July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
The Federal Energy Regulatory Commission (FERC) set in motion a new round of restructuring for the U.S. electric power industry when it issued its latest Notice of Proposed Rulemaking (NOPR). The "Open Access" NOPR is a blueprint for dramatic changes, including a mandate for pro forma transmission tariffs, strict new standards to enforce "comparability of service" between transmission owners and third-party users, and rules to govern the recovery of various types of "stranded investment" through transmission rates.
The proposed rule stipulates that pro forma transmission tariffs based on FERC Form 1 data will go into effect for all utilities 61 days after the ruling, and that stranded investment charges will be bundled into transmission rates for customers that seek to purchase power outside the system. The latter stipulation will greatly complicate the calculation of transmission tariffs and is sure to be disputed by power marketers, wholesale customers, and others who seek to escape high rates.
In 1993, utilities wheeled more than 347,972 gigawatt-hours (Gwh) of electricity, up 29.1 percent from 1988. The increase in wheeling is due in large part to a significantly larger bulk-power market. Since 1980, bulk-power purchases by investor-owned utilities (IOUs) have more than doubled. This upward trend in wheeling is certain to continue as competition increases and utilities open their transmission systems by offering comparable service. The ruling will also affect utility returns on transmission investments. At the end of 1993, utilities had invested over $80 billion in transmission plant (em 12 percent of total utility plant investment. For 30 IOUs, transmission assets represent more than 20 percent of total electric utility plant.
To examine the impact of this ruling on wheeling tariffs, Resource Data International recently conducted an analysis of utilities in the Western Systems Coordinating Council (WSCC). First, we calculated pro forma transmission tariffs for each utility, based on 1993 FERC Form 1 data, to determine the tariff for firm point-to-point transmission service. We also calculated potential stranded investment and liabilities in four different categories: generation assets, regulatory assets, purchased-power contracts, and coal contracts.
PacifiCorp and Pacific Gas & Electric (PG&E) stand as examples of the potential differences in transmission tariffs for high- and low-cost electricity providers. (They also represent 20 percent of all electricity wheeled in the WSCC in 1993.) According to our estimates, PG&E will charge $2.20 per kilowatt-month (Kw-month) for firm transmission capacity; PacifiCorp will charge $2.94/Kw-month (em 34 percent higher than PG&E's cost. Most of the difference in costs can be traced to PacifiCorp's greater investment in transmission plant per kilowatt of demand.
The cost differential between these two utilities changes dramatically if a stranded investment charge is added. Our analysis reveals that while PacifiCorp is unlikely to face any stranded investment, PG&E might have more than $7 billion dollars in stranded investment and liabilities. The majority of this stranded investment reflects long-term purchased-power contracts and deferred regulatory assets. If PG&E's entire stranded investment were put into transmission charges over a 20-year period, their firm point-to-point charge would nearly double, to $4.41/Kw-month. When a stranded investment charge is included in the tariff,