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issues, the commission must recognize that the states and the stakeholders in the SMD process are best suited to resolving these issues on a regional basis.
We're encouraged that the commission's public statements indicate that it now plans to alter its resource adequacy proposal. In contrast to the states, FERC has very limited jurisdiction in the area of resource adequacy.
We feel the commission also needs to modify its transmission-planning proposal to recognize that many states have substantial jurisdiction in this area as well. The commission must work with the states to get a better understanding of how various state planning and resource adequacy processes work, and the statutory obligations under which state regulators act.
Overall, SMD should complement state activities, not preempt them, nor contravene state law obligations. Cooperation and coordination between federal and state authorities also is necessary to ensure that jurisdictional utilities are able to recover the substantial costs of compliance with the SMD.
Expand Transmission, Generation Infrastructure
The proposed SMD recognizes the need to expand our nation's transmission and generation infrastructure. At the same time, though, the commission's proposal contains at least two provisions that would discourage future construction.
The commission originally proposed an all-source RFP approach to transmission planning that simply would not work. A subsequent statement by the chairman in early January indicated that this process could slow down needed transmission investment and therefore should not be included in the commission's final rule. We look forward to the commission following through on this commitment.
We also recommended a regional planning approach to determining transmission needs. The independent transmission providers (ITPs) should initiate a bottom-up approach that combines all plans across the ITP market area, undertakes a preliminary regional evaluation and needs assessment, and results in a final transmission plan. Transmission owners and independent transmission companies should have the first opportunity to expand or improve their own systems. Others should have the opportunity to build if the system owners do not.
The commission also proposed mandating that existing transmission owners should not have the right to plan and expand within their existing area. Instead, they should be relegated to being builders of last resort. Given the critical need for cost-effective transmission infrastructure, we strongly urge the commission to revisit this policy.
Transmission owners and independent transmission companies must have the first opportunity to build within their footprints. Opportunities for transmission expansion must be available to all potential builders, including incumbent transmission owners, independent transmission companies, and merchant transmission.
With respect to resource adequacy, we agree with the commission that appropriate incentives are needed to develop generation resources. We support the commission's resource adequacy requirement, but the commission must address how to ensure that all load-serving entities share in the cost of providing adequate capacity to meet the reliability reserve requirements. Under the SMD proposal, the financial penalties do not eliminate incentives to free ride on the capacity commitments of others.
Encourage Regulatory Certainty
Many in the country's investment community don't see SMD as a solution to the financial market challenges that many electric companies now face. A