On August 31, 2023, FERC approved Missouri River Energy Services (Missouri River) request for three transmission incentives for its investment in two, high-voltage transmission line segments which are part of the Big Stone Project, a MISO Multi-Value Project that is part of the portfolio of 18 Long Range Transmission Tranche 1 Projects included in MTEP 2021. Missouri River requested (1) a hypothetical capital structure of 50% equity and 50% debt (Hypothetical Capital Structure Incentive) for its investment in the Big Stone Project; (2) inclusion of 100% of prudently incurred Construction Work in Progress (CWIP) in rate base for the Big Stone Project (CWIP Incentive); and (3) recovery of 100% of prudently incurred costs in the Big Stone Project’s transmission facilities that are abandoned for reasons beyond Missouri River’s control (Abandoned Plant Incentive).
The Big Stone Project involves the construction of two high-voltage transmission line segments. The first segment is an approximately 95-105-mile, 345 kV line from the Big Stone South Substation in South Dakota owned by Otter Tail Power Company (Otter Tail) to the Alexandria Substation in Minnesota owned by Missouri River (Big Stone South-Alexandria segment). Missouri River states that the line will be on a new right-of-way and is expected to be constructed to facilitate a potential second 345 kV circuit on the same towers. Missouri River further states that both the Big Stone South and Alexandria Substations will need to be expanded to terminate the new line. The second segment of the Big Stone Project is a 345 kV line from the Alexandria Substation to the planned new Big Oaks Substation in Minnesota (Alexandria-Monticello segment). This line will be strung largely on existing double-circuit capable towers and will also require the acquisition of some new rights-of-way as the line approaches the Big Oaks Substation near the Mississippi River. Missouri River explains that the Alexandria Substation will also have to be expanded to terminate the Alexandria-Big Oaks line segment.
The Big Stone Project has an expected in-service date of June 1, 2030 with an estimated total cost of $573.5 million (in 2022 dollars), with Missouri River’s investment comprising approximately 50% at an estimated amount of $285.6 million. In addition to state and federal approvals, the Big Stone Project requires a certificate of need and route permit from the Minnesota Public Utility Commission and a facility permit from the South Dakota Public Utilities Commission.
The remainder of this blog covers the hypothetical capital structure request. Missouri River sought authorization to use a hypothetical capital structure of 50% equity and 50% debt for the life of the financing of the Big Stone Project. In support, Missouri River explained that, as a municipal joint action agency, Missouri River cannot issue stock and thus cannot raise equity capital through a stock offering to finance the Big Stone Project. Missouri River therefore contended that a hypothetical capital structure is needed to provide the returns necessary to achieve the financial metrics identified in the rate policy of Missouri River’s Board of Directors and to produce a debt service coverage ratio that is consistent with maintaining Missouri River’s existing Moody’s Aa2 credit rating. Missouri River explained that, without the Hypothetical Capital Structure Incentive, the debt service coverage ratio on the Big Stone Project would be below the range expected of a Moody’s Aa2-rated joint action agency and would put substantial downward pressure on Missouri River’s current credit rating. Missouri River further explained that the Hypothetical Capital Structure Incentive provides a return to reflect the higher risk and complexities of the Big Stone Project as the projected $285.6 million investment in the Big Stone Project will be the largest transmission investment ever made by Missouri River, representing 221% of Missouri River’s projected 2023 net transmission plant of $129.5 million and 48% of its total long-term debt. Missouri River also asserted that the Big Stone Project requires multiple permits and must be coordinated with multiple owners, which creates a more complex negotiating, decision-making, and implementation process; therefore, Missouri River maintained that, without the Hypothetical Capital Structure Incentive, “it would make more sense for Missouri River to invest in other more routine projects.” Finally, Missouri River argued that granting the Hypothetical Capital Structure Incentive will further the Commission’s policy goal of promoting public and cooperative power investment in transmission and is consistent with Commission precedent.
FERC granted Missouri River’s request for the Hypothetical Capital Structure, finding that Missouri River had demonstrated that the requested incentives are tailored to the risks and challenges faced by the Big Stone Project and that approval of the Hypothetical Capital Structure Incentive and CWIP Incentive will bolster Missouri River’s financial metrics, help ensure maintenance of its current credit rating, and enable its participation in the Big Stone Project. Further, FERC found that the requested hypothetical capital structure is within the range that the Commission has allowed for other entities reliant on non-equity financing.