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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

the RTO, the costs would be embedded, using accelerated depreciation and a basis point adder. 14

Some have opposed the TransConnect proposal, arguing that FERC should defer any decision on ROE until it is able to rule simultaneously on both the ROE request and the entire "stage two" application for RTO West. They claim that initial protocols submitted by RTO West plans still leave things uncertain about how TransConnect and the RTO would share the responsibilities in grid planning. They say that FERC should not set ROE until such questions can be answered. Other opponents ask about non-wires solutions to grid expansion. They suggest that any planning protocol should also include a competitive bidding requirement that would give opportunities to others besides the ITC or the RTO to participate in planning and construction, with "first refusal" rights given to TransConnect to match a winning bid.

For its part, TransConnect has acknowledged that FERC precedent denies a right of first refusal to an RTO in a competitive bidding scenario, but claims that rule should not bar such rights to an ITC operating under the RTO umbrella. TransConnect adds that it has "provided a mechanism" to allow third-party players to make capital contributions to TransConnect and to participate in economic benefits generated by the ITC. 15

At press time, the TransConnect Case was still pending, though a decision on RTO West, including protocols for grid planning and expansion, was expected sometime this summer.

  1. San Diego as & Elec. Co., FERC Docket No. EL02-54, Mar. 27, 2002, 98 FERC 61,332.
  2. 65 Fed. Reg. 809 (1/6/2000).
  3. PJM, Order Provisionally Granting RTO Status, FERC Docket No. RT01-2, July 12, 2001, 96 FERC 61,061.
  4. Id.
  5. MISO, FERC Docket Nos. ER98-1438 et al., Opin. No. 453, Oct. 11, 2001, 97 FERC 61,033.
  6. MISO, FERC Docket No. ER01-485, Jan. 30, 2002, 98 FERC 61,064.
  7. With the termination of the 30-year government bond as an indicator of risk-free return, these "reasonable" ranges may be widening. The issue of determining additional utility risk relative to long term government issues may become moot, as rating agency data becomes more important.
  8. Note that ALJ Cintron issued an initial decision on Apr. 25. In that order, the judge OK'd an ROE of 12.38%, that being the midpoint of a range of reasonableness running from 8.79% to 15.96%. The judge relied on a nine-company proxy group suggested by the expert witnesses for both the FERC staff and MISO. But the judge rejected the DCF analyses offered by Moody's and Standard and Poor's. The judge also rejected the concept of using a proxy group composed of gas pipeline companies. See MISO, FERC Docket No. ER02-485, Apr. 25, 2002. 99 FERC 63,011.
  9. New England Power Pool, Order on Transmission Incentive Pilot, FERC Docket No. ER01-2922, Oct. 25, 2001, 97 FERC 61,093.
  10. FERC Docket No. RT01-77, Mar. 14, 2001, 94 FERC 61,271.
  11. GridFlorida, Order Provisionally Granting RTO Status, FERC Docket No. RT01-67, Mar. 28, 2001, 94 FERC 61,363.
  12. It is generally assumed that utilization levels of transmission before and after an RTO are likely to vary, with higher levels