When economic reformers in the old Soviet Union searched for a metaphor to describe their move to a market economy, they a spoke of a horseman jumping a ditch. The true test of a strategy was that...
rejected a proposed 11.7 percent rate and set a 9.68-percent ROE for transmission assets for Southern California Edison, and which is eliciting protests from Edison Electric Institute and others that if the FERC insists on low returns for transmission, its RTO efforts are doomed to failure.)
JOSKOW OFFERS A DIFFERENT TAKE ON ROE. He notes that transmission revenue represents only about 4.5 mills per kilowatt-hour (about a half a cent), or about 6 percent of the average customer's bill. And ROE on transmission investment (net of taxes) is less than 1 mill.
"Regulators," Joskow notes, "will not be doing consumers any favor at all if the small price reduction they receive in the short run as a result of cutting a couple of points off the expected rate of return ¼ destroys the transmission owner's incentives to invest."
But even if the FERC should cave and offer higher ROEs, as the industry wants, Joskow still warns against putting too much faith in ROE incentives as a way of enticing grid expansion:
"Indeed, proceeding under the assumption that, at the present time, 'the market' will provide needed transmission network enhancements is the road to ruin.
"There is abundant evidence that market forces are drawing tens of thousands of megawatts of new generating capacity into the system [but] there is not evidence that market forces are drawing ¼ entrepreneurial investments in new transmission capacity."
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