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Life in the Transco Age

The competitive transmission genie is out of the bottle.

Fortnightly Magazine - March 2014
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The structure of the transmission industry is changing substantially, and will continue to do so for some time to come. With the advent of competition, there will be both legacy and new transmission players, with opportunities opening up for both progressive utilities and independent transmission companies alike.

How can we make such a statement? It's supported by strong precedent in power generation, as well as ongoing trends in the evolution of markets and business models.

Back in the late 1970s and early 1980s, the U.S. Congress heralded a revolutionary development, when it enacted the Public Utility Regulatory Policies Act (PURPA). For the first time, the law obligated utilities to purchase generation capacity and energy from others rather than only build it themselves. These new upstarts - qualifying facilities (QF) or so-called "PURPA machines" - had to meet strict efficiency and size criteria. For QFs that succeeded in being built and coming on line, utilities were required to provide interconnection service and to calculate and pay the utility's avoided cost for their entire output.

Figure 1 - Utilities Creating Merchant Transcos

PURPA was the camel's nose under the tent. By the mid-1980s PURPA catalyzed a massive influx of offers from non-utility generators (NUG) to sell power to the utilities, to such an extent that some utilities couldn't absorb them all. Interconnection became a major issue. Some states adopted payment approaches ( e.g., New York's "6-cent law") that seriously cut into utility profits, and utility credit ratings began to suffer. There was talk of repealing PURPA, but it had solid political support.

What to do? Faced with barbarians at the gate, the utilities came up with a brilliant solution: make the NUGs compete, not with the utilities' cost, but with each other. They started to issue RFPs that identified their capacity needs, timing, and types of power required. Early on, through trial and error, utilities discovered that they needed to set threshold criteria for bids, such as requiring that they have features like a reliable fuel supply and a contracted site. Within just a few years, a number of states ( e.g., Massachusetts, Minnesota, Wisconsin, etc.) had adopted approaches to evaluate bids for capacity, and to accept only those that were deemed best using a complex array of criteria. Also, the utilities also figured out how to participate in their own solicitations, using independent evaluators or separating the evaluation from the bids. Using this approach, hundreds of thousands of megawatts were offered to utilities; tens of thousands of megawatts were selected; and most (but not all) of the selected projects signed contracts and were built; some failed to secure air permits or financing.

The Energy Policy Act of 1992 (EPAct) gave a whole new meaning to this competition by allowing independent power producers (IPP) that didn't meet PURPA's efficiency standards to compete head-to-head with utilities to supply baseload generation. At this point, utilities set up their

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