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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

Requirements (TRRs) in advance.

FERC rejected the "pay down" requirement restricting municipal and cooperative owners' use of their own transmission revenues, but otherwise accepted the filing and set the case for settlement negotiations, where it remains at press time. 2 It is perhaps significant that the only municipal entity to contribute transmission to the ISO under that arrangement did not own enough to implicate the cost-shift caps.

There is, of course, no inherent reason why all customers of an RTO should not share equally in paying for all facilities, of whatever vintage that the RTO controls and uses to provide its services. This result is particularly appropriate when one considers the usual rate treatment of transmission facilities built today. Usually built by the IOUs, these brand new facilities are the most expensive of all. Yet most rate treatments, including that of the California ISO, roll the full costs of the newest vintage transmission facilities into rates immediately, without caps or concerns about "shifting" costs to non-IOU customers. The end result is to carve out different and discriminatory treatment for a particular vintage of facilities between one and twenty years old, sometimes only if they are owned by municipal or cooperative entities.

While the California ISO methodology may be an extreme example, to the extent that any RTO rate methodology draws lines between facilities based on vintage, cost, or ownership, owners of disfavored facilities will be more reluctant to participate in an RTO. Only full recognition of the total costs of all grid facilities, to be borne equally by all similarly situated customers, is likely to solve the "Swiss cheese" problem of the missing consumer-owned entities.

Even assuming that an RTO will include all TRRs in its rates, there remains the problem of how municipal and cooperative TRR is to be determined. There are several issues. First, since these entities have not historically been regulated by the FERC, they have never been required to keep their books in accord with FERC's Uniform System of Accounts (USOA). Often, these entities could not comply with a requirement that they submit TRR data in USOA format. While newer, large projects may conform to USOA requirements, older facilities may have been recorded on a wholly different basis, or may have been bundled as part of a generation project. Since municipalities do not pay taxes, there may have been no reason to track depreciation.

Return on Equity: Is the City of Vernon the Model?

There is also the question of a reasonable return. After all, surely municipals and cooperatives are entitled to a reasonable return on their investments. But since they do not issue stock, they cannot earn a return on equity as the IOUs do. A final issue is how the TRR of a non-FERC jurisdictional entity is to be reviewed. While IOUs and state public service commissions might like to see a full FERC section 205 filing and review, similar to what the IOUs must undergo, FERC has made it clear that such an undertaking for municipals and cooperatives simply is not within its statutory authority.