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Public Power & RTOs: How To Avoid Making Swiss Cheese

Several issues need to be addressed before municipals and co-ops participate significantly in regional transmission organizations.
Fortnightly Magazine - August 2002

1 and bond covenants. Placing transmission owned by co-ops under control of an RTO may risk running afoul of these restrictions. Moreover, a cooperative that obtains more than fifteen percent of its revenue from non-members risks losing its own tax exemption under Treasury regulations. Widespread state law prohibitions against municipal ownership of shares in for-profit corporations have raised concerns. The recent trend away from for-profit transcos and towards a non-profit or manager-only structure for the top regional transmission entity reduces these concerns. Moreover, the universally favored form for regional transmission entities has been the LLC (Limited Liability Company), for which state law is more accepting of municipal participation.

Congestion & Rate Design: Sorting Out the Inequities

Assuming that the threshold legal obstacles to joining an RTO and turning over control of transmission facilities have been overcome, municipal and cooperative entities still face issues of rate design and implementation that may affect them disproportionately and render RTO participation disadvantageous. These issues may include:

  • Rate designs that do not completely incorporate the transmission revenue requirement of municipal or cooperative-owned facilities;
  • Methodological strictures for establishing transmission revenue requirements that do not account for differences in municipal and cooperative accounting and structure; and
  • Unequal application of congestion management programs causing discriminatory rate impacts.

Some of these issues are closest to resolution for the California ISO, which is involved in pending litigation before the D.C. Circuit Court of Appeals. Indeed the examples discussed below are drawn from issues that arose with the California ISO. However, similar problems have arisen in other ISO/RTO contexts across the country, wherever there was a need to bring municipal or cooperative entities into a regional transmission entity. Moreover, municipal and cooperative entities have constructed their own high voltage transmission facilities often during the past two decades, with the rise of joint power agencies as vehicles to facilitate projects on this scale. As a result, their newer-vintage transmission was built when the costs of construction were higher and is far from fully depreciated-in contrast to the much older, often highly depreciated facilities owned by most investor-owned utilities (IOUs).

Consequently, in any region that uses or expects to use a region-wide rolled-in rate, mixing in newer, relatively more expensive municipal and cooperative facilities tends to raise the overall rate. This has given rise to claims of "cost shift," usually raised by IOUs and sometimes by state public service commissions (PSCs), especially if they regulate IOU rates but not municipal or cooperative rates. The IOUs and PSCs claim that this result somehow unfairly "shifts" municipal and/or cooperative costs to IOU customers.

In California, the claims of "cost shifts" resulted in an ISO proposal for a Transmission Access Charge, which capped the amount by which the rates of IOU customers could rise when municipal or cooperative transmission was added to the mix. This decision effectively left those costs with municipal and cooperative customers, who still had to pay a full share of the costs of the IOU facilities. Also, the charge required municipals and cooperatives to use their transmission revenues to pay down their Transmission Revenue