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...
A Pricey Peninsula
Michigan chafes over regional grid planning, providing a policy lesson for the feds.
This month the nation’s utilities will report back to the U.S. Federal Energy Regulatory Commission on how they will comply with FERC Order 1000, the rule issued last summer that requires all transmission providers to participate in regional grid planning, and forces grid planners to take account of state and federal policy governing renewable energy.
And with this landmark step, the industry turns back full circle to the days of vertically integrated resource planning, before everything broke loose in electric restructuring.
With Order 888, issued in 1996, the feds unbundled transmission from generation. That led directly to the formation of regional transmission organizations (RTOs), ensuring that grid management and centralized unit dispatch and would be overseen by agencies with no financial interest in energy markets or the generation revenue stream.
Now, however, with Order 1000, the commission has engineered a virtual rebundling of these two sectors—power plants and wires—by requiring regional planners, when they study where to lay down the lines, to consider not only what power flows are needed to keep the lights on, but also the motives, mandates, and economics of various portfolios of generation resources, and their effects on wholesale prices and retail rates.
That’s called integrated resource planning (IRP), the longtime province of state regulators and vertically integrated electric utilities. But with Order 1000, IRP is being ferried away from the states and reinvented on a regional level, in a process to be managed by the feds.
Speaking at a press gathering last month, FERC Chairman Jon Wellinghoff conceded that his agency likely would “get some pushback” from the industry in those Order 1000 compliance filings. But on that score he cited rights of first refusal (ROFR)—the notion that incumbent transmission owners ought to get a first crack at building infrastructure identified in the planning process:
“Some areas have different ideas on that,” Wellinghoff said.
But as for the bigger question—how much transmission to build—the chairman saw no basic conflict that markets can’t resolve.
Of course, cost estimates have run as high as $800 billion for the new lines needed to gather wind and solar from flyover country to load centers in the Midwest and East, to satisfy state-mandated renewable portfolio standards (RPS). And by contrast, however, as Wellinghoff noted, some see the cost of solar photovoltaic cells installed behind the customer meter falling as low as $2 a watt, not to mention all that transmission investment that is thereby avoided.
So the chairman reminded his audience of energy beat reporters that FERC, as a federal agency, would stay neutral in the contest between supply-side and demand-side solutions. That would leave the industry free to meet renewable energy goals either by wind from the Dakotas, implying a massive wires build-out, or instead by rooftop PV—a fix that could turn much of any future big build into stranded investment.
“We need,” he said, “to build only the transmission that we need.”