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Killing the Goose

Second thoughts on transmission’s golden egg.

Fortnightly Magazine - March 2012

filed Sept. 12, 2011.)

New England’s transmission owners dispute that notion, however, claiming that consumer benefits can be measured. In their comments, they say that the $4.3 billion in new baseline reliability grid projects approved by ISO New England since 2005 have saved a combined $420 million in annual congestion costs and avoided daily payments for reliability, such as through RMR (reliability must-run) contracts, versus the estimated $28.5 million annual cost in 2010 for FERC-approved grid incentives.

By contrast, the regional state committee for the Southwest Power Pool suggests a completely different solution: change the ROE adders from unbridled bonuses to closely monitored performance trackers, complete with targets and milestones—in much the same way that a county or state government might monitor progress on a public contract for new highway construction and withhold partial payment for missed deadlines.

In fact, the state committee reports that SPP already has formed a project cost task force to scrutinize grid project cost estimates and design a standardized cost estimate reporting template. The SPP also has published a “Study Estimate Design Guide” that lists criteria for development of transmission construction cost elements, plus best practices and performance criteria, for transmission lines of 100 kV or greater.

The Organization of MISO States also has proposed a similar idea in its comments. In effect, the MISO and SPP state committees would have FERC split its Order 679 rate incentives into two categories, awarded in two separate steps. In the first step, occurring soon after the initial project proposal, the commission would award risk-reducing incentives, designed to help grid developers overcome financing risk and raise capital. In step 2, beginning later, FERC would award revenue-enhancing incentives keyed to certain performance criteria established and monitored by state-level or regional planners, and earned by the developer only by keeping to budgets and milestones, and only after also proving that customer benefits will exceed costs.

How this model would work for independent transcos and merchant developers remains to be seen.

Southwestern Power Group, developer of the Sun Zia grid project, claims that the primary challenge for merchant transmission developers operating outside of RTO regions isn’t the planning process, but a lack of any rate base or captive customers. Southwestern thus urges FERC to clarify its anchor tenant policy—which allows developers to go outside open-access rules to offer pre-subscribed capacity on new projects—and then modify its 2005 policy statement (Dkt. PL05-11, 111 FERC ¶61,473) that currently restricts power producers and other market participants to a passive ownership interest no greater than 49 percent in merchant and independent transco grid projects.

A Hollow Test

EPAct 2005 and Order 679 came along well before the commission mandated regional grid planning to consider environmental and public policy needs in last year’s celebrated Order 1000, and therein might rest the most intractable problem in reforming its incentives policy.

In fact, one might well argue that the vague nature of the current routine-or-non-routine nexus test has proved useful to FERC. For example, it allowed the commission to use Order 679 to justify incentives for grid projects that aid