Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

A Candy-Coated Grid

Incentives for transmission investment could boost postage-stamp pricing over license-plate rates.

Fortnightly Magazine - March 2006

time between rate cases);
• current expensing (instead of capitalization) of pre-commercial costs for permitting or site certification; and
• rate base recovery of 100 percent of prudent construction work in progress (CWIP), rather than accrual of an allowance for funds used during construction (AFUDC).

Most importantly, however, the list of rewards in the notice of proposed rulemaking (NOPR) also included an ROE “sufficient to attract new investment” and, as had failed to pass muster with the appellate court judge, a higher ROE allowance for utilities joining an RTO. (See, NOPR, FERC Docket No. RM06-4, issued Nov. 17, 2005.)

As of mid-January, the new NOPR had spawned more industry comment than just about any other FERC proposal in recent memory. Much of the response appeared extremely favorable, but therein was the problem. As the Pennsylvania PUC had noted, “it is difficult to argue against the abstract notion [of] new transmission investment.” Yet, as the PUC also noted, “transmission congestion is not always best relieved by construction of new or additional transmission facilities.”

Many questioned the lack of any objective standards, benchmarks, or cost-benefit analysis defining what utilities or developers would need to achieve or prove to qualify for incentives. FERC’s “asymmetric” plan, they complained, was lacking penalties for all sorts of possible ways in which utilities might fail to follow through on commitments for investment or development. It appeared to many that FERC intended to reward utilities simply for carrying out “good utility practice”—for doing no more than satisfying a pre-existing legal obligation to construct and maintain transmission networks as a monopoly asset, capable of meeting all reliability standards and ensuring adequate service to consumers at least cost.

Representing NASUCA, the National Association of State Utility Consumer Advocates, Ohio Consumer Counsel Janine L. Migden-Ostrander argued that FERC had “ignored” parts of the EEI survey that showed a reversal of the trend since 1999, with annual expenditures on grid expansions now said to hit about $6 billion in calendar 2006—higher than FERC’s figure of $5 billion required, and high enough, perhaps, to dispense with any need for “candy.” She warned that incentives easily could outweigh benefits, and as an example offered an analysis that NASUCA witness Matthew I. Kahal had performed on a policy statement on grid expansion proposed by FERC only a few years earlier (FERC Docket No. PL03-1), showing that similar incentives could cost consumers nationwide as much as $711 million a year, or $13 billion over a nearly 20-year time frame. (See NOPR, Comments of NASUCA, p. 3, filed Jan. 11, 1005.)

Nevertheless, there remain larger concerns. The problem lies in EPACT’s call for incentives not only to ensure reliability, but also to benefit consumers by “reducing the cost of delivered power by reducing transmission congestion.” This requirement appears to sanction incentives for grid expansions that are commonly viewed as optional or “economic.” In RTO parlance, an “economic” grid expansion is treated as a merchant endeavor—a private asset dedicated to profit with no public interest characteristic that might require certification from regulators.

In essence, EPACT’s reference to congestion relief compels