Frontlines

Pancakes for Breakfast?

Two new transcos wake up to a stack of protests.

With the first deadline only a month away, electric utilities have launched trial balloons before filing plans at the Federal Energy Regulatory Commission for regional transmission organizations (RTOs).

And, like water flowing uphill, these balloons want to float upwind, toward the money.

I'm thinking in particular of two new ventures. The first is International Transmission Co., proposed by DTE Energy, the parent company of Detroit Edison. The second is American Transmission Co. LLC., the transco (stand-alone transmission company) created in Wisconsin by state legislation that claims six utility members plus a municipal utility as an equity partner.

Regardless of motive, these two balloons share the same goal: Lock in the profits before the feds close the door. For credibility, each looks to state PUC ratemaking.

In some regions that have formed independent system operators (ISOs), and in others that failed, and in the Midwest, where the rules are still in doubt, the utilities say they must accept a pay cut to join the club. In a column I wrote exactly one year ago, I quoted José Delgado, vice president of electric system operations at Wisconsin Electric Power Co., on the cost of joining an ISO. Delgado, who now moonlights as CEO of ATC Management, the corporate manager of the ATC transco, had testified last year in the Midwest ISO proceedings, showing how WEPCO (and others) enjoyed a much higher return on equity (ROE) on transmission plant from state regulators than they would under ISO protocols.

This past summer I cornered Bill McCormick, CEO of CMS Energy, at a press luncheon in Washington, D.C. CMS Energy owns Consumers Energy, the electric utility located just to the North of DTE, and the other big transmission player in Michigan. I asked McCormick about DTE's proposal, and he talked freely about the idea of spinning off transmission.

"You ask yourself whether you're getting enough on your investment, and if not, you think about getting rid of it," he told me. And the FERC's grudging acceptance of an 11.6 percent ROE on transmission service in the recent Southern California Edison case doesn't really ease the pain. Utilities want more. But now McCormick and Delgado have learned how to play the game.

It's simple. Call the FERC's bluff. The feds say they want innovative ratemaking ideas, so oblige them. Before you take the vow of poverty, design your tariffs and ROE on your own terms. Then bring those dollars with you as a fait accompli. Your transco will operate within the ISO/RTO as a separate profit zone, outside the low-rent district.

There's a problem, however. While you're boosting your bottom line, you're adding a middleman. In the jargon of electric transmission, that's one extra "pancake" on the plate. And pancakes sit heavy on a regulator's stomach.

"Did the commission mean what it said about not offering bribes?" That's Robert McDiarmid talking, from the Washington, D.C. law firm of Spiegel & McDiarmid, a staunch ally of municipal utilities. He represents a coalition of transmission-dependent muni's in Michigan that opposes DTE's clever scheme. Detroit Edison would spin off its grid assets to ITC and at the same time lock in rates at a high level equal to the revenue requirement for transmission service implicit in the transmission rate component of Detroit Edison's current retail rate for bundled electric distribution service, as set by the Michigan Public Service Commission in 1994 in a traditional state retail rate case. Edison would then accept a freeze on transmission rates—one that would mirror the freeze on retail electric rates imposed by Michigan's recently enacted restructuring legislation.

McDiarmid bristles at the whole idea. "What the filing really counts on," he argues, "is regulatory capitulation—the notion that the FERC will accept even a patently unreasonable and unsupported rate increase as a quid pro quo for Detroit Edison's transmission divestiture."

He sees DTE angling for advantage by being one of the first out of the box: "For obeying the law, and with no showing of materially changed circumstances, the DTE companies deem themselves entitled to double the rates."

DTE's gambit also has caught the eye of Michigan Attorney General Jennifer Granholm and the corporate advocacy group ABATE (Association of Businesses Advocating Tariff Equity), which includes large-volume industrial electric customers such as General Motors, Ford, and Daimler/Chrysler.

Granholm warns that DTE's plan would hike average transmission rates 48 percent higher than Edison's current, FERC-filed open-access transmission tariff (OATT). She says it would boost rates as much as 72 percent for firm point-to-point service.

"All customers taking service under grandfathered agreements predating Order 888 will be protected from the proposed rate increase." And Granholm also questions DTE's theory that you can extract a fair ROE for transmission from a state PUC order. She claims that back in Detroit Edison's 1994 retail rate case, the state PSC did not define and quantify unbundled generation, transmission, and distribution components consistent with current accepted methods.

In Wisconsin, Delgado would defend high profits in the name of expansion. In his case, ATC would belong to the Midwest ISO, but would collect its own ROE proposed at 12.2 percent—a figure chosen to mirror the highest state-approved ROE for any of the six transmission owners, and higher than the 11.5 percent ROE stipulated as acceptable by Midwest ISO members.

Moreover, ATC would earn that higher ROE on a jacked-up rate base. In what it called a "transmission expansion adder," ATC would calculate ROE on the current level of equity capital plus the equity value of future transmission construction planned by year's end. What a terrific way to justify profits—an incentive to expand the grid—what everyone wants.

Beyond that, ATC would run a single pricing zone within the Midwest ISO, at first charging a license plate rate for network service (reflecting the different cost structures of its individual members), but later phasing out license plate pricing to a single network rate over the five years starting with ATC's 2001 startup.

(One member of ATC, Wisconsin Public Service Corp., has complained about this phase-in plan. William L. Bourbonnais, WPSC's manager of rates and economic evaluation, asks why ATC picked 1999 to measure costs for license plate pricing, instead of 2001. Bourbonnais says the 1999 date will penalize his company, which spent bundles on grid investment in the last two years: "The cost of new 1999-2000 investment was allocated disproportionately to WPSC ... forcing it to bear a disproportionately heavy share of the costs of transition.")

But again, it falls to Robert McDiarmid, this time representing the Southern Minnesota Municipal Power Agency, to put it all in perspective.

In the upper Midwest, McDiarmid's clients must occasionally transmit energy into or through the Alliant Energy system, which heretofore has charged a single, one-zone transmission rate. But now, as McDiarmid notes, only one of Alliant Energy's three operating utility subsidiaries would belong to ATC. That would be Wisconsin Power & Light. The other two Alliant subsidiaries, Interstate Power and IES would remain outside the transco, forcing Alliant to split its territory into two transmission zones, East and West, and adding costs for customers.

"This re-serving of old, moldy pancakes," McDiarmid says, "has about the attractiveness of similarly aged pancakes for breakfast."

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