Fortnightly Magazine - November 15 2001


Camp Flowgate



'RTO Week' finds FERC still unsure about electric transmission.

If you think the feds have this transmission thing figured out, think again. Listen to Commissioner Bill Massey, as he groped for ideas during "RTO Week," the five-day workshop conducted last month by the Federal Energy Regulatory Commission (FERC) to formulate policy for its latest scheme, the "regional transmission organization."

"Are we so underbuilt in transmission," he asked, "that we don't just need a process, but a specific process that guarantees expansion?" J

unior commissioner Nora Mead Brownell could add little else than to suggest more hearings: "Maybe what we need is another working group with state regulators, traders, and consultants to tell us what information we need."

And then there was Commissioner Linda Breathitt, bless her soul, who confessed that, "Up until this week, I had never heard of 'flowgates.'"

Yet Breathitt did contribute one of the more cogent observations of the week:

"FERC has no experience in setting up a process for evaluating transmission projects and putting them in place," said Breathitt, "as [we] have in the area of gas pipelines. So FERC has trouble envisioning how the process should look at an RTO."

The real star of the week was José Delgado, the Cuban dynamo. He was the only one at RTO Week with a clear idea of his purpose on Earth-which is to build more transmission lines.

(My apologies here to attorney Sue Kelly. She brought the house down with her 'show tunes' theory of regulation-how she learned from that it's better to be a bee, like Enron, than a flower, like a rural co-op or other small utility-but , was that really necessary?)

Delgado, known by some as "Mr. Transmission," worked formerly with Wisconsin Electric Power, where he helped develop the Midwest Independent System Operator. Today he serves as CEO of American Transmission Co., a for-profit, transmission-only monopoly that operates primarily in Wisconsin. And he is tanned, rested, and ready.

"We have no native load. Everyone is a customer."

Delgado, you see, has no choice. Transmission is all he's got: "We have only two flavors of service, network and point-to-point."

Of course, Delgado does face some self-imposed limits. He insists his credibility is on the line with every project, so he'll choose which ones to forward to the RTO planning committee, if it comes to that.

"Please don't think that all I'm doing is putting sticks in the mud and stringing a wire between them," he pleaded. "If I get a request by some one to build a line to move 1000 megawatts from Vermont to Wisconsin, the first thing I check is the sanity of that person."

Yet Delgado appears dead-set on his mission.

"You have a system that is naturally biased against building new transmission," he explained. "Transmission comes in big lumps and takes a long time to build. So yes, we are going to be building too much, probably. But if the load is there we better have the transmission lines ready, or there will be hell to pay and I will have a one-way ticket out of Milwaukee."

"IF YOU WANT PERFECT HEDGES, YOU NEED FLOWGATES." That was Shmuel Oren, the engineering professor from Cal-Berkeley, who led an engaging dialogue with Reem Fahey from Edison Mission Energy. And here's the issue: Do you get a healthier transmission sector by relying on financial hedges linked to actual physical transmission constraints at interfaces (flowgate rights, or FGRs), or from virtual hedges as we have now in the Northeast (known as fixed or firm transmission rights-FTRs), that guarantee the right to move power through congestion from point to point?

But Oren believes that while FTRs coupled with locational marginal pricing (LMP) help make gen plant siting more efficient, it doesn't tell you where to upgrade the wires. Oren adds that FTRs are fine for the holders, but he believes they impose an added socialized uplift cost on the have-nots, especially when the holders don't exercise all their rights, which leaves grid assets unused. But with FGRs, claims Oren,"the hedging contract is tied to physical elements in the grid." Reem Fahey concedes that FGRs "lend themselves better to trading in the secondary market," but she claims FTRs are more practical for traders.

"If you have an FGR system," she says, "then you have to buy 200 different FGR contracts to be hedged." Oren's answer: limit FGR trading only to the "commercially sensitive" flowgates, but then Fahey wants to know who decides that. She warns that since you can't know that in advance (or perhaps even the optimal amount of FTRs to release to auction, either, says Oren), that any program of congestion hedging contracts forces the RTO in effect to take a position in the market-to accept a certain degree of financial risk that congestion revenues will fail to cover its actual cost to the market. Does that auger for a transco-type RTO?

Fahey's solution: Trade both FGRs and FTRs. Let the traders choose.

"I'M HEARING STORIES ABOUT LOTS OF NEW GAS TURBINES BUILT IN LOUISIANA," said Commissioner Massey, "but primarily for export [to neighboring states]. They're afraid that it will take lots of transmission upgrades, and that all the upgrade costs will get rolled in, and weigh heavily on Louisiana customers."

Massey's comment drew out William K. Newman, sr. v.p. for transmission planning and operations for The Southern Company, who complained about the same thing happening in southern Mississippi and Alabama, where the natural gas is plentiful, but the need for power just isn't there.

"It's two to three times more expensive on a per-megawatt basis to build transmission than to build gas pipeline," Newman explained. "So I question the idea of building all these gas turbines at the wellhead and then assuming that you're going to string wire to get to market."

Newman's quote offered an implied indictment of LMP, and its ability to send price signals both to power producers and to grid managers to help steer capital investment to the right place.

Out West they don't much like LMP. They say it ignores costs that hydro plants incur for items not linked to energy production, such as flood control, agricultural irrigation, and fish preservation.

Enron's Steve Walton, formerly with hydro owner PacifiCorp, conceded that hydro systems operate differently, but said he had been "eating a lot of crow lately," and had come to accept LMP. He put his faith in the power producers:

"Let the generators decide where they want to build the plant-whether to build turbines in Southern California and take gas delivery on the new Sonoran pipeline, or build in Nevada and Arizona instead and use a new transmission line to move the power to California. And availability of pollution rights will play a role in this."

SO THE RTO MIGHT MORPH INTO A SOVIET-STYLE CENTRAL PLANNER. Some want eminent domain rights for new transmission lines, but that could make things worse-and steal turf from state regulators.

"You cannot combine a merchant transmission solution with eminent domain rights," said Vermont regulator Michael Dworkin.

"State eminent domain laws require proof that the project at hand is the most efficient alternative. That ... will automatically involve a governmental decision on efficiency and planning.

"I, as a state regulator, will be forced to choose between a pipeline and transmission ... I will want some help from the RTO ... but an RTO pre-approval process will act like a prudence review and then will be binding on the state PUC."

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