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...
Open Access on Trial
The old rules don’t always fit with new commercial realities.
access policies, FERC had required transmission providers to develop processes designed to permit all parties to access transmission services in a non-discriminatory manner. Incumbent utilities and regional transmission organizations must all operate under open access transmission tariffs (OATTs) that include, inter alia, obligations to build new lines where necessary to serve demand and to interconnect new generation pursuant to interconnection queues, open season bidding procedures, and first-come, first-served requests for service.
When a new entrant proposes to develop a transmission line, there’s no existing OATT on which to rely in determining which customers have which rights. Whereas an independent transmission line must be backed by long-term service agreements with creditworthy and reliable customers in order to secure necessary financing, potential customers, particularly those who are developing new generation resources, must have access to the transmission facilities necessary to move their power to markets in order for their generation projects to be viable. This creates both a chicken-and-egg situation between the transmission developer and its potential customers and also a regulatory issue for FERC to ensure that access by customers is open and nondiscriminatory. Addressing this situation in the early 2000s, FERC required that the independent developer conduct an open season bid process, whereby it would offer all of the capacity on its line to the public on a non-discriminatory basis. There’s no one definition for an open season and each is designed individually, but all must be filed for after-the-fact approval by FERC.
Although FERC denied early requests for waiver of its open season requirement to allow developers to conduct bilateral negotiations with potential customers, 6 it was somewhat flexible in how it deemed the open season requirement to be met. In the case of Cross Sound Cable (CSC), for example, FERC held that where a new generation project to be transmitted through CSC was the winning bidder in a request for proposals (RFP) process sponsored by the Long Island Power Authority (LIPA), the RFP process satisfied the open season requirement. CSC was permitted to contract with LIPA for 100 percent of the capacity of the first phase of the new line. 7
In theory the open season concept appears to be a reasonable means of subscribing the capacity of a new transmission line. Actual practice has exposed several flaws that have proven the opposite. Many, if not all, of the open season procedures necessarily involve iterative rounds of bidding to reconcile the ultimate sizing and cost of the line with the bids that are submitted. Thus, the open season doesn’t easily accommodate the continual jockeying of sizing, costs, project timing and customer base inherent with the in-tandem planning needs of transmission and new generation. Nor does its one-size-fits-all approach permit bilateral resolution of other physical and financial considerations that might be individual to each participant in the process.
Recognizing that many open seasons weren’t producing viable projects, in 2009 FERC approved nearly identical proposals by new entrants Chinook Power Transmission and Zephyr Power Transmission to permit them to pre-subscribe up to 50 percent of their proposed new capacity through bilateral negotiations