The time-honored discounted cash flow method for determining appropriate utility returns falls short when interest rates are low. Inadequate ROEs ultimately increase cost of capital and wipe away...
Barriers to Transmission Superhighways
History teaches us that the most successful American businesses emerge from the crucible of competition.
Important challenges still confront the development of a coherent strategy to create an efficient modern transmission system. Assuming the Federal Energy Regulatory Commission (FERC) and Congress are earnest about creating a 21st century grid—the Energy Policy Act of 2005 and FERC’s frantic schedule of activity indicate they are—new transmission ideas, projects, and technologies need to emerge.
Transmission innovation, often thought to be an oxymoron, will flourish more fully in an environment where there is a competitive struggle. History teaches us that the most successful American businesses emerge from the crucible of competition, especially when there are well-designed “rules of the road.”
For new transmission ideas and opportunities to come forward, the planning processes of transmission utilities, independent system operators (ISOs), and regional transmission organizations (RTOs) must not be allowed to become instruments that bar entry—intentionally or unintentionally—to new transmission projects. However, as transmission owners and operators continue to develop new and improved ways to manage their operations, two areas emerge as barriers to the entry of new transmission projects:
1. Ongoing efforts to develop a coherent large generation and transmission interconnection process. In PJM, often at the vanguard in the resolution of issues that emerge later in other competitive markets, the interconnection process continues to interfere with the problem of retiring generators. That process, in turn, is being held up by the slow development of a coherent capacity (or as PJM puts it, “reliability pricing”) policy.
2. The application of network versus point-to-point transmission services. The original cost and payback of the transmission system are embedded in “network service” tariffs. In some RTOs, the cost of new transmission needed to maintain reliability is covered by proposed transmission enhancement charges. But it is not clear where new transmission entities fit into these allocations.
Both the interconnection and the transmission pricing issues are wrapped around the axle of the most important unfinished piece of competitive market design: capacity (or, as PJM would have it, reliability) pricing.
In the absence of reasonable capacity revenues, the owners of unprofitable generators take steps to close them down either by retirement or by mothballing. When the initial competitive markets were designed, little thought was given to this part of the business cycle. In the late 1990s, when investment in generation was booming, it was important to develop coherent rules governing the entry of generators. Similarly, transmission investment was all about how to manage the insertion of new generators into the grid, not about how to manage the withdrawal of generators out of the grid.
At the same time, it became