities seeking to build new transmission facilities must 
file under part 35 of the Commission's regulations, an application 
describing how the entity will bring benefits to the grid. The 
information provided for under part 35 is identified as FERC-516.
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    \53\ 5 CFR 1320.13 (2005).
---------------------------------------------------------------------------

    69. The Commission is submitting these reporting requirements to 
OMB for its review and approval under section 3507(d) of the Paperwork 
Reduction Act.\54\ Comments are solicited on the Commission's need for 
this information, whether the information will have practical utility, 
the accuracy of provided burden estimates, ways to enhance the quality, 
utility, and clarity of the information to be collected, and any 
suggested methods for minimizing the respondent's burden, including the 
use of automated information techniques.
    Burden Estimate: The Public Reporting burden for the requirements 
contained in the NOPR is as follows:

----------------------------------------------------------------------------------------------------------------
                                                     Number of       Number of       Hours per     Total annual
                 Data collection                    respondents      responses       response          hours
----------------------------------------------------------------------------------------------------------------
 FERC-516
    Transco.....................................              30               1             296           8,880
    Traditional Public Utilities................             200               1             211          42,200
-------------------------------------------------
        Totals..................................             230               1             222          51,080
----------------------------------------------------------------------------------------------------------------

    Total Annual Hours for Collection: (Reporting + recordkeeping, (if 
appropriate)= 51,080 hours.
    Information Collection Costs: The Commission seeks comments on the 
costs to comply with these requirements. It has projected the average 
annualized cost to be the total annual hours of 51,080 times $120 = 
$6,129,600. (The hourly rate was determined by taking the median annual 
salary from Bureau of Labor Statistics, Department of Labor 
Occupational Outlook Handbook. The figures reported by BLS are for 2002 
and added to them was an inflation factor of 4.73 percent for the 
period January 2003 through December 2004.)
    Title: FERC-516 ``Electric Rate Schedule Filings.''
    Action: Proposed Collections.
    OMB Control No: 1902-0096.
    Respondents: Business or other for profit.
    Frequency of Responses: On occasion for applicants and annually for 
transmission investment report.
    Necessity of the Information: This proposed rule, if adopted, would 
implement the Congressional mandate of the Energy Policy Act of 2005 to 
establish incentive-based (including performance-based) rate treatments 
for the transmission of electric energy in interstate commerce. This 
mandate addresses an identified need to encourage construction of 
transmission infrastructure and encourage investment. Sufficient 
supplies of energy and a reliable way to transport those supplies are 
necessary to assure reliable energy availability and to enable 
competitive markets. Without sufficient delivery infrastructure, some 
suppliers will not be able to enter the market, customer choices will 
be limited, and prices may be needlessly higher or volatile. The 
implementation of incentive and performance-based rate treatments 
support the Commission's mandate to support investments in transmission 
capacity to reduce the cost of delivered power by reducing congestion.
    Internal review: The Commission has reviewed the requirements 
pertaining to public utilities and transmission companies and 
determined the proposed requirements are necessary to meet the 
statutory provisions of the Energy Policy Act of 2005.
    70. These requirements conform to the Commission's plan for 
efficient information collection, communication and management within 
the energy industry. The Commission has assured itself, by means of 
internal review, that there is specific, objective support for the 
burden estimates associated with the information requirements.
    71. Interested persons may obtain information on the reporting 
requirements by contacting: Federal Energy Regulatory Commission, 888 
First Street, NE., Washington, DC 20426 [Attention: Michael Miller, 
Office of the Executive Director, Phone: (202) 502-8415, fax: (202) 
273-0873, e-mail: [email protected]]. Comments on the 
requirements of the proposed rule may also be sent to the Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Washington, DC 20503 [Attention: Desk Officer for the Federal Energy 
Regulatory Commission].

V. Environmental Analysis

    72. The Commission is required to prepare an Environmental 
Assessment or an Environmental Impact Statement for any action that may 
have a significant adverse effect on the human environment.\55\ The 
Commission has categorically excluded certain actions from these 
requirements as not having a significant effect on the human 
environment.\56\ The actions proposed here fall within categorical 
exclusions in the Commission's regulations for promulgation of rules 
that are clarifying, corrective, or procedural, and for electric rate 
filings submitted by public utilities, the establishment of just and 
reasonable rates, and confirmation, approval and disapproval of rate 
filings submitted by Federal power marketing agencies.\57\ Therefore, 
an environmental assessment is unnecessary and has not been prepared 
for this NOPR.
---------------------------------------------------------------------------

    \54\ 44 U.S.C. 3507(d) (2000).
    \55\ Order No. 486, Regulations Implementing the National 
Environmental Policy Act, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & 
Regs., Regulations Preamble 1986-1990 ] 30,783 (1987).
    \56\ 18 CFR 380.4 (2005).
    \57\ 18 CFR 380.4(a)(2)(ii) and 380.4(a)(15).

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[[Page 71419]]

VI. Regulatory Flexibility Act Certification

    73. The Regulatory Flexibility Act (RFA) \58\ requires that a 
rulemaking contain either a description and analysis of the effect that 
the proposed rule will have on small entities or a certification that 
the rule will not have a significant economic impact on a substantial 
number of small entities. However, the RFA does not define 
``significant'' or ``substantial'' instead leaving it up to any agency 
to determine the impacts of its regulations on small entities. The 
proposed regulations would not have a significant adverse impact on a 
substantial number of small entities. The proposed rule applies only to 
entities that own, control, or operate facilities for transmitting 
electric energy in interstate commerce and not to electric utilities 
per se. Small entities that believe this proposed rule will have a 
significant impact on them may apply to the Commission for waivers.
---------------------------------------------------------------------------

    \58\ 5 U.S.C. 601-612 (2000).
---------------------------------------------------------------------------

VII. Comment Procedures

    74. The Commission invites interested persons to submit comments on 
the matters and issues proposed in this notice to be adopted, including 
any related matters or alternative proposals that commenters may wish 
to discuss. Comments are due on or before January 11, 2006. Comments 
must refer to Docket No. RM06-4-000, and must include the commenter's 
name, the organization they represent, if applicable, and their address 
in their comments. Comments may be filed either in electronic or paper 
format.
    75. Comments may be filed electronically via the eFiling link on 
the Commission's Web site at http://www.ferc.gov. The Commission 
accepts most standard word processing formats and commenters may attach 
additional files with supporting information in certain other file 
formats. Commenters filing electronically do not need to make a paper 
filing. Commenters that are not able to file comments electronically 
must send an original and 14 copies of their comments to: Federal 
Energy Regulatory Commission, Office of the Secretary, 888 First Street 
NE., Washington, DC 20426.
    76. All comments will be placed in the Commission's public files 
and may be viewed, printed, or downloaded remotely as described in the 
Document Availability section below. Commenters on this proposal are 
not required to serve copies of their comments on other commenters.

VIII. Document Availability

    77. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through FERC's Home Page (http://www.ferc.gov) and in FERC's 
Public Reference Room during normal business hours (8:30 a.m. to 5 p.m. 
Eastern time) at 888 First Street, NE., Room 2A, Washington, DC 20426.
    78. From FERC's Home Page on the Internet, this information is 
available in the Commission's document management system, eLibrary. The 
full text of this document is available on eLibrary in PDF and 
Microsoft Word format for viewing, printing, and/or downloading. To 
access this document in eLibrary, type the docket number excluding the 
last three digits of this document in the docket number field.
    79. User assistance is available for eLibrary and the FERC's 
website during normal business hours. For assistance, please contact 
the Commission's Online Support at 1-866-208-3676 (toll free) or TTY 
(202) 502-8659, or e-mail at [email protected]. You may also 
contact the Public Reference Room at (202) 502-8371 or e-mail at 
[email protected].

List of Subjects in 18 CFR Part 35

    Electric power rates, Electric utilities, Reporting and 
recordkeeping requirements.

    By direction of the Commission.
Magalie R. Salas,
Secretary.
    In consideration of the foregoing, the Commission proposes to amend 
part 35 of Chapter I, Title 18, Code of Federal Regulations, as 
follows:

PART 35--FILING OF RATE SCHEDULES AND TARIFFS

    1. The authority citation for part 35 continues to read as follows:

    Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42 
U.S.C. 7101-7352.

Subpart F--Procedures and Requirements Regarding Regional 
Transmission Organizations


Sec.  35.34  [Amended]

    2. In Sec.  35.34, remove and reserve paragraph (e).
    3. A new subpart G is added to read as follows:

Subpart G--Transmission Infrastructure Investment Provisions


Sec.  35.35  Transmission infrastructure investment.

    (a) Purpose. This section establishes rules for incentive-based 
(including performance-based) rate treatments for transmission of 
electric energy in interstate commerce by public utilities for the 
purpose of benefiting consumers by ensuring reliability and reducing 
the cost of delivered power by reducing transmission congestion.
    (b) Definitions.
    (1) Transco means a stand-alone transmission company that has been 
approved by the Commission and that sells transmission services at 
wholesale and/or on an unbundled retail basis, regardless of whether it 
is affiliated with another public utility.
    (2) Transmission Organization means a Regional Transmission 
Organization, Independent System Operator, independent transmission 
provider, or other transmission organization finally approved by the 
Commission for the operation of transmission facilities.
    (c) General rule. All rates approved under the rules of this 
section, including any revisions to the rules, are subject to the 
filing requirements of sections 205 and 206 of the Federal Power Act 
and to the substantive requirements of sections 205 and 206 of the 
Federal Power Act that all rates, charges, terms and conditions be just 
and reasonable and not unduly discriminatory or preferential.
    (d) Incentive-based rate treatments for transmission infrastructure 
investment. The Commission will authorize any incentive-based rate 
treatment, as discussed in this paragraph (d), for transmission 
infrastructure investment, provided that the proposed incentive-based 
rate treatment is just and reasonable and not unduly discriminatory or 
preferential. An applicant's request, to be made in a filing pursuant 
to section 205 of the Federal Power Act, or in a petition for a 
declaratory order that precedes a filing pursuant to section 205, must 
include a detailed explanation of how the proposed rate treatment 
justifies incentive-based (or performance-based) treatment based on the 
purposes and requirements of this section. For purposes of this 
paragraph (d), incentive-based rate treatment means any of the 
following:
    (1) The Commission will authorize the following incentive-based 
rate treatments for investment by public utilities, including Transcos, 
in new transmission capacity that reduces the cost of delivered power 
by reducing

[[Page 71420]]

transmission congestion and ensures reliability, as demonstrated in an 
application to the Commission:
    (i) A rate of return on equity sufficient to attract new investment 
in transmission facilities;
    (ii) 100 percent of prudently incurred Construction Work in 
Progress (CWIP) in rate base;
    (iii) Recovery of prudently incurred pre-commercial operations 
costs;
    (iv) Hypothetical capital structure;
    (v) Accelerated regulatory book depreciation;
    (vi) Recovery of 100 percent of prudently incurred costs of 
transmission facilities that are cancelled or abandoned due to factors 
beyond the control of the public utility;
    (vii) Deferred cost recovery; and
    (viii) Any other incentives approved by the Commission, pursuant to 
the requirements of this paragraph, that are determined to be just and 
reasonable and not unduly discriminatory or preferential.
    (2) In addition to the incentives in paragraph (d)(1) of this 
section, the Commission will authorize the following incentive-based 
rate treatments for Transcos, provided that the proposed incentive-
based rate treatment is just and reasonable and not unduly 
discriminatory or preferential:
    (i) A return on equity that both encourages Transco formation and 
is sufficient to attract investment; and
    (ii) An adjustment to the book value of transmission assets being 
sold to a transco to remove the disincentive associated with the impact 
of accelerated depreciation on federal capital gains tax liabilities.
    (e) Incentives for joining a Transmission Organization. The 
Commission will authorize an incentive-based rate treatment, as 
discussed in this paragraph (e), for public utilities that join a 
Transmission Organization, provided that the proposed incentive-based 
rate treatment is just and reasonable and not unduly discriminatory or 
preferential. Applicants for the incentive-based rate treatment must 
make a filing with the Commission under section 205 of the Federal 
Power Act. For purposes of this paragraph (e), an incentive-based rate 
treatment means a return on equity that is higher than the return on 
equity the Commission might otherwise allow if the public utility did 
not join a Transmission Organization. The Commission will also permit 
public utilities that join a Transmission Organization the ability to 
recover prudently incurred costs associated with joining the 
Transmission Organization, either through transmission rates charged by 
public utilities or through transmission rates charged by the 
Transmission Organization that provides services to the public 
utilities.
    (f) Approval of prudently-incurred costs. The Commission will 
approve recovery of prudently-incurred costs necessary to comply with 
the mandatory reliability standards pursuant to section 215 of the 
Federal Power Act, provided that the proposed rates are just and 
reasonable and not unduly discriminatory or preferential.
    (g) Approval of prudently incurred costs related to transmission 
infrastructure development. The Commission will approve recovery of 
prudently-incurred costs related to transmission infrastructure 
development pursuant to section 216 of the Federal Power Act, provided 
that the proposed rates are just and reasonable and not unduly 
discriminatory or preferential.
    (h) Reporting transmission investment activity to the Commission. 
Jurisdictional public utilities are required to report annually to the 
Commission no later than April 18, 2007 and, in succeeding years, on 
the date on which Form 1 information is due, the following information 
on Form X:
    (i) In dollar terms, actual transmission investment for the most 
recent calendar year, and planned investments for the next five years.
    (ii) For all current and planned investments over the next five 
years, a project by project listing that specifies for each project the 
expected completion date, percentage completion as of the date of 
filing, and reasons for delays.

BILLING CODE 6717-01-P

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[GRAPHIC] [TIFF OMITTED] TP29NO05.000

[FR Doc. 05-23404 Filed 11-28-05; 8:45 am]
BILLING CODE 6717-01-C