FERC faces a growing chorus of rebellion on earnings incentives.
"If I may say, today, we the states are the chosen ones." That was Virginia utility commissioner Hullihen ("Hulli") W. Moore, speaking on the phone in January with Federal Energy Regulatory Commission (FERC) Chairman Pat Wood and other federal and state regulators, trying to untangle the business of transmission reform.
Moore's comment proved prophetic. Within two months, the state public utility commissions (PUCs) representing Pennsylvania, Michigan, and Ohio took the extraordinary step of asking FERC to overrule any state that would block FERC's plan, in a motion filed in March.
The problem was none other than Hulli Moore's Virginia. In February, the Virginia General Assembly had enacted House Bill 2453, a law prohibiting any Virginia utility from transferring ownership of its transmission system, and the state's governor had shown no inclination to cast a veto. American Electric Power, with a subsidiary operating in Virginia, had cited the new law as reason to go slow on joining PJM-or any regional transmission organization (RTO), as it had promised as a condition of its merger with Central & South West.
The three PUCs were aghast. They saw Virginia as hijacking FERC's agenda:
"Since AEP indicates that it cannot operate its Virginia-based transmission facilities separately from the rest of the system, Virginia and the Virginia Commission are exercising de facto jurisdiction over a wholesale electric market region which extends over the SPP [Southwest Power Pool], MISO [Midwest ISO], and PJM [Pennsylvania-New Jersey-Maryland Interconnection] regions covering 27 states and the District of Columbia." .
So regulators now drive the debate. That muscle was seen clearly in comments filed by state PUCs in response to FERC's January plan to offer rate incentives for utilities who (1) form new RTOs, (2) transfer grid assets to independent transmission companies (ITCs) that join with RTOs, or (3) invest in new transmission facilities. FERC's planned incentives would grant increases in authorized return on equity (ROE) ranging from 50 to 150 to 100 basis points.
As might have been expected, the response has ranged from cautious approval to outright objection. State PUCs warn of higher rates. They see FERC's plan as too broad, lacking a cost-benefit analysis. (Indiana and Iowa regulators argue, however, that the ROE incentives are too narrow.)
he criticisms tend to fall under one of 10 categories:
- Unproven. Incentives are tied too closely to RTO and SMD concepts, which themselves are objectionable as too costly.
- Inflationary. Encourages and rewards utilities for divesting grid assets at inflated prices, saddling retail customers with the bill.
- Unjustified. Undercuts requirement in FERC Order 2000 to present positive cost-benefit data to justify innovative pricing schemes.
- Too Expensive. Cost of paying out the incentive outweighs revenue from operational savings.
- Inconsistent. Contrary to FERC's proposal in SMD to adopt participant funding to pay for transmission expansion.
- Overbroad. Should be applied, if at all, only to "economic" transmission enhancements-i.e., those grid projects designed to bring new competitive generation resources to market-but not to "reliability" transmission, meaning those projects needed only to maintain system reliability.
- Overly Generous. Provides retroactive windfall to utilities that have already formed RTOs, or that have already transferred grid assets to an ITC, where incentive is no longer needed.
- Poorly Targeted. Should apply only to new investments in infrastructure-not to a simple transfer of ownership of existing facilities.
- One-Sided. Distorts traditional process of integrated resource planning (IRP), which mandates equal consideration of generation, transmission, and demand-side resources to meet infrastructure needs.
- Unwarranted. Utilities don't need to receive regulatory incentives to join RTOs, since economic realities virtually will force utilities to join RTOs, without any incentive at all, if they want to take advantage of low-cost resources available in regional energy trading.
What is interesting, however, is that several parties who favor restructuring along lines enunciated by the agency do not agree that higher revenues for transmission owners are needed, or that incentives mark a necessary cost of industry reform. Consider, for example, the comments submitted by the Transmission Access Policy Study Group (TAPS), an informal association of transmission-dependent public power utilities.
TAPS offers a rough estimate of the nationwide bill for the restructuring incentives alone at $11.8 billion. Those costs would leave customers "worse off than they are today," with no guarantee of savings that might occur if structural reform is actually accomplished "at some point in the future," according to TAPS.
Several state PUCs feel that ROE incentives can be effective, but they suggest that FERC tailor the plan to regional particulars. Massachusetts reminds FERC that with New England having already switched to regional control of grid operations, and with a regional market that features numerous features of FERC's SMD, rate incentives need only apply for "achievements above and beyond these accomplishments."
In short, the comments demonstrate the difficulty of getting parties to agree to programs that mandate higher rates-no matter how attractive the policy goals might sound.
TAPS agrees with FERC that vertically integrated utilities enjoy motive and opportunity to skew grid operations to their advantage. Yet it argues that FERC's plan will boost rates and put the burden of fixing the problem directly on the victims of the alleged discrimination.
On the other end of the scale, the National Association of State Utility Consumer Advocates (NASUCA) reveals a broad disagreement with FERC's overall plan. The group says the costs associated with the ROE plan are "conservatively calculated" at $13 billion over the 19-year time horizon contemplated by FERC.
According to NASUCA, the policy means that FERC no longer will set the ROE component of transmission rates according to its best estimate of a utility's cost of equity, but on an artificially higher figure limited only by the top end of reasonable range for a proxy group of companies. NASUCA warned that grid owners would be encouraged to litigate not only the best estimate of cost of capital, but also the top end of the range as well.
- Northeast Power Markets. A study done for the Maine PUC found no clear benefit in forming a regional transmission organization (RTO) spanning northern Maine and the Canadian province of New Brunswick. It warned of environmental opposition to plans for New Brunswick to develop more low-cost power by refurbishing nuclear capacity and converting coal plants to Orimulsion, which is the brand name given to a fossil fuel produced from natural bitumen mixed with water.
- RTO Startup Costs. FERC denied automatic cost recovery for utility load-serving entities that fund startup costs for certain market operations for the Midwest ISO. Instead, it will require the utilities to file rate applications and prove that such costs otherwise will remain stranded.
- Must-Offer Bidding. FERC rejected a proposal by the California ISO to pay only the market-clearing price (MCP) to power plants when the ISO dispatches a plant that bids into the real-time imbalance market under must-offer rules. Power producers had claimed the ISO rule would deny full cost recovery if the MCP fell short of generator bids.
- ISO Credit Policies. The New York ISO proposed to limit the amount of unsecured credit offered to market participants based on each player's risk profile, as determined by measuring each player's tangible net worth and then applying a multiplier factor based on the party's credit rating (ranging from "BBB-" to "A+"). Member utilities faulted the plan for omitting other provisions for working capital contributions and allocating bad debt losses among ISO members.
- Gas Price Spikes. The Texas PUC has moved to lessen the impact of natural gas fuel price spikes on retail electric customers who choose default service from a utility marketing affiliate. The PUC raised the minimum level of gas price increase that must occur before the supplier can include a new fuel cost adjustment in the regulated default price. -B.W.R.
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