FERC's Hypothetical Capital Structure Incentive — Change is Afoot

On July 2, 2026, the Commissioners announced, through joint and separate statements accompanying a transmission incentives order, their intention to reconsider the evaluation and approval process for hypothetical capital structure incentive requests.¹ This decision follows a series of public statements over the past year² that highlighted "serious and respectful disagreement among the Commission"³ regarding the required level of support that needs to be put forward by the applicant and the manner in which an incentive capital structure should be assessed and granted by the Commission. The Commissioners increasingly agreed that the status quo approach is insufficient and that stronger justification and evaluation are necessary. Notably, six days earlier, Chairman Swett and Commissioner Rosner issued a near-identical joint statement with the June 26, 2026, Midcontinent Grid Solutions Wisconsin, LLC decision.⁴

The Commission has explained that the incentive assists the applicant with raising capital during the construction period of the project by providing regulatory certainty during a period when its actual debt and equity amounts are expected to vary. Additionally, the Commission has found that the incentive establishes certain financial principles for the applicant that incumbent transmission owners have in place, but which remain undetermined for nonincumbent transmission developers. According to the Commission, this helps level the playing field between nonincumbent and incumbent transmission developers in Order No. 1000 competitive solicitation processes. Most frequently, applicants request a hypothetical capital structure with 60% equity and 40% debt, which the Commission has commonly granted.

July 2, 2026 Commissioner Statements

In the joint statement accompanying the Grid Growth Ohio, LLC decision on July 2, 2026, the four Commissioners stated that "the time has likely come for the Commission to reconsider how it approaches hypothetical capital structure incentives" and that they plan on sharpening their evaluation of capital structure incentive requests.⁵ Commissioner Chang, a consistent critic of the status quo approach, issued a separate statement expressing her agreement with the need for change and her willingness to collaborate with her colleagues.⁶ In the joint statement the four Commissioners also outlined the reasons for pursuing reform, stating:

Notwithstanding these statements, it is important to note that the Commission granted Grid Growth Ohio, LLC's request for a 60% equity and 40% debt hypothetical capital structure incentive, with the Commissioners explaining in the joint statement that modifications to the Commission's current approach were not ripe for the instant order. Commissioner Chang dissented from the decision regarding this aspect.

The Lead-Up to These Statements

A likely turning point leading to this call for action was the Commission's 2025 Valley Link Transmission decision, which denied the applicant's incentive request for a 60% equity and 40% debt hypothetical capital structure and set the matter for hearing and settlement proceedings.⁸ The Commission determined that the applicant did not adequately support its specific proposed capital structure and raised concerns about potential cost impacts on ratepayers for the $3 billion project.⁹

However, the decision to reject the incentive capital structure was not unanimous. Commissioner Rosner dissented, arguing that the rejection was inconsistent with Commission precedent because the applicant's justification was similar to those previously approved. He cautioned against undermining regulatory certainty and opposed making policy changes without a fully developed record. Former Chairman Christie concurred in the decision to reject the incentive.

Indeed, following that rejection, the Commission granted several hypothetical capital structure requests in later decisions.¹⁰ Notably, these approvals were often accompanied by Commissioner statements concurring or dissenting with the decision. For instance, Commissioner Chang consistently dissented from granting the capital structure incentive.¹¹ Moreover, in one case, Commissioner LaCerte concurred but noted that the applicant's support only narrowly met the Commission's "low bar" for granting the incentive. He also recommended that the Commission consider reforms to its evaluation process for these requests.¹²

These developments indicated that the Commissioners were dissatisfied with the status quo approach, prompting them to state their intent to require stronger justification and evaluation for hypothetical capital structure incentives.

What May Be Next?

The form of the expected Commission action remains uncertain — a rulemaking, a policy statement, a paper hearing process, or another form. Commissioner See has indicated a preference for changes through a policy statement or other generic action.¹³ In terms of a new direction, Commissioner Chang has also proposed alternative capital structure models beyond the commonly used 60% equity and 40% debt structure.¹⁴ These alternatives included the use of the average capital structure of a proxy group of other similarly situated utilities or that of a region, or the use of the capital structure of the dominant utility in a transmission pricing zone.

We look forward to the Commission's future approach to evaluating incentive capital structures.

Footnotes

NewGen Strategies & Solutions is a utility regulatory and financial consulting firm serving electric, water, wastewater, and solid waste utilities nationwide.

© 2026 NewGen Strategies & Solutions, LLC. All rights reserved. This content is for informational purposes and does not constitute legal or financial advice.