Cost of capital is often a contentious issue in utility ratemaking. This is due, in part, to the inexact nature of the tools available to financial analysts and the considerable room for divergent...
Breaking the Gridlock
A proposal to remove the bottlenecks on grid investment.
three pillars of the Cross Sound Cable model are:
• A locational capacity market;
• A long-term bilateral contract for transmission rights; and
• LSE sponsorship.
The critical element of this is the ability of the LSE to enter into a long-term contract for transmission rights. That makes the project financeable and allows a true market mechanism to function for transmission.
To remove any conflicts of interest and create a level playing field for procuring the most reliable and low cost energy supply for the loads they serve, it may be necessary for LSEs to divest their generating assets to satisfy their regulators. If the LSEs are pure distribution companies, they would be in the best position to source the wholesale power needs of the served load. LSEs are in the best position to do a market trade-off between generation, transmission and demand side alternatives in procuring energy at the lowest cost and highest reliability.
The tortured process of regional planning by RTOs and protracted negotiations on “participant funding” simply will not produce a market-driven solution that will get the job done in terms of upgrading the U.S. transmission grid. Regulators need to recognize that transmission, along with generation and demand-side management options, is part of a rational economic market structure for electricity markets. The paradigm shift that needs to occur in the mind of regulators is to put the LSEs in the driver’s seat and have the RTO provide regional planning oversight rather than try to be a rate-maker, regulator, facilitator, and arbitrator rolled into one.
Having a market driven process for transmission expansion would spur innovation and applications of new technology solutions. The current regulated approach rewards investors based on dollars invested rather than benefits of the upgrade. There is little incentive for innovation or investments in new technology. For example let’s assume a $10 million transmission line upgrade or a $5 million investment in Flexible AC Transmission Technology Systems (FACTS), both generate a 9 percent regulated return and provide the same $100 million in energy cost savings. The regulated return on the investment in FACTS would be half of the low tech solution so there is no incentive for transmission system owners or investors to push the envelope in terms of technology applications. To foster innovation, the payback in the transmission investment should be in terms of the savings and not on the dollars invested. A market based procurement of transmission capacity or generation capacity by LSEs would provide a market mechanism to do just that without the complex, long drawn and contentious cost allocation process that the RTO based transmission expansion planning entails.
LSEs “own” the load. They are required to ensure adequate capacity and to provide low-cost power. Putting LSEs in charge of procuring the best combination among generation, transmission, and demand-side options to satisfy their capacity and energy needs is fully consistent with an LMP-based market structure and constitutes an effective solution to the “big brother RTO” approach. This market-driven solution is possible only if regulators recognize the fact that transmission is part of the decision