FERC Filings
FERC RTO NOPR COMMENTS
Consideration of Incentive Pricing Proposals
Consideration of Incentive Pricing Proposals
In the NOPR the Commission expresses its willingness to consider, on a case-by-case basis, incentive pricing proposals that allow transmission owners who turn over control of their facilities to an RTO to share in the benefits created. The incentives identified by the Commission could include higher return on equity, deference in dispute resolution, reduced or eliminated codes of conduct, streamlined filing and approval procedures, accelerated recovery of transmission expansion or RTO start-up costs, inclusion of an acquisition premium or higher asset valuations in rates.
It is important to distinguish between incentives designed to entice recalcitrant transmission owners into joining RTOs and those designed to provide the maximum incentive for efficient transmission operation. In the first instance, it is likely that the cost of incentives sufficient to convince transmission providers currently using their facilities to gain significant market advantages to forego that role voluntarily would be extremely high. The appropriate action is clearly to remove the current incentives for owners of both generation and transmission to favor their own generation through strategic operation of their transmission system. The Commission must, in addition to removing any incentives for NOT joining an RTO, be prepared to use sticks willingly and liberally, in the form of negative incentives, to "encourage" RTO participation. "Sticks" could include lower returns on equity, intensified merger review, loss of market-based rates, and greater scrutiny of pending filings and applications.
In the absence of a mandate for RTO membership, the Commission is correct to question whether "encouragement" of voluntary RTO participation is enough to remedy the on-going discrimination documented by the NOPR. While not enforcing a national mandate for RTO formation, the Commission should consider whether it would require RTO participation by a lone regional hold-out (whether jurisdictional or not). Failure to do so may result in RTO "doughnuts" that are ultimately unable to provide the benefits envisioned by the NOPR. In addition, regardless of action on the RTO front, EPSA again urges the Commission to take up the comparability issues raised in the Petition for Rulemaking on Industry Structure (supra, n.5). Only when all uses of the transmission service occur under the same tariff will continuing incentives for discrimination be eliminated. While RTOs can help create more efficient markets, true comparability is needed to ultimately end residual discrimination.
Incentives to encourage efficient management and operation of the transmission grid, which in turn benefits the competitive bulk power market, should be more freely dispensed. Ultimately, it is important that transmission providers be encouraged, and not discouraged, from making transmission investments, as well as to operate the transmission grid as a business. One roadblock to robust wholesale competition to date has been the lack of proper signals to transmission providers to operate their facilities openly and efficiently. Vertical integration has given transmission providers who own generation the motive, opportunity and incentive to use their transmission facilities to favor their own generation, at the expense of other market participants. In promoting RTOs, the Commission should encourage these institutions, whether they be ISOs or Transcos, to operate as transmission businesses, earning greater "profits" when they achieve such goals as increased throughput or improved customer satisfaction. On a case-by-case basis, properly structured incentives, such as higher or accelerated return on transmission investment or employee incentive programs, tied to throughput, reliability, cost savings or other measurable efficiency goals, will provide important market benefits.
While for-profit entities can easily adopt incentive-based mechanisms to improve performance, other organizations can be structured to promote efficient and effective management. Indeed, the electric industry should not overlook the growing practice in non-profit companies of setting and rewarding employees on the basis of annual performance targets. Such incentives should reduce the potential for RTOs that are ISOs to create and perpetuate layered bureaucracies, as the ISOs have done to date. Such incentives would focus on the cost of the RTO to participants, and should partially mitigate the increased costs that some RTOs have imposed on market participants. Thus, EPSA recommends that RTOs that are ISOs be encouraged to adopt employee incentive plans that promote efficient decision making and actions. RTOs could, for example, institute weighted multi-factor performance bonus criteria with
performance tied to how successfully the RTO mitigates transmission congestion, reduces transmission costs, avoids curtailment of transactions, improves reliability and throughput or achieves other measurable factors.