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Long-Term Transmission Rights: A High-Stakes Debate

The absence of long-term transmission rights could exclude potential competition—and cause higher electricity costs.

Fortnightly Magazine - March 2006

ideally are positioned to offer long-term transmission service in restructured markets.

But parties on all sides of the transmission rights controversy agree that, because of the creation of RTOs, transmission owners no longer have the authority to control transmission risks. On one side of the debate, APPA notes that “RTO … regimes … all suffer from diffusion of responsibility for transmission planning among the RTO and many member transmission owners (TOs).” 22 On the other side of the debate, the Edison Electric Institute notes that “transmission owners within organized markets have turned over control of their transmission systems to RTOs and ISOs. Transmission owners in these markets lack the tools and authority necessary to take actions to reduce congestion costs.” 23

Southern California Edison says that, “In the past, TOs were able to control their cost risk from congestion through redispatch; however, under an RTO or ISO regime, TOs are no longer the control area operators and thus would not have the ability to manage risk.” 24 National Grid USA, which is the sort of transmission-focused firm that ideally would offer long-term rights among its menu of services, explains why neither it nor other transmission owners should want to assume the associated risks:

In today’s RTOs/ISOs, transmission owners do not have the tools or information to manage congestion costs; ownership and operation of the transmission system are split among the RTO/ISO and numerous transmission owners; the ultimate decision of how many financial transmission rights to offer is made by the RTO/ISO—not the individual transmission owners; and transmission owners may be subject to restrictions at the state level that would bar recovery of costs needed to fund shortfalls. 25

In short, we have created an electricity industry in which transmission firms lack the authority to manage transmission risks, particularly in the long term; and they are consequently unwilling to offer the long-term products that they might offer if they did have such authority. As WPS Resources has put it, “FERC’s initiative to develop competitive markets has resulted in the disintegration of vertically integrated entities … so that it currently is unclear who has the transmission obligation to serve and what the obligation means in the current RTO environment.” 26

The question might be raised about whether the RTOs themselves, which bear responsibility for transmission planning, also might bear the risks of offering LTTRs. The Midwest ISO denies that this would be appropriate, and instead proposes to pass the buck to transmission owners:

The RTO/ISO has no ability, nor should it, to manage the risks associated with creating an incorrect quantity of rights. That risk can best be managed (and perhaps only can be managed) by the transmission asset owner. 27

Other parties similarly note that “RTOs and ISOs should not need to, or aspire to, dabble in the derivative securities business.” 28 FTC staff suggest that “private parties have not developed more extensive alternatives whereby transmission customers can mitigate transmission risk in RTO areas… [partly because of] the non-profit status of RTOs.” 29

Because nobody is willing to be in the business of