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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

of stranded transmission post-construction becomes a more pronounced part of novel problems and possibilities.

Industry players are only now getting around to the question of how RTOs and transmission owners should interact on planning issues.

If an RTO always approves the recommended transmission projects of a member, and never requires planning for a project the owner did not recommend, does this suggest that the RTO is not truly independent? Some might argue that the RTO merely "rubber-stamps" whatever the owner supports and recommends. The opposing argument is that the owner has exceptionally good planners that are accurately anticipating the RTO's needs, and are in constant communication with it to develop well-coordinated planning. As such distinctions would be nearly impossible to judge without both day-to-day involvement, and assessment of people's state of mind, these nuances should not be permitted by regulatory policy to affect the risk assigned to the owner or the return on equity obtained through the RTO.

Performance-Based Rates: Who Takes the Lead?

In Order 2000, 2 FERC encouraged RTOs to consider performance-based rates and other types of incentive-driven methods (such as an enhanced ROE) to fund current investment and future capacity expansion.

FERC has issued decisions to indicate that traditional utilities, i.e., vertically integrated transmission owners, cannot unilaterally propose PBR options for funding grid expansion. However, it remains an open question whether transmission owners will be able to carve out a scope of performance for PBR that is compatible with the scope of an RTO's performance. Hopefully, FERC's new rule on standardized market design will make it easier for ITCs and RTOs to reach agreement on this issue.

As FERC policy stands now, transmission owners (TOs) that participate in an RTO can determine their own transmission revenue requirements, and can file such data unilaterally as a rate, in the absence of an agreement with the RTO. But structural changes to transmission rates that include PBR elements must be proposed by the RTO itself. 3 Otherwise, the RTO would not meet the criteria of administering a single, region-wide transmission rate and providing a cohesive tariff.

An RTO that "endorses" a filing made by all participating transmission owners, but does not "sponsor" the filing, may therefore find its tariff rejected without prejudice until the RTO becomes the applicant. 4 At a minimum, this would require RTOs to provide witnesses to support the request.

ROE Incentives: Some Policy Guidance

Unlike PBRs, enhanced ROEs have few of these procedural requirements. Whether they are reasonable will be subject to the same sort of customary debate that for some time now has attended the traditional utility rate case. The case to watch is the Midwest ISO (MISO), the nation's first officially certified RTO.

FERC offered some important guidance on this question in a key preliminary ruling issued in January. In April, FERC Administrative Law Judge Carmen Cintron made additional findings on how to use the discounted cash flow (DCF) method to set ROE for RTOs.

Initially, MISO TOs had sought an ROE premium level of 11.5 percent to encourage utilities to join the regional grid, but