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Merchant Transmission Redux

Financial transmission rights and regulated returns have not induced needed construction. Presenting an alternative model.

Fortnightly Magazine - September 2006

the future role of independent transmission companies is not yet clear.

Where competition has been possible, it usually has improved market efficiency and ensured the erosion of high profits as competitors enter. In transmission, however, nodal pricing and natural monopoly interact to reduce the incentives of competitors who are rewarded with FTRs. The RICC proposal facilitates competition by offering investors a reward based not on the costs that remain after construction (as a grant of FTRs does), but on the savings that their investment produces for market participants.

Investor Relations

RICC offers any interested investor a multi-year window to earn returns that increase with the efficiency of its project, rather than with the amount invested, as happens under traditional regulation. It is fully consistent with the existing system of regulation and with the continuing role of utilities and independent transmission companies as owners of lines. It also is equitable; LSEs share the benefits from the outset, the costs of RTOs and TOs are covered, risk is shifted from consumers to investors, and there is a well-defined cap on the revenue that a sponsor can collect.

Simple regulatory measures that supplement existing open access and RTO rules can defuse a sponsor’s potential to abuse market power. The simulations that determine saved congestion costs already are a part of every RTO’s operations and planning. A number of regulatory rulemakings will be necessary, but this time the payoff may be a transmission system that has finally moved into step with the rest of its industry.

 

Endnotes:

1. Edison Electric Institute, EEI Survey of Transmission Investment: Historical and Planned Capital Expenditures (1999-2008), May, 2005 at 3.

2. Edison Electric Institute, U.S. Transmission Capacity: Present Status and Future Prospects, Aug. 2004 at 6. http://www.eei.org/industry_issues/energy_infrastructure/transmission/USTransCapacity10-18-04.pdf.

3. U.S. Energy Information Administration, Electric Power Annual (Nov. 2005) tables 6.1 and ES. http://www.eia.doe.gov/cneaf/electricity/epa/epaxlfilees.xls and http://www.eia.doe.gov/cneaf/electricity/epa/epaxlfile6_2.xls. This figure does not include some bilateral transactions. See Vito Stagliano and J. Jolly Hayden, “The Electric Transmission Paradox,” Electricity Journal 17 (Mar. 2004), 37-46.

4. A set of numerical examples, comparisons with conventional regulation, and additional discussion of technical details can be obtained from jjhayden@sbcglobal.net.

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