The time-honored discounted cash flow method for determining appropriate utility returns falls short when interest rates are low. Inadequate ROEs ultimately increase cost of capital and wipe away...
Long-Term Transmission Rights: A High-Stakes Debate
The absence of long-term transmission rights could exclude potential competition—and cause higher electricity costs.
Once upon a time, back in the days of the “traditional regulation” of the electric power industry, one could plunk down a billion dollars on a generation plant and have a pretty good idea of what one would be paying to deliver the power to customers. If one were a transmission owner, the cost of transmission service would depend upon the costs of building and maintaining transmission, which tend to rise over time in a reasonably stable manner. If one were not a transmission owner, one would obtain transmission service from a transmission provider that would be committed to provide service for the life of the generating plant at cost-of-service rates that would, again, rise over time in a reasonably stable manner. In either case, there were the possibilities of transmission service curtailment and of nasty inflationary surprises; but both service quality and prices nonetheless remained fairly stable.
In the new world of locational marginal pricing (LMP), the price of transmission service between generators and loads can bounce around wildly from one hour to the next. For a large power plant, the variability in transmission charges can be in the tens or even hundreds of millions of dollars over the life of the plant. To address such financial risks, the regional transmission organizations (RTOs) that use LMP have introduced various forms of transmission rights that guarantee a stable transmission charge over the lives of the rights. But because the available rights have lives of no greater than one year, they are useless for the purpose of hedging the transmission risks that are faced by an investor in a new generator with a 40-year life. In other words, someone who plunks a billion dollars down on generation plant today will have very little idea what one will be paid for transmission service over the life of the investment.
Although power-industry restructuring has not changed significantly the aggregate uncertainties in the costs of transmission service and generation dispatch, the financial effects of these uncertainties have been redistributed among market participants in ways that, among other things, have created new financial risks for investors in generation. These uncertainties discourage generation investment and ultimately raise the price of electricity to consumers.
Why is it that transmission owners, who offered long-term transmission rights (LTTRs) under traditional regulation, are unable or unwilling to do so in restructured markets? Why is it that, in our new competitive electricity markets, nobody is out there selling, at a profit, the long-term transmission products that some transmission customers surely want?
To address questions like these, the Federal Energy Regulatory Commission (FERC) recently invited “comments on establishing long-term transmission rights in markets with locational pricing.” 1 In brief, the comments indicate that restructured markets have been designed so that those who have the ability to build transmission have little incentive to do so. Indeed, the comments of