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Killing the Goose

Second thoughts on transmission’s golden egg.

Fortnightly Magazine - March 2012

don’t really serve their supposed primary purpose of helping to overcome the financial and development risks inherent in launching such a huge and complicated project as a high-voltage transmission line. Second, the adders aren’t tied to performance in any way, so developers can earn bonus returns on cost overruns, and can earn them despite severe project delays.

That’s because in practice, the commission often awards the bonus on a conditional basis in a declaratory order issued at an early stage in the life of the project, before the project wins final approval by regional planners or state siting authorities, and thus before its ultimate design and cost are fully known. Then, as the budget creeps upward, costs are simply added to rate base, where they become eligible for the incentive return. APPA and the joint commenters explain:

“What was once sufficient incentive to jumpstart a project becomes a bonus for coming in over budget.

“It is as if the company management had voted to offer its CEO a $1 million bonus for bringing a project in on time and within budget, but promised twice the bonus if the project came in late and at double its budgeted cost.” (Joint Comments, p.62, filed Sept. 12, 2011.)

Of course, many transmission project developers—including ATC and AEP among them—assert that that grid project development involves long lead times plus significant hurdles in siting and permitting, making it all but impossible to avoid significant project redesign along the way from initial proposal to in-service startup.

ATC warns: “Don’t put the sponsor at risk that regional cost allocation will change later because project costs have gone up after initial estimates.”

AEP urges FERC that if it chooses to limit the effect of ROE adders to the developer’s initial proposed and budgeted cost, it should allow adjustments to original cost to reflect changes in project scope that arise during regulatory or planning review processes.

Yet one industry group consisting largely of state attorneys general and utility commissions from New England asserts that the transmission component of retail rates in that region has more than doubled since FERC issued Order 679, from about 5 percent in 2006 to about 13 to 14 percent currently, and sees the ratio rising to as high as 24 percent by 2015 (see Figure 2) . And on the other side of the country, the California Public Utilities Commission complains of a similar trend, noting in its comments filed at FERC that the high-voltage transmission access charge (TAC) billed by the by the California ISO climbed from $2.97/MWh in October 2006, to $5.25/MWh in September 2010. More recent data shows that CAISO’s TAC climbed to $6.48/MWh in April 2011.

Moreover, the CPUC finds no reason to believe that these higher costs have added to consumer welfare:

“Once transmission incentives are awarded, it is financially beneficial for a project sponsor to abstain from cost containment.

“ROE incentives … have a clear impact to ratepayers, but it is impossible to say if, in turn, ratepayers received commensurate benefits through reduced congestion or improved reliability.” (Comments, p.7,