A SUNDAY AFTERNOON, NOT THREE WEEKS 'TIL CHRISTMAS, and I was holed up at Washington's Mayflower Hotel, attending a workshop (no Santa, no elves) on electric transmission pricing.
I wasn't alone, however. At least 200 others had filled the hotel's East Room near to capacity to hear about such topics as nodes, zones, access charges and load duration curves. The 5th National Electricity Forum, sponsored by the U.S. Department of Energy and the National Association of Regulatory Utility Commissioners, was under way. Harvard Professor William Hogan stood at the podium, explaining how his congestion pricing method had won approval from the Federal Energy Regulatory Commission just two weeks earlier for the new PJM independent system operator.
A few steps away, through the door and in the lobby, music blared from office Christmas parties in full swing. Revelers slid past, drinks in hand, oblivious to the PUC staffers at the registration desk, lining up for their badges and conference materials. Not everyone it seemed, had heard of or cared about deregulation.
FERC Chairman James Hoecker, speaking two days later, caught the mood of the partygoers. Consumers, Hoecker said, had raised no clamor yet for electric utility competition. Until they did, customer choice would prove a "tough sell."
That prospect could change. Karen Hunsicker, a staffer on the Senate Energy and Natural Resources Committee, predicts that Congress will gain momentum on electric restructuring soon after direct access begins in California.
"Wait 'til Jan. 1, when constituents start writing letters."
"That will give Congress something to solve," adds Sue Sheridan, offering a similar view from the minority professional staff of the House Commerce Committee. "It will move us out of the ideological stage that we're stuck in."
Nevertheless, other than direct reform of the Public Utility Holding Company Act, Sheridan hesitates to forecast passage of any comprehensive electric restructuring bill this year, given the short time available to Congress on the 1998 legislative calendar. "There are 120 legislative days in the Senate," she said, "including Mondays and Fridays."
On the morning of Dec. 8, Deputy Energy Secretary Elizabeth Moler had opened the DOE/NARUC conference with her top ten reasons why new federal legislation is needed on electricity restructuring. Reason number one? Reduce consumer costs by $20 billion a year, says Moler. If true, that promise should give Congress the sort of pocketbook issue it needs to justify a vote on a consumer choice bill. Nevertheless, Moler offered neither prediction nor promise on when the Clinton Administration might come out from intra-agency review with its own reform bill, or what that bill might contain.
In fact, a close look at Moler's top-ten list shows a host of problems that don't require solving unless Congress should pass legislation mandating customer choice. For instance, Moler cites sections in the Federal Power Act, PUHCA and PURPA as outdated, but only in a competitive market.
When questioned on whether the administration would mandate nationwide competition, she appeared to retreat. "It might be the best we can do," she conceded, "to recognize that the states decide for themselves."
On the other hand, if Congress should go searching for "clamor," it need look no further than the rush by utilities within a given geographic area to form a voluntary regional ISOs, and how that move is undercut by the private-use restrictions imposed on tax-exempt debt used by cooperative associations, municipal utilities and the federal power marketing administrations. These tax rules slow the nationwide reform of transmission access and pricing.
In contrast to a federal restructuring bill, it has proven relatively easy to sell electric utilities on the idea of handing over control of their transmission lines to a regional ISO, while retaining ownership of the asset itself. The latest word, however, is that utilities favor ISOs because they don't expect them to work. Some say that if ISOs should ever achieve true independence - that is, if they actually work - then they would be doomed to failure.
In theory, a truly independent ISO would eliminate all generation market power from transmission markets. That would squeeze out all excess margin, guaranteeing a pure, regulated rate of return for electric transmission assets. Few presume that a utility would stand by and let others control its assets, or push return down so low that rates recover costs and not much more. Instead, many believe that a utility in that case would divest itself of its transmission assets. Ironically, the lines would likely pass to competitive power producers, who would retain a real monetary incentive to upgrade or build lines under most of the schemes now being proposed for congestion pricing at the ISOs. Of course, new "transcos" could form that would own only transmission. ISOs would disappear. Power producers building new lines could trade the capacity to the transcos for transmission congestion rights.
Does that mean that ISOs represent only a transition phase: a half-way step in electricity evolution?
Roy Thilly, of Wisconsin Public Power, questions whether ISOs represent only the appearance of a solution. Is it reasonable, he asks, that transmission owners will give over control of transmission assets to ISOs? He takes little comfort from the fact that ISOs are forming voluntarily. How different, he asks, would ISOs look if formation was mandatory and if the FERC could impose conditions?
Commissioner Massey responds simply that the FERC is doing the best it can with what it's got.
"Are ISOs the ultimate end game?" he asks. "I don't know of anyone who is discouraging a transco. We're simply working with the authority that we have. We're counting on the industry to act on a voluntary basis.
"If Congress wants to have regional transcos, it needs to say so," adds Massey.
Ironically, the most serious challenge to voluntary ISOs has come from Congress - from the joint committee on taxation. Last fall, the joint committee advised that government-owned utilities who cede control over their transmission assets violate the private-use restriction on tax-exempt debt. That advice has discouraged much of the public power industry from joining voluntary ISOs, producing patchwork structures that cover only a portion of the grid.
California Commissioner Gregory Conlon points out that municipal utilities control 30 percent of the electric transmission in his state, but are not participating in the California ISO.
Montana commissioner Bob Anderson adds, "How can an ISO be effective in achieving its goals without 100-
percent participation? For instance, Bonneville Power believes it can't join Indego."
Massey sees no easy answer: "Does a patchwork ISO give rise to arguments of discrimination? I think that's a good question."
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And now a note from Public Utilities Fortnightly on the occasion of our 70th Anniversary.
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