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Open Access on Trial

The old rules don’t always fit with new commercial realities.

Fortnightly Magazine - December 2011

With billions in new investment needed to strengthen and expand the nation’s electric transmission grid over the next several decades, the Federal Energy Regulatory Commission (FERC) is injecting market-based solutions into the planning, construction, and operation of new transmission lines. Among its initiatives are the elimination of barriers that might prevent new players from competing against incumbent utilities for the right to build, own and operate this new infrastructure, and to earn the various financial and rate incentives that might be on offer.

Yet FERC’s own policy could hinder these reforms.

That policy—the linchpin that underlies any attempt by FERC to relax rules to encourage grid expansion—is the hallowed requirement that transmission owners and operators must provide open-access transmission service to all eligible customers on a non-discriminatory basis. This doctrine of open access remains central to FERC’s legitimate authority under the Federal Power Act (FPA). Yet this very policy might be stifling some grid projects—especially those built by private generation developers.

These developers inhabit a different world from traditional load-serving utilities—one that demands a new way of doing business. Yet FERC is finding that establishing one set of rules to govern open-access transmission across the broad spectrum of incumbent utilities and new entrants might not prove either practical or consistent with the financial and commercial realities each group faces.

FERC thus confronts new questions in its move to market-based solutions: 1) who may have access to new transmission, when, and under what terms and conditions; 2) which entity might have an obligation to build needed new capacity and how that is to be financed; 3) how can new entrants participate in utility planning processes; and 4) how can FERC accommodate a lighter mode of regulation for certain entities who have no market power without running afoul of its FPA requirements to regulate in a nondiscriminatory basis.

It’s arguable that FERC itself has inadvertently created issues that have thwarted progress in this area.

During the last 30-plus years, the commission has shifted its philosophy. It has veered from its original focus of regulating by fiat, seeking uniformity, and demanding strict cost-of-service pricing as essential to its legislative mandate. Instead, FERC has concluded that a competitive market produces more efficient results than an artificial one, in which prices and structures are set by a federal agency. It has turned to market-based solutions as the foundation of a new regulatory regime.

Market-based solutions dominated FERC regulation over interstate natural gas transportation and wholesaling during the late 1970s and early 1980s, followed by market pricing and flexible regulation for new interstate gas pipeline projects. In the 1990s, similar changes began to affect the electric industry when FERC permitted sellers to charge negotiated rates for wholesale sales of electric power. Today, the wholesale electric sales market depends on a system