In thinking about transmission pricing for a competitive electric industry, we should remember that the fundamental objective of competition is to increase economic efficiency. Improved economic...
he is: Is the grid really a monopoly? If so, how should the FERC respond? Efficiency takes a back seat to control of market power under a legal analysis. Choose the model - ISO or transco - by how well it deflects anticompetitive conduct and how easy it is to regulate. In fact, Koch acknowledges that while transcos may appear more market-friendly, the efforts involved in controlling them eventually may spur more bureaucracy.
"The transco model," says Koch, "can honestly be seen as furthering a strong national commitment to private ownership and control. ¼ Still, whereas the transco will be privately owned and operated, it will require an active role for government regulation and disappoint pure deregulation."
But I think I was most taken with Joskow's fresh approach. He asks a question I haven't heard much, if at all: Do RTOs help make consumers better off?
"Transmission regulatory reform," says Joskow, "should not be viewed primarily as a 'carrot' ¼ to entice reluctant utilities to form and participate in RTOs."
IN THE MIDWEST ISO, UTILITIES ARE FIGHTING with the FERC over the allowed return on equity. That fight provides a good example of what's at stake in the RTO docket and why Joskow thinks consumers are being overlooked.
A settlement a few months back between MISO and the FERC staff OK'd an ROE floor of 10.5 percent, with room to grow to 11.5 percent, but the MISO members say the higher figure still won't save them from revenue losses when the MISO tariff eliminates rate pancacking, and when they lose the higher returns earning on transmission assets through bundled retail rates approved by state PUCs.
In a brief filed Aug. 2 (Docket No. ER98-1438), the MISO utilities said Cinergy would lose $8 million a year (a one-third drop in transmission revenues) on joining the ISO. They offered testimony by José Delgado (vice president for electric system operations at Wisconsin Electric Power), showing how, under state PUC regulation of bundled retail rates, ROE averaged 12.7 percent for MISO members. He argued that 100 basis points (up to 11.5 percent) would boost transmission rates by only 4 cents per kilowatt-month, a mere fraction of the 74 cents saved by avoiding a pancacked charge from even the lowest-priced tariff for any MISO member, and thus certainly not burdensome on consumers.
Consultant Charles Olson (H. Zinder & Associates) argued further that if the FERC should insist on its discounted cash flow ROE method, with the two-stage procedure for factoring in short- and long-term dividend growth, without using a risk-premium method as a counterbalance, then at least the commission should select interstate gas pipelines as proxy companies for the MISO utilities. After all, the utilities would function much like transmission-only pipelines after ISO formation. Olson's method would yield a DCF-derived ROE of between 11.87 percent and 15.37 percent.
(Note: It was the staff's strict selection of electric utility proxy companies, and its refusal to consider using a risk-premium method, that led to the now-famous ruling of March 31 by administrative law judge Michel Levant (Docket ER97-2355) that