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Frontlines

The market speaks but we don't listen.
Fortnightly Magazine - May 15 2003

is transferable. But you've got to transfer the actual cause of victory, not simply the effect.

With its Order 2000, and with the concept of regional transmission organizations (RTOs), FERC seeks to make the grid independent from the commodity. That's what it did with natural gas in Orders 436 and 636, by forcing the interstate pipelines to unbundle transportation from the gas itself.

But that's not the reason why gas restructuring worked. No, the secret to success in gas stemmed from the creation of regional hubs and markets to reveal the true commodity price. That helps reveal a true basis differential to measure the cost of product transport to downstream consuming areas, and it fuels the engine driving investment in new pipeline construction. It's the price, stupid (to recall the political argot of the time). Make a market with an honest price and everything falls into place. Investors don't care if a pipe or line is "independent." But in our case, the pipeline unbundling that occurred at the same time under Order 636 tends to obscure that fact. It has led FERC to the faulty assumption that it will duplicate the gas victory in the power industry if only it can repeat the trick of unbundling the transport function.

HARVARD PROFESSOR WILLIAM HOGAN ALLUDES TO FERC'S CONFUSION IN A PAPER HE PRESENTED LAST MONTH IN TEXAS.

In that paper (Transmission Market Design, Apr. 4, 2003) Hogan takes FERC to task for waffling on whether transmission should remain regulated, with a top-down resource planning process run by RTOs, or whether to count on participant-funded merchant transmission as playing a significant role in an SMD world.

As Hogan explains, the problem stems from the two-sided nature of transmission: essential for reliability in some cases (and deserving of regulation), yet sometimes indistinguishable from a generation resource, as where reliability is already assured, but a new line is built to import lower-cost power from a distant source.

Hogan calls this the "slippery slope" problem-the impossibility of drawing a bright line between merchant and regulated transmission-between purely economic projects allocated by capital risk, and projects needed for reliability and thus made subservient to RTO-imposed resource planning.

On that score, Hogan praises the New York ISO for adopting a tariff that would distinguish between economic and monopoly investment in RTO processes. But he castigates FERC for pushing PJM "towards the precipice of the slippery slope" by adopting a central planning process for grid investments undertaken primarily for economics. "Initially," says Hogan, "PJM was inclined towards an approach similar to the New York model."

Above all, Hogan warns, "there may have been some ambiguity about the degree to which FERC's charge 'to support competition' implied also mandating regulated investments for economic purposes.

"This ambiguity was resolved in a subsequent FERC order that clearly indicates [that] 'to support competition' means investment for economic purposes."

Why have a market if we are going to ignore it and instead impose our own preconceived notions of what investment is needed? Here we see that FERC rejects its own SMD.

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