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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

own information upon which to make decisions in this area.

Second, FERC should revisit its independence criteria as applied to passive ownership of ITCs. No inducement to reorganize the transmission function will work if there are net losers. The current transmission owners should be allowed to retain passive ownership interests and participate financially in the new stand-alone network business, provided they have no control over the day-to-day operation of the system. FERC's significantly enhanced market oversight capability is a major reason why more liberalized ownership criteria can be employed without increasing the risk of abuse. In the final analysis, we believe the benefits of ITCs warrant significant creativity in this area. We believe that the success of American Transmission Company (ATC) provides a compelling case for flexibility on independence criteria. This company was created by the transfer of transmission assets from integrated electric utilities operating primarily in Wisconsin, in exchange for stock in the new company. The bargain, dictated by Wisconsin statute, puts in place independent management over a company that is 100 percent FERC-jurisdictional. The management proposed a set of investment incentives in FERC filings and then negotiated in settlement discussions with stakeholders a set of defined incentives that were approved by FERC. The company has been highly successful in raising capital and building substantial new transmission infrastructure in a region long characterized by substantial underinvestment.

Finally, a set of incentives must be designed to make transmission investment more attractive and enhance the market value of existing facilities. Naturally, an incentive applied to just 10 percent of an enterprise's revenues will fail to elicit results-hence the need for stand-alone transmission companies. On the other hand, it would not be in the public interest to afford transmission owners a premium disproportionate to the benefits they provide to consumers. Moreover, a set of cost-conscious consumers purchases energy and transmission separately. Transmission owners ignore them at their peril. We believe that in the context of clearly articulated incentives with strong support from FERC, practical accommodations with these vested interests will be achieved.

FERC's Rate Incentive Tools

FERC should establish or, as appropriate, unequivocally restate specific incentives that it will make available to any entity that qualifies as an ITC. These incentives should be open to any person that acquires transmission assets presently owned and controlled by a vertically integrated electric utility. The following incentives, most of which reflect established FERC ratemaking proceedings, are the minimum FERC should offer:

  1. A premium of 100 basis points in return on equity over the required cost of equity that would otherwise be dictated by FERC precedent; 14
  2. The ability to use a hypothetical capital structure for a defined period of time; 15
  3. Construction work in progress (CWIP) in rate base and an additional 50 basis points for new infrastructure development designed to produce a measurable reduction in transmission congestion; 16
  4. Asset depreciation on shorter than historical lives; 17
  5. Authorized creation of regulatory assets to the extent that pre-existing retail-rate orders prohibit the passthrough of the increased bulk transmission-service rate in retail rates, with a defined beginning date and