A case study shows how today's typical tariffs can force some industrial electric customers to subsidize others.
There ought to be a better way for electric utilities to set prices for...
lead to a significant horizontal consolidation of operation and ownership in electric transmission.
A New Set of Risks
Already, FERC's Order 2000 has encouraged consolidation between the Midwest ISO and the Southwest Power Pool, along with various other forms of grid owner-operators, such as American Transmission Company, TransElect, Grid America, and TRANSLink. Other entities have been discussed in the Northeast, Southeast, desert Southwest, and Northwest. Last year, FERC suggested that there should be four RTOs across the United States, but has since backed away from that view. Now, however, with its SMD rule, FERC seeks a virtual equivalency to the four-RTO concept, with a requirement that all jurisdictional entities must turn over transmission grid operations to an independent transmission provider (ITP) that uses a standard market design. Other agreements for a standard tariff and reconciliation of "seams" anomalies, plus reciprocity across boundaries, will achieve the same result. FERC will get what it wants, but companies will have a somewhat greater choice on how to get there.
FERC's proposed rules, when successfully implemented, will force separation of business units and impose business-like thinking on management, to deal with such risks as:
- Locational pricing and new valuations for generation, transmission, and distribution assets;
- Arrangements with state regulators on retail rates, siting, and other issues, some of which will support RTOs and some will not;
- A new risk profile for the transmission business (Is it still a "core competency" for utilities?);
- A bidding war for talent among grid operators;
- Shrinking "headroom" between capped retail rates and costs of doing business;
- A loss of preference for assets dedicated to native load; and
- Higher risks associated with maintaining reliability of service.
Since system operation is the hub of energy and capacity markets and the value chain, any strategy to deal with these risks will involve corporate financial planning and raise a host of important issues. (See Sidebar, "Twenty-Four Questions")
Mergers on the Horizon?
Following a spate of merger transactions among utilities in the 1990s, there are no significant mergers pending in the industry today. That situation mirrors other industries, where uncertain economic conditions brought merger activity to a standstill.
Yet mergers have proved profitable in other industries, such as banks, airlines, and telecommunications.
With stock prices possibly reaching lows, assets may again become attractive. Utilities may gain special favor as dividend-producing investments in an uncertain and slow-growth economy. The generation business is struggling and trading at all-time lows, and surely that segment will see further consolidation.
If anything, FERC's proposed rules suggest that the electric industry will follow the natural gas model. Although the electric grid has important physical properties that differ greatly from natural gas, the structure can be made similar. Transmission and transportation can be independent from supply. End-use distribution can be centrally situated in the value chain.
Granted, the market-operation function is considerably more complex on the electric side, which has been a key reason for the length of time required to develop a standard design. Yet FERC now has provided the framework that allows flexibility in the form of independent transmission entities, while