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...
Transmission Policy in Flux
More planning, fewer incentives, and a black swan on the horizon.
in some cases, but the economy as a whole (and the reputation of the industry) suffers when there’s an outage, and outages can cascade. Transmission lines constructed to improve the integration of renewables benefit all of society and not just the sellers and buyers of the power. If renewables didn’t provide broad societal benefits, one wonders why they should be built in the first place since they are usually more expensive than fossil-fueled alternatives.
Taking all of these factors into account in the cost allocation process simply isn’t feasible, and attempting to do so likely will produce process failure. Prof. William Hogan has argued otherwise, 8 but I don’t agree with him because his definition of benefits is too narrow and he understates the difficulties of applying his proposed methodology. Moreover, the first approved line might provide greater benefits to one region, but the next one might provide greater benefits elsewhere. 9 The interstate grid is a single machine, and we should enjoy its benefits on a shared basis and with a national outlook.
My taxes helped pay for Interstate 90 in Colorado, and the taxes of Coloradans helped pay for Interstate 95 on the East Coast.
Nevertheless, the core problem is that the nation hasn’t yet embraced the value of a national electric system, and this fact has limited the opportunities for new transmission investment. FERC’s efforts to promote transmission by providing a price incentive were beginning to work, but FERC seems to be backing off from those efforts in response to local pressure. FERC will need to be more aggressive in asserting its authority vis-à-vis the states in order to promote its vision of a highly efficient interstate bulk power system. The utility industry should get behind this effort—not only to reduce the cost and enhance reliability in the near term, but also because electricity delivered over the bulk power system, the core product of the electric industry, will face increasing competition in the future.
3. Renewable energy advocates shouldn’t welcome the governor’s position. The proposed legislation puts a cap on the increases in retail rates that will be permitted to integrate wind. This means substantially less green energy will be procured than would be achievable under a policy based on least-cost renewable generation.
5. Several years ago, FERC chose to require individual electric utilities to use the median of the range of reasonableness to establish ROEs, as opposed to the midpoint. Golden Spread Elec. Coop. Inc. v. Sw. Pub. Serv. Co., Opinion No. 501, 123 FERC ¶61,047 at pp. 62-64 (2008) . This has generally produced much lower ROEs. FERC allows groups of utilities subject to a single ROE to use the midpoint of the DCF range of reasonableness.