With budget battles heating up in Washington, Congress and the Obama administration are squaring off to debate energy policy legislation. While Democratic leadership favors a clean energy standard...
of material off the record.
"It takes a real genius," he added, "to cultivate ignorance without cultivating incompetence."
STALON'S POINT WAS REAL: Should the commissioners at the FERC cultivate ignorance of what investors will think about the new RTOs? Or should they anticipate investor reaction and devise incentives to play to that audience?
That's the question the commission now faces in Docket ER97-2355, in which it must set an allowed rate of return on common equity (ROE) for electric transmission services provided for the California Independent System Operator (ISO) by the transmission owner, Southern California Edison Co.
That case has attracted interest from trade associations, the Midwest ISO and even some members of Congress. Last March, administrative law judge Michel Levant denied Edison's proposed 11.7 percent ROE and instead set an ROE of 9.68 percent, rejecting calls to use interstate gas pipelines as a proxy group for comparison purposes, or to counterbalance the conservative discounted cash flow (DCF) method with a risk premium analysis. Defending Levant are the California Public Utilities Commission, the state's Electricity Oversight Board, Enron Power Marketing, the Sacramento Municipal Utility District and others. On Dec. 1, Edison reiterated its claim for an ROE of at least 11.6 percent, but some company affidavits urged a rate as high as 12.6 percent. Earlier, on Nov. 1, FERC staff witness Tim Kinsey updated his DCF testimony, appearing to support a rate as high as 10.31 percent.
The case is peculiar. In theory, it's an adversarial rate case, to be decided strictly on the evidence. How has Edison fared since it transferred grid assets to the ISO? Has it suffered financial injury? Is Edison in danger of not recovering its stranded costs? Did Levant's order lead Wall Street to downgrade credit ratings or recommend against buying stock in Edison International (EIX), the utility's parent company? Yet on Sept. 17, the FERC invited the electric industry to think outside the box and offer additional theories through a "paper" hearing outside of trial-type evidentiary hearing procedures:
"In light of the possible risks associated with the transfer of operational control of facilities to the California ISO, and the potential increase ¼ in the number of public utilities that face similar risks ¼ we will ¼ consider additional evidence and arguments." 88 FERC ¶61,254.
Edison (with defenders) claims that by transferring grid assets to the control of the non-profit ISO, which lacks a motive to seek a financial return, its transmission operation has become more risky - so unstable a business that it would be wrong to use the DCF method to set ROE, according to witnesses Lawrence Kolbe, of the Brattle Group, and Dr. James H. Vander Weide, of Duke University. Kolbe emphasizes further that when telecommunications and similar network industries were unbundled, risk actually rose for the segments (Bell carriers, etc.) that remained regulated. Investors abhor any enterprise in which the equitable owner does not exercise day-to-day control, directly or indirectly, these witnesses say. This argument seems intuitive. Yet Edison has no concrete evidence. The FERC staff counters that Kolbe, Vander Weide and other