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Commission Watch

PUCs could face rate shock if feds push plans for an RTO signup bonus.
Fortnightly Magazine - March 15 2003

its authority over transmission matters in general and the practical effect of granting incentive returns on transmission investment. The PSC said that the economic impact of such rate hikes on native load customers should be a primary consideration in deciding an appropriate RTO structure. It concluded that rates would go up for native load customers in Louisiana if ratemaking power escapes to the federal level. It explained that Entergy expected to earn a 13 percent ROE under FERC jurisdiction, while it was authorized to earn only 11 percent ROE at that time under state regulation.

The Rush to Incentivize

FERC's rush to incentives comes at a time when its underlying policy-remaking the grid into RTOs or similar institutions-has floundered.

Up till now only two RTOs-the Midwest ISO and the PJM Interconnection-have received final certification, even while FERC Order 2000, an earlier blueprint for transmission market reform, had called for RTOs to be in operation across the nation by December 2001.

To jumpstart that process, FERC's proposal would now reset the deadline for RTO formation to Dec. 14, 2004. And, as if to put PUC worries at ease, FERC insists that the new ROE incentives would fall subject to a cap equal to the top of a range of reasonable ROEs for a proxy group of transmission owners participating in an RTO.

But make no mistake: The new incentives seem designed to rescue a teetering policy.

As FERC explained, "Many of our orders to date on transmission rates have been targeted more toward 'hold harmless' provisions to protect a utility from adverse rate-making consequences due to its transfer of its facilities to an RTO or ITC." In light of the slower-than-anticipated progress toward national grid reform, FERC said it had decided to take the bull by the horns and ensure that transmission owners would receive benefits from RTO formation.

Although rates for transmission services could rise when a utility takes advantage of the incentives, the commission insists that "customers benefit when transmission services are overseen by RTOs, independent of market participants." It explained that RTOs and FERC'S proposed standard market design would eliminate rate pancaking, improve congestion management, more accurately reflect transmission capacity, and provide for more efficient planning for transmission and generation investment. It added that the incentive for RTO formation would be available to public utilities that have already turned over the operational control of their facilities to a FERC-approved RTO but not yet received the 50-basis point incentive.

In some ways, the fight between FERC and the state PUCs over transmission pricing and ratemaking reflects a fundamental disagreement over the very nature of the transmission grid.

In short, the states see transmission as a mature sector that benefits from a hands off, or business-as-usual treatment. By contrast, FERC sees the grid as an emerging market-a fast-changing sector that carries higher-than-normal risk and that demands higher-than-normal rewards.

Rate Case Dichotomy: SoCal Ed and MISO

This dichotomy can be seen in a pair of transmission rate cases decided at FERC during the past several years. The first case, issued more than two