Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

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

The California ISO sought to deal with the question by having non-FERC jurisdictional entities file TRRs with it, for an ISO review. While FERC eventually rejected any TRR review panel that did not include a right of appeal to FERC, 3 the current mechanism offers non-jurisdictional entities a choice between filing with the ISO and filing its proposed TRR directly with the FERC.

In the first case to come before FERC or the courts, the City of Vernon, California, filed its proposed TRR with the FERC when it sought to become a Participating Transmission Owner (PTO) with the California ISO. Vernon noted that it was a non-jurisdictional utility, but proposed to meet any standard the commission cared to apply. 4 The filing did not contain the standard material and statements required of an IOU in a Section 205 filing. It is significant to note, as the commission did, that Vernon's transmission facilities consisted of entitlements in large projects built by others (so that Vernon merely was passing along costs set by others).

In addition, Vernon was in the atypical position of having financed its facilities out of current earnings, without borrowing by issuing municipal debt or other financial instruments. In order to calculate a reasonable return on the capital asset that it had purchased for cash, Vernon sought the same number used for return on equity by Southern California Edison, the IOU in which the Vernon system is embedded, as a proxy for a reasonable return on its investment. While the IOUs and the CPUC argued that Vernon's return should be based on the cost of debt, Vernon had no debt to consider.

FERC chose not to require a full section 205 review of Vernon's TRR, though it claimed the right to assure itself that the addition of the Vernon TRR would not render the ISO's jurisdictional rates unjust or unreasonable. In this respect, the assurance that Vernon made to FERC that it was merely passing along costs rather then developing them was important. Indeed, Vernon had entitlements in certain lines in which the IOUs also had entitlements. Given that the IOUs had been allowed to include the same costs from the same lines in their own, fully reviewed, FERC-jurisdictional TRRs, there was actually little reason to be concerned. 5 However, FERC did order certain changes to Vernon's TRR, which Vernon voluntarily made. Given Vernon's non-jurisdictional status, FERC would have faced substantial legal obstacles to ordering Vernon to make the changes and join the ISO, but since the changes were acceptable to Vernon, the question did not arise.

FERC did approve Vernon's proposal to adopt Southern California Edison's return on equity as a proxy, provided that Vernon also used the capital structure and debt cost the utility had filed. The IOUs and the CPUC objected to both the use of the utility proxy return and the lack of full section 205 review. The IOUs appealed the case to the D.C. Circuit Court of Appeals, where it has been fully briefed and is set for argument in the fall.

Unintended Consequences: Locational Marginal