[BETA] Fortnightly

PUCs could face rate shock if feds push plans for an RTO signup bonus.

State PUCs will surely weigh in on the latest move by the Federal Energy Regulatory Commission (FERC) to work its will on the nation's electric transmission grid. In this case, the item in question concerns a policy statement proposed by FERC that would reward electric utilities for investing in new transmission upgrades and-more importantly-for joining up with a regional transmission organization (RTO).

Certainly, no one suggests that state regulators oppose grid expansion. But if past decisions offer any guide, one can expect that state PUCs will question any new policy that ties incentives for grid expansion to a surrender of rate-making jurisdiction to federal agencies.

In short, the evidence indicates that state PUCs fear a new round of rate hikes if FERC should get its way on grid restructuring.

Meanwhile, recent PUC actions continue to cast doubt on the benefits that might follow from reform of wholesale markets-even though some states still attempt to sound optimistic in the face of paltry progress .

Illinois, an advocate for choice, still complains of lackluster growth in competition and in the number of customers opting for supply choice. Michigan, another booster, reports a modicum of progress, though the numbers seem not too much different than those seen in Illinois. And Pennsylvania, the poster child for electric utility reform, has been forced to fall back and assign customers to suppliers on a random basis, at least in the Philadelphia area, under a regulatory settlement that called for compulsory assignment if not enough individual customers elected competitive suppliers.

The Federal-State Conflict

FERC's new proposed pricing policy for electric transmission services, aired in January, features rate incentives to reward grid investment and the formation of RTOs. The key elements of the plan include:

• RTO Signup. An incentive adder for all public utilities equal to an additional 50 basis points on their return on equity (ROE) for participation in an RTO;
• Asset Divestiture. An additional 150 basis points for divestiture of transmission assets; and
• Investment Incentive. A generic ROE-based incentive equal to 100 basis points for investment in new transmission facilities.

FERC claims that the program will reduce wholesale transmission and transaction costs over the long run by improving grid performance. But at the same time, by allowing utilities to earn additional profit for participating in RTOs or investing in transmission facilities, the move would likely increase retail rates for consumers.

This type of incentive program has been the subject of criticism by state regulators. They cite concern over the possible effect that such a move might have on retail rates. For example, last year the Louisiana Public Service Commission (PSC) cited just such concerns in voting against a proposal whereby Entergy Gulf States would have divested and transferred transmission assets as part of a plan to join the proposed SeTrans RTO in the Southeast U.S. Docket No. U-25965, Order No. U-25965-A, March 19, 2002, 216 PUR 4th 1 (La.P.S.C.)

In that case, the PSC raised concerns over both the effect of the plan on