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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

years ago, involved Southern California Edison Co. The second case, involving the Midwest ISO (MISO), was handed down in early February, just three weeks after FERC announced its new policy on grid incentives.

In the recent MISO order, FERC upheld an earlier ruling allowing the Midwest ISO to increase its ROE from 10.5 percent to 12.88 percent, including an upward adjustment of 50 basis points to reward the ISO-participating utilities for turning over operational control of their transmission facilities. The Midwest ISO had asked for new rates based on a 13 percent ROE.

More importantly, however, the MISO case showed FERC's determination to continue to view the transmission grid as an emerging sector, in line with its thinking of two years ago. In particular, FERC rejected calls to set the ROE at a lower level based on theories the commission had long applied while setting ROE for gas pipeline companies. Two years earlier, in the case involving SoCal Edison (which had transferred control of grid assets to the California ISO), FERC had rejected the use of a "two-step" discounted cash flow (DCF) formula normally applied in rate cases for interstate gas pipelines. The commission explained that, unlike the gas pipeline industry, which was nearly through with its restructuring at the time the two-step DCF was adopted, the electric industry was "just beginning a significant new phase of its restructuring." As a result, FERC at that time rejected the 9.68 percent ROE set by an administrative law judge in an initial ruling and granted the company its requested ROE of 11.6 percent. FERC said that the proper application of the DCF for electric transmission service would allow an ROE of 11.73 percent but that a downward adjustment was appropriate to match the award with the company's request. See,

In that light, the MISO case makes it clear that the commission is now committed to rates for transmission service that are sufficiently high to encourage further investment in new facilities and also to encourage a reorganization of transmission system operation. While granting the 50-basis-point award in that case despite claims that the base ROE figure was itself too high, FERC went further and said that it would consider future cases providing a larger upward adjustment for greater levels of transmission system independence. The ruling makes clear that in the eyes of FERC, the rate increase that will naturally follow such adjustments to ROE is well worth the future benefits expected to accrue to both consumers and providers of energy services once a competitive market develops.

FERC goes on to emphasize the importance of independence of the transmission function to market development, stating that dissolving the vertically integrated utility for the sake of independent operation of the transmission system would make the power market "more efficient, fair, trustworthy, and cost-effective."

Whether all players with say over the future structure of the industry will find a common position on the issue remains to be seen.

The State of Competition: Recent PUC Actions

Three pro-choice states keep a stiff upper lip in spite of discouraging trends.