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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

decisions regarding grid operations.

Does the RTO context change the nature of how to go about setting ROE? Perhaps it does.

For example, in the MISO order, FERC rejected for now each of the two incentive "adders" (100 and 200 basis points), along with the 15-year depreciation period, saying it wanted more stakeholder input. One might infer from this distinction that a stakeholder process is not employed when a utility transmission owner files a request for a changed ROE. However, it is customary for all RTO filings to be subject to a stakeholder process. FERC added that MISO "should also consider the role of performance-based rates within the context of its innovative rate proposal for new transmission facilities."

Because MISO is a non-profit and independent entity, it has the theoretical ability to minimize transmission costs by balancing its operating decisions and upgrade decisions through a PBR. Yet other failed PBR cases indicate the challenges involved in such "balancing."

In , FERC did not act on the region's PBR request, but ordered GridFlorida to explain in a future compliance filing why retention of 25 percent of revenue was an incentive likely to enhance throughput. 11 (Throughput is a term usually applied to pipelines, which are not entirely analogous operationally.)

FERC stated that because Order 888 entitled customers to short-term and non-firm service, if it was available and at a tariff rate, GridFlorida must explain how its conduct would improve efficiency or maximize use, relative to historical levels. 12 Similarly, Northeast Power Pool's pilot project for maintenance of a 345-kV line was rejected in part for failure to explain any additional benefit relative to prudent utility practice: minimizing total cost by working on the line while it was energized to reduce higher cost replacement power. 13 The standards set for PBR are fairly high, and are perhaps more difficult during the RTO startup phase.

Given the large amount of change attending startup of RTOs, benchmarks for performance could be defined over the first one to two years of operations if mature and stable congestion management techniques are implemented. Many ISOs and RTOs have staged their functionality, and congestion solutions are sometimes deferred, phased, or planned to evolve based on empirical market demands. However, if locational marginal pricing is used from the outset to establish baselines for congestion, RTOs can begin to define PBR rates for performance that increases stability or reduces congestion, measured in dollar values.

Looking Ahead: An Upcoming Case

Interesting questions remain in the wake of these cases, and a pending filing by TransConnect, an ITC that would operate under the umbrella of RTO West, may help answer some of them.

The TransConnect filing of November 2001 seeks a 14.5 percent ROE under a partially capped five-year zonal rate. Benchmarks for reliability and throughput are to be published for a year before they are used to measure performance. New transmission costs may be directly assigned to a third party, who then obtains the Firm Transmission Rights associated with the project, or directly assigned to the ITC. If system benefits are determined by