^th each year (Annual Update). “Attachments H-3D and H-3E of the PJM [Interconnection, L.L.C. (“PJM”) Open Access Transmission Tariff (“Tariff”)] sets forth Delmarva’s formula Rate template and protocol[].” Delmarva Power & Light Company, 160 FERC ¶ 61,102 (2017), at P 2. The formula rate template is typically submitted to FERC in the form of a Microsoft Xcel file, which serves as the company’s full disclosure of all applicable line item inputs allocated or directly assigned to each appropriate FERC account as required under FERC’s Uniform System of Accounts. Commission approval of Delmarva’s Annual Update authorizes the utility to recover its ATRR. The formula rate protocol is a governing document that typically lays out how the formula rate is calculated, the major components of the formula, how and when the Annual Update is to be filed and made publicly available, and how it may be challenged.

On January 18, 2017, DEMEC submitted a Formal Challenge to Delmarva’s 2016 Annual Update pursuant to Section 206 of the Federal Power Act (“FPA”), arguing three measures taken by Delmarva had a “significant impact” on its ATRR: (1)…“inclusion of discretionary Prepaid Pension Assets in rate base;” (2)…“directly assign[ing FERC] Account No. 454 (Rent from Electric Property) revenue credits to Transmission, instead of using a plant allocator;” and (3)…“use of the Commission-approved return on equity (“ROE”) inclusive of ROE adders in calculating its Allowance for Funds Used During Construction (“AFDUC”). Id., at P 7.

Inclusion of Discretionary Prepaid Pension Assets in Rate Base

First, DEMEC claimed that Delmarva’s inclusion of Prepaid Pension Assets is improper and by doing so, inflated its ATRR by approximately $1.5 million. Moreover, DEMEC avers that ratepayers should not be required to pay a return on company shareholders’ voluntary contributions. Delmarva responded to DEMEC’s claim and highlighted the important “difference between Generally Accepted Accounting Principles (“GAAP”) accounting standards and the requirements of the Employee Retirement Income Security Act (“ERISA”) and the Pension Protection Act of 2006, which impose higher pension funding obligations than Delmarva’s GAAP-based pension costs…” Id., at P 15. Furthermore, Delmarva keenly articulated that the contributions made as Prepaid Pension Assets earn a return that remains in the respective pension fund, thus benefiting ratepayers due to the overall reduction of the company’s annual pension expense. Id. As such, the utility’s management determined that the applicable contributions are necessary to comply with ERISA and the Pension Protection Act of 2006.

FERC rejected DEMEC’s claim on this issue as outside the scope of a Formal Challenge because such challenges “are limited to whether [the utility’s] costs are reasonable, prudent, and properly recorded, and whether the formula rate has been applied according to its terms.” Id., at P 19. The Commission deems DEMEC’s assertion that Delmarva’s Prepaid Pension Assets should be excluded from rate base, an “impermissible attack on the formula rate itself” and reminds DEMEC and future complainants that challenges to a utility’s formula rate are generally limited to whether the costs or inputs of such rate were prudently made. Id., at 20. FERC found that “pre-paying pension costs to ensure the security of employees’ pensions is a reasonable and prudent business decision” and thus passes the prudence test as articulated in New England Power Co., 31 FERC ¶ 61,047 (1985).

Directly Assigning Costs versus Using a Plant Allocator

The reason DEMEC challenged Delmarva’s measure of directly assigning costs to FERC Account No. 454 rather than utilizing a plant allocator or percentage ratio to allocate such costs, is because in Delmarva’s prior Annual Updates the company utilized a plant allocator to make such allocations. DEMEC argued that in accordance with Section.f.iii(d) of Delmarva’s formula rate protocol, Delmarva is “to provide notice of any changes in accounting from its previous Annual Update that affect inputs to the formula rate or the resulting charges under the formula rate” and seek FERC approval of such under Section 205 of the FPA. DEMEC’s Formal Challenge at 8-9. However, in its Answer, Delmarva explains that DEMEC is “confusing cost accounting with cost allocation” and that directly assigning line item costs to FERC Account No. 454 is actually a more accurate and precise measure of cost allocation compared to utilizing a plant allocator.

In a latter response, DEMEC persisted that Delmarva made an accounting change, citing to the Commission’s order in Transcon. Gas Pipe Line Corp., 106 FERC ¶ 61,299, at PP 190-192 and 203 (2004), for support that direct assignment and plant ratios utilized to allocate costs are manners “of accounting.” Delmarva refuted that interpretation.

With the final word on the issue, FERC found “Delmarva’s use of the direct assignment method” to allocate transmission-related costs to Account No. 454 “not an accounting change, but a change in the method used to functionalize revenues[,]” ruling that such change does not warrant Commission approval. Delmarva Power & Light Company, at P 31-32. Indeed, FERC prefers the direct assignment of transmission-related costs and revenues over the use of a plant allocator. Id., at 33.

ROE for Calculating AFUDC Rate

Allowance for funds used during construction (“AFUDC”) accounts are where a utility books and defers its financing costs of constructing transmission facilities before those facilities are placed into service. After such facilities are energized and placed into service, the utility may file pursuant to Section 205 to recover carrying charges inclusive of the utility’s FERC approved return on equity associated with the facilities.

Unapologetically, DEMEC actually argues that under Order No. 561 and 561-A, the ROE applied to Delmarva’s AFUDC accounts should be the cost of equity “allowed by the regulatory commission having primary rate jurisdiction” and that in this case, the Delaware Public Service Commission has primary rate jurisdiction over Delmarva’s Transmission related costs booked to its AFUDC accounts. See id., at P 35. In its Answer, Delmarva correctly argues that its FERC-approved ROE “is the correct input for calculating the AFUDC rate for” its FERC jurisdictional transmission facilities. (Emphasis added).

In its decision, the Commission asserted its jurisdiction over Delmarva’s transmission-related financing costs booked to its AFUDC accounts, finding the use of the FERC allowed ROE approved for all associated costs and revenues is just and reasonable. FERC reminded DEMEC of its issuance of Order No. 888, which unbundled transmission and distribution assets, and separate jurisdictional cost recovery pertaining thereto.

50 Basis Point Adder for RTO Participation

Pursuant to FERC Order No. 679 and Section 219 of the FPA, a utility is authorized to earn a 50 basis point adder on its allowed return on equity if the transmission-related costs and revenues originate from facilities placed under the operational control of an independent system operator (“ISO”) or regional transmission organization (“RTO”). The purpose of such incentives is to encourage utilities to construct and make timely investments in electric transmission. In its Formal Challenge, DEMEC claimed Delmarva cannot recover the 50 basis point adder on transmission-related financing costs booked to its AFUDC accounts because the applicable transmission facilities have not yet been placed under the operational control of PJM. In response, Delmarva identifies how DEMEC’s claim contravenes Commission precedent in Northern Pass Transmission LLC, where FERC “approved Northern Pass’s Transmission Service Agreement inclusive of the 50 basis point adder for RTO membership reflected in the requested ROE prior to and during construction.” 136 FERC ¶ 61,090, at P 5 and P 1 (2011). DEMEC fired back in an attempt to distinguish Northern Pass Transmission LLC from the current case, arguing that unlike Northern Pass Transmission LLC, Delmarva has not filed for Commission approval to recover the 50 basis point adder.

The Commission found Delmarva’s inclusion of the 50 basis point adder as applied to its AFUDC accounts just and reasonable. In helpful and clarifying precedent FERC determined that “[t]he RTO adder applies to membership in an RTO, not to specific projects or to the timing of cost incurrence. For example, the RTO incentive applies to all project investment recovered by the utility in rates after joining an RTO, including the remaining undepreciated costs of facilities built before the utility joined the RTO. We see no reason to exclude the RTO adder to calculate AFUDC related to facilities under construction when the utility is part of the RTO.” Delmarva Power & Light Company, at P 50.

Conclusion

A challenger’s burden of proof to challenge the inputs of a utility’s formula rate is extraordinarily high. The most effective means of meeting the underlying burden is by creating “serious doubt” as to the prudence of the utility’s expenditure. New England Power Co. In the underlying proceeding, DEMEC failed to plead a prima facie case establishing serious doubt. (Emphasis added). Accordingly, FERC denied DEMEC’s Formal Challenge and request for hearing as to the prudency of Delmarva’s formula rate.

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