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Exposing Myths on what the FERC Really Wants

Fortnightly Magazine - March 1 2000

the situation for passive and active ownership, where Order 2000 gives guidance. The Preamble states that FERC has inadequate experience to judge whether multi-interest group (stakeholder) boards meet the requirement or whether the commission should require independent (non-stakeholder) boards. The Preamble also states that FERC will require an independent audit of ISO boards two years after any qualifies as an RTO. (p. 229, and footnote 330.)

With an audit looming, which has more difficulty, the transco, with its rules on passive and active ownership, or the ISO, with the uncertainty surrounding its board? We submit the transco. The ISO could not, in practice, "play it safe" by choosing to create a non-stakeholder board. Transmission owners have objected to that type of governance and some think it engenders inefficiency by keeping the experts out. Nevertheless, stakeholder boards allow transmission owners to wield influence in the governance of the RTO, even if indirectly through log rolling.

Utilities may find becoming transcos easier in another respect as well. Order 2000 gives RTOs important responsibilities in running the grid. Section 35.34(k)(7) of the regulatory text defines the responsibilities of RTOs in planning and expansion to include "direct[ing]" construction of facilities to ensure reliability. As of this writing, utilities have applied for rehearing of that requirement. They ask the FERC to add a guarantee that the transmission owners within the ISO/RTO will recover the cost of facilities. However, even if the FERC should grant the petitions, owners still would not recover costs if the not-for-profit ISO/RTO should make a mistake in overestimating threats to reliability. That can happen with the RTOs division of responsibility from accountability. Remember what happened with nuclear plants, even when regulators allowed the costs in rates.

Myth No. 8: FERC Will categorically Deny Some


Reality: ferc will be flexible

The myths about incentives emerged from the debates long before Order 2000, when rhetoric filled the air about "FERC candy" and "signing bonuses." In the end, of course, the commission made incentives the linchpin of Order 2000. It even included some of those "signing bonuses" that the critics decried. At the meeting where the FERC adopted the RTO Rule, I, one of your authors (Commissioner Hébert) noted that everyone had compromised, at least to some degree. Nevertheless, the idea has spread that the final rule somehow narrowed the list of incentives that the FERC would consider from what the commissioner advocated.

Here are the facts. Section (e) of the regulatory text (the provision that governs transmission price innovation) lists eight separate incentives. Only two of those - concerning rate moratoria - have any time limits. The FERC has discussed and now stands ready to approve these eight. RTOs eventually may gain others, as Section (e)(4) states that RTOs may submit "any other" proposal in a filing under Section 205 of the Federal Power Act.

Moreover, consider one particular incentive, an acquisition adjustment (an increase in the rate base to reflect purchase price). RTOs may well qualify, since the Preamble states that the FERC will follow current policy on rate base valuation. The applicable