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Transmission Expansion: Risk and Reward in an RTO World

Some thoughts on who should take the lead and how to set up financial incentives.
Fortnightly Magazine - August 2002

certain generators. In fact, with an RTO opinion on system-wide benefits, the risk of a stranded investment should be quite low. Any energized high-voltage line (unless it is radial) that is certified as offering system-wide benefits is probably always going to carry some trickle of power due to Kirchoff's law. Continued "usefulness" is more assured than it is for projects that lack system-wide benefits.

The more realistic source of risk of stranded investment comes before the line is energized.

In such a case, when transmission is planned in an RTO or ISO (independent system operator) context, the project may combine merchant and regulated participation, and cross jurisdictional lines, service territories, and state boundaries. FERC is just beginning to develop case law in this area, in a test case involving California's long-standing Path 15 bottleneck, and has taken the first tentative step in approving a three-party deal involving public and private interests.()

Revenue collection on behalf of joint developers likely will involve the California ISO. If, hypothetically, the project ultimately cannot be permitted, collection of development costs will be reviewed in an entirely new context. Even if the project is permitted, the ISO's revenue collection on behalf of a consortium presents novel return on equity (ROE) issues. Is the ISO to collect ROE for some (FERC regulated) members of the consortium, or all? For entities not FERC regulated, should the same ROE be used?

Initial Planning: RTO Monopoly or A Role for Owners?

Another wrinkle to be ironed out concerns transmission investment that is not decided by an RTO but by the transmission owner.

Many investments that improve stability fall short of a new major line or equipment with any regional importance. Transmission owners (rather than the RTO) likely might undertake such projects voluntarily.

Should FERC encourage such investments? How would their benefits be measured? Will such investments continue to take place, or will they simply have to wait until the RTO's planning staff and the organization are more mature, and more pressing facilities all have been built?

For example, an RTO finds an automated switch would improve ATC (available transmission capacity) and reduce congestion during enough hours to be cost effective. But what if its intended use of the switch would be inconsistent with generally accepted, lower industry standards? Can it order the investment and raise the standard, or must it live within the equipment tolerances as it inherited them? Should such investments be left to an owner's performance-based rates (PBR), flowed through by virtue of an RTO's PBR, or deferred in favor of regional-scale projects the RTO wants? What if these smaller projects fall into limbo between the disincentives for localized projects and the larger regionalized planning?

If an ITC (independent transmission company) operates under an RTO umbrella and chooses to sponsor its own grid expansion project, it might well agree to provide investment capital in exchange for receipt of all associated firm transmission rights (FTRs) or perhaps other types of congestion rights. In this case, the line begins to approximate the merchant nature of gas transmission lines, and the topic