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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

strategic thought, capital, and management skills needed for transmission development. RTOs often labor under such complex policies and massive market administration responsibilities as to open themselves to criticism. 9 Consequently, while RTOs will be suited for certain purposes, such as overseeing regional markets and transmission access, there is some question as to their ability to plan and implement capital-intensive projects. The investment strategies of vertically integrated utilities in non-RTO regions, on the other hand, may be suspect when financial opportunities and rate considerations favor not making infrastructure investments, especially of an interregional nature. 10 Because ITCs will be regulated by a single federal regulatory authority, that small part of the overall cost of delivered power that transmission comprises will be more predictable to retail customers, who also should have access to more diverse suppliers as a result. Moreover, we do not perceive a threat to native load if the states and FERC work together to ensure no decline in service quality.

ITCs will need grid investment for growth. For sustained throughput, they require expanding energy markets and reduced congestion, as they continue to depend on regulatory approvals for siting and operations. They will make valuable new partners in regional planning processes, where such processes exist, and will be important proponents for renewable resources and other alternatives to new generation. Moreover, ITCs are a practical means of including all transmission facilities, including those of public power entities like large municipal utilities, G&Ts, and joint action agencies, within a single operating company. 11

Finally, with ITCs, investors would be better able to assess the risks and rewards of the sector and to judge actual performance. The advantages of handing off management and development responsibilities, such as the siting of major facilities in what the Secretary of Energy calls "national interest corridors," to transmission companies that do nothing else are apparent in terms of motivation, accountability, expertise, and commitment to non-discrimination and markets.

If it intends markets to work, FERC must pick one direction and hold course, rather than let a thousand flowers bloom. As we discuss below, it already has the resources to encourage voluntary separation of transmission from other utility functions. In addition, Congress has supplied additional incentives to divest transmission to independent transmission companies by permitting deferral of capital gains from transmission divestiture for up to 8 years. 12 Of course, across large commodity markets served by network facilities like electric transmission, it is both impractical and uneconomic to carve out systems or regions for exception. We nevertheless recognize that electricity markets vary, and that restructuring demands some flexibility. Nevertheless, there is no reason that ITCs cannot supply that flexibility. 13

Specific Measures

What does FERC need to do? Because policy needs to follow facts, FERC first must cure the glaring data inadequacies regarding what transmission is being built, by whom, and for what purpose. With only limited exceptions, even after assembling information from NERC, trade associations, the Energy Information Administration, and the RTOs, no precise picture emerges of what transmission is being planned or built. FERC therefore needs to collect its