The appropriate role for ITCs is rather different-and maybe not as exciting-as the role ITC proponents seem to have in mind.
This article is a response to what TRANSLink sees as the "four key benefits the hybrid RTO/ITC structure envisioned by TRANSLink provides to electricity customers" in the MISO RTO where TRANSLink proposes to operate. Similar statements of the perceived advantages of ITCs (independent transmission companies) have been made before, particularly by National Grid USA, the ITC that was to be part of the proposed Alliance RTO. Such statements should be examined carefully in light of theory, experience, and FERC's Standard Market Design (SMD), to separate the clear benefits of ITCs from those that are possible-but-unproven, improbable, or even illogical.
TRANSLink CEO Audrey Zibelman's Perspective, published in the July 15, 2002 issue of Public Utilities Fortnightly, discusses the benefits that TRANSLink sees for its ITC, focusing on the unanswered-even unacknowledged-question that leaps from the pages of all ITC proposals so far: Just what will an ITC actually do, and how might it actually do it, in the context of the SMD? The benefits that TRANSLink sees for its ITC proposal are essentially the same benefits claimed by other ITC proponents. It is worth discussing these one by one.
TRANSLink's "Four Key Benefits"
Key Benefit 1: Focus on Transmission as a Business
This one is easy, at least at a high level. Of course it is a good idea for transmission assets to be managed by a for-profit company that sees transmission as its main business. Such a company: 1) should have profit incentives to build, maintain, and operate an economical and reliable grid; 2) should be an advocate for transmission solutions to system problems; and 3) should provide a fair return to investors. Such companies should and will be fundamental parts of the competitive electricity markets of the future-and the sooner, the better.
That said, it must be added that nobody has yet come up with a very good way to align the interests of a for-profit ITC with the interests of customers, the market, or society. TRANSLink, like other ITC proponents, suggests that ITCs will do the right thing if they have profit incentives to "increase the level of electricity flowing over the bulk transmission system." But if performance-based regulation of ITCs is to have the benefits typically claimed for it, something much better than this-and better even than the more sophisticated regulatory schemes that have been proposed and tried-will have to be found.
Key Benefit 2: System Planning and Expansion
This one is not so easy, at any level. According to TRANSLink, it "leads the planning process in its region" and "financing, siting, and constructing transmission within TRANSLink's footprint are left exclusively to TRANSLink." But why should transmission remain an unchallenged monopoly, when every other part of the industry is being subjected to competitive pressure as far as practical? The old natural monopoly argument is unpersuasive today, when generation and demand management compete directly with transmission as ways to maintain reliable and efficient operations, and when merchant companies are eager to build and operate transmission facilities within or between the "footprints" of would-be transmission monopolies.
On the other hand, system planning does require a broad overview to decide, for example, whether strategically located generation, a merchant direct current line, or investment by the incumbent ITC is the best solution for the system as a whole. And when significant new alternating current facilities are the best solution, something like an ITC probably will be needed to manage the difficult siting, financing, and other implementation problems.
There are no perfect solutions to the problem of planning and implementing transmission expansions. The best imperfect solution will require a planning process overseen, if not managed, by the RTO-if only because some options may involve more than one ITC-and with the ITC(s) playing a large but not necessarily "lead" role. The ITC will, as a practical matter, probably build and own most of the grid assets in its footprint. But there is no compelling argument for, and several persuasive arguments against, putting any ITC in charge of deciding what the system needs and when, or for granting an ITC the absolute right to build everything that it or someone else decides is needed.
Key Benefit 3: Efficient and Cost-Effective Operations and Maintenance
This alleged benefit suggests and/or creates serious confusion and ambiguity about the respective roles of the ITC, the RTO, and/or "the market" in the SMD. TRANSLink certainly is correct that ITCs resulting from horizontal consolidation can increase scale and scope economies that reduce the costs of keeping the grid up and running. TRANSLink also is correct that combining small control areas into larger ones can reduce overhead costs and, much more importantly, will improve the reliability and efficiency of system dispatch and operations. The real issue here is whether the ITC or the RTO is, or should be, responsible for the latter type of efficiencies.
TRANSLink says it will perform all short-term reliability functions, and "will be responsible for scheduling transactions over its system and will provide certain ancillary services," while MISO/SPP "will provide oversight of TRANSLink's operating protocols and will be responsible for supplying ancillary and congestion management tools necessary to enable the market." TRANSLink says nothing about who will operate the energy (balancing), transmission, or ancillary service markets, who will issue dispatch instructions and determine the payments associated with following or violating such instructions, or who-if anyone-will determine market-clearing locational marginal prices (LMPs).
The central feature of FERC's SMD is that system transactions are scheduled through, reliability is maintained by, and congestion is managed and priced in, an integrated dispatch/spot market (LMP) process. In such a system, there is no way for the ITC to be responsible for scheduling transactions and maintaining reliability while the RTO is responsible for managing congestion, and the RTO or somebody else operates the spot markets. The last system to try such a schizophrenic split was in California. If TRANSLink really is going to schedule transactions and manage short-term reliability, TRANSLink will have to manage the LMP-based spot market, define and administer the associated financial transmission rights (FTRs), operate the day-ahead energy and ancillary service markets, and more. An ITC could do all this as a logical matter, but it is usually thought unwise to put these dispatch and market functions into a for-profit monopoly that makes most of its money owning, planning, and expanding the grid.
In principle, the RTO and FERC could define, and then monitor the implementation of the ITC's dispatch and pricing protocols in enough detail to assure that the ITC did not manipulate things to its advantage-just as the RTO and FERC could, in principle, define and monitor an ITC-controlled planning process in enough detail to prevent it from being manipulated to the ITC's advantage. In practice, however, such regulatory constraints and meddling would not be very effective. Perhaps more important for ITC proponents, an ITC whose operations were so narrowly defined and so diligently policed by the RTO and regulators would hardly be the kind of customer-focused, profit-driven, and innovative company they have in mind.
Key Benefit 4: Product and Service Innovation
This is an obscure and speculative benefit. It is often said that ITCs will find new products and services to offer their customers, but there are few specific examples of any kind, and none that illustrate ITC innovations within the SMD. TRANSLink's only example is what it calls an "innovative rate design that addresses … cost-shifting issues … ," but that FERC has yet to approve. It may be that ITCs can deliver benefits of this type-after all, a principal advantage of competition is that competitors may come up with something that nobody anticipated in advance-but there is little reason to think these would be significant.
For-profit ITCs can and should improve the efficiency of grid planning and operations by combining smaller grid companies into larger ones, and should make money doing so, if only at an attractive-but-reasonable regulated rate of return. ITCs also should look for transmission solutions to system problems and, like everybody else in a competitive system, try to convince the final decision makers that their solution is the best for the system and its customers. But proposals that ITCs can or should control system operations to maintain reliability or manage congestion or "maximize throughput" are inconsistent with FERC's SMD-unless the ITC does essentially everything and becomes the RTO in all but name.
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