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Commission Watch

FERC faces a growing chorus of rebellion on earnings incentives.
Fortnightly Magazine - April 15 2003
  • windfall to utilities that have already formed RTOs, or that have already transferred grid assets to an ITC, where incentive is no longer needed.
  • Poorly Targeted. Should apply only to new investments in infrastructure-not to a simple transfer of ownership of existing facilities.
  • One-Sided. Distorts traditional process of integrated resource planning (IRP), which mandates equal consideration of generation, transmission, and demand-side resources to meet infrastructure needs.
  • Unwarranted. Utilities don't need to receive regulatory incentives to join RTOs, since economic realities virtually will force utilities to join RTOs, without any incentive at all, if they want to take advantage of low-cost resources available in regional energy trading.

What is interesting, however, is that several parties who favor restructuring along lines enunciated by the agency do not agree that higher revenues for transmission owners are needed, or that incentives mark a necessary cost of industry reform. Consider, for example, the comments submitted by the Transmission Access Policy Study Group (TAPS), an informal association of transmission-dependent public power utilities.

TAPS offers a rough estimate of the nationwide bill for the restructuring incentives alone at $11.8 billion. Those costs would leave customers "worse off than they are today," with no guarantee of savings that might occur if structural reform is actually accomplished "at some point in the future," according to TAPS.

Several state PUCs feel that ROE incentives can be effective, but they suggest that FERC tailor the plan to regional particulars. Massachusetts reminds FERC that with New England having already switched to regional control of grid operations, and with a regional market that features numerous features of FERC's SMD, rate incentives need only apply for "achievements above and beyond these accomplishments."

In short, the comments demonstrate the difficulty of getting parties to agree to programs that mandate higher rates-no matter how attractive the policy goals might sound.

TAPS agrees with FERC that vertically integrated utilities enjoy motive and opportunity to skew grid operations to their advantage. Yet it argues that FERC's plan will boost rates and put the burden of fixing the problem directly on the victims of the alleged discrimination.

On the other end of the scale, the National Association of State Utility Consumer Advocates (NASUCA) reveals a broad disagreement with FERC's overall plan. The group says the costs associated with the ROE plan are "conservatively calculated" at $13 billion over the 19-year time horizon contemplated by FERC.

According to NASUCA, the policy means that FERC no longer will set the ROE component of transmission rates according to its best estimate of a utility's cost of equity, but on an artificially higher figure limited only by the top end of reasonable range for a proxy group of companies. NASUCA warned that grid owners would be encouraged to litigate not only the best estimate of cost of capital, but also the top end of the range as well.


  • Northeast Power Markets. A study done for the Maine PUC found no clear benefit in forming a regional transmission organization (RTO) spanning northern Maine and the Canadian province of New Brunswick. It warned of environmental