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Grid Investment & Restructuring: Two Challenges, One Solution

FERC must align the immediate self-interest of profit-maximizing entities with its own view of what is in the public interest.

Fortnightly Magazine - August 2005

However, the agency's prior efforts to mandate the elements of wholesale competition nationwide have encountered substantial and effective political and industry opposition, as demonstrated by the regrettable rebuke to standard market design and the tepid reception given regional grid managers in large regions of the country. As a result, FERC's determination to force profit-maximizing entities to act contrary to their immediate self-interest must now give way to an approach that redefines that self-interest to include an independent transmission sector that FERC generally has regarded as in the public interest.

The Critical Path

FERC presumably will, and should, continue its quest for fundamental change in integrated utility operations and for non-discrimination in the electricity marketplace. If it does so with any reasonable expectation of near-term success (which it currently lacks), its options are limited. Given its limited political capital and limited statutory authority to mandate a new market reality, FERC should instead use its rate policies to promote voluntary separation of transmission from generation, creating an independent, stand-alone business. That does not require a retreat from Order No. 2000 and regionalization or any moderation of its vigilant oversight of market behavior. But letting a thousand flowers ( i.e., business models) bloom is merely a recipe for more uncertainty, market balkanization, and queasy investors. Choosing a more deliberate path that jump-starts a critical network business that will have no stake in who wins in the commodity markets effectively could address the two challenges discussed above. Left unresolved, those two problems either will slow progress in wholesale markets or stop it cold every time, for a long time.

Among the most formidable and most easily-identified obstacles to transmission planning and construction 5  are state siting laws and local politics. 6  Initially these seem like problems susceptible only to incremental solutions that do not fiddle with the industry’s structure. Yet, non-structural solutions have not met with success. Under Order No. 888 (and possibly its forthcoming update) and Order No. 2000 , however, the power market forever was changed—and still transmission infrastructure languishes, in some places more than in others. The sorry state of transmission investment argues that additional measures be taken. Not surprisingly, FERC’s members seemed to acknowledge at its June 15 open meeting that the industry should  move in the direction of stand-alone, independent transmission companies (ITCs), whose sole business it is to produce and manage the most efficient delivery system for power. Despite discussion of elasticizing passive ownership requirements, the agency thus far has given only a tentative indication of how it might induce existing transmission owners and their state regulators to seriously consider repositioning transmission assets to make investment in that sector more attractive. 7

Why ITCs?

As with RTOs, ITCs may stand a better chance of acceptance in regions where a tradition of multi-system coordination has facilitated regional planning and a system of sharing cost responsibility. In some instances, transmission-only companies have been given both the rate flexibility and the legal ability to address deficiencies in transmission investment successfully. 8 ITCs already have shown they are well equipped to supply the