A spate of newly announced deals, including Allegheny Energy’s proposed $9.27 billion acquisition of FirstEnergy, plus PPL’s takeover of E.ON US for $6.73 billion, has left the utility industry...
The Myth of the Transmission Deficit
new transmission is considering transmission built by or for merchant generators. If that is not happening, then it is possible that the transmission lines associated with new generation that used to be recorded as transmission plant on the utilities' books are no longer being recorded there. Not because the transmission isn't being built, but because others, such as merchant generators, are building this transmission (or at least paying for it).
PJM seems to be an example of this phenomenon. The latest transmission expansion plan calls for more than $700 million of new transmission. Of that $700 million, merchant generators will pay more than $500 million. 12 If the generators' $500 million is not being included in utilities' forecast of transmission spending, then a major chunk of new transmission investment is being missed.
Next, let's look at the peak-demand forecast. This is another possible source of inaccurate transmission-need assessment. The drumbeat for new transmission now is reminiscent of the drumbeat for new generation that started several years ago. The kick-off for that was a famous, or infamous, Forbes article by Peter Huber and Mark Mills, predicting an insatiable new demand for electricity caused by the Internet revolution (more PCs, more servers, etc.). 13 That drumbeat helped propel the enthusiasm of Wall Street for new generation-and the rest, as they say, is history.
Finally, let's assume for the sake of argument that we do need substantially more transmission than that being planned. Do utilities need a higher rate of return to build it? Authorized rates of return at 11 and 12 percent already seem hefty for a low-risk investment. 14 And the industry did not in the past claim these returns as a barrier to specific projects; instead, the industry has cited regulatory uncertainties and the familiar NIMBY problem 15 (including the inherent reluctance on the part of states to authorize new lines from which they derive no benefit).
What We Need
If we do not have a huge transmission deficit requiring huge new investment and incentives, what do we need to secure the reliability and efficiency of the nation's transmission system in the wake of the August blackout? We need a stable regulatory environment that identifies and delivers reliability-based infrastructure on a timely and rational basis, and that enables efficient responses to market forces.
Consider first the reliability needs for new transmission. The process of determining reliability requirements is a well-established one. The North American Electric Reliability Council (NERC) and the regional reliability councils prepare a 10-years-out reliability assessment every year that includes an assessment of future transmission reliability. 16 The reliability assessment includes each region's own analysis, with specific needs for new transmission facilities.
How these transmission needs are addressed is more complicated. The traditional approach of voluntary cooperation among utilities to get needed new transmission built may evolve somewhat if reliability standards become mandatory. The new RTO approach identifies, plans, and builds reliability-based transmission on a coordinated basis involving all stakeholders. The traditional and the RTO approaches both rely on a bottoms-up needs assessment-not the macro-trend analysis debunked above.