FERC Filings
COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION re PROPOSED PRICING POLICY FOR EFFICIENT OPERATION AND EXPANSION OF THE TRANSMISSION GRID
BODY
EPSA strongly endorses the Commission’s primary objectives in this Policy Proposal: promoting RTO membership and efficient infrastructure investment. Independent and well-structured RTOs can, and in some instances have, brought about significant consumer benefits in the form of efficient and robust wholesale markets. Thus, the Policy Proposal offers a positive approach that encourages TOs that have not yet joined an RTO to do so in a manner that can benefit all involved. Additionally, the Policy Proposal provides flexibility that should allow transmission owners (TOs) the ability to align their strategic objectives with the transmission markets needed to facilitate wholesale competition.
While EPSA supports the Commission’s goal in issuing the Policy Proposal, there are nonetheless certain suggestions EPSA has that will strengthen the proposal and address some concerns. Most importantly, the Commission must ensure that the Policy Proposal supports both its RTO initiatives and critical elements of its SMD initiatives. The Commission must ensure that the Policy Proposal, while providing an incentive for RTO membership in regions where RTO formation has lagged, does not inadvertently and adversely impact the development of RTOs and appropriate market structures in the rest of the country. As we have learned, RTO formation, without a well-functioning market, is not enough. In fact, the basis for the SMD NOPR is the Commission conclusion that RTOs will deliver consumer benefits only in conjunction with seamless competitive markets. Thus, the Commission should consider a bifurcated approach involving an initial incentive for RTO membership and a subsequent incentive to the RTO for market structure implementation.
EPSA also has concerns about certain aspects of the Commission’s proposal to provide incentives for transmission expansion. First, the Policy Proposal needs to support a planning process that is truly regional in scope and conducted by an independent entity with incentives for all investment that relieves transmission congestion and constraints. Second, incentive equity returns should be rewarded only for completed expansions, rather than the promise of expansion. Third, the Commission should allow for incentive mechanisms that provide the flexibility for entities to propose substitute incentives that are more closely tailored to the entity’s specific need. Finally, the policy should be balanced and not favor one form of transmission ownership over another with respect to incentives.
I. Providing Incentives For RTO Membership Is A Significant Positive Step
The Commission’s new Policy Proposal will increase the tariff rates of TOs that transfer operational control of their transmission facilities to a RTO or ITCs that form from divestiture of transmission assets. Of course the net benefit to consumers from more robust competition which should result from this development should more than offset this increase in revenue to transmission owners. Clearly it is important that the Commission balance these objectives; sufficient incentives to motivate the desired behavior by TOs without threatening the net benefit to consumers contemplated by the competitive initiative. The Policy Proposal’s primary goal is to reward TOs for joining RTOs and turning over operation of their transmission assets to an RTO or Independent Transmission Provider (ITP). This is a crucial first step toward the establishment of competitive markets, which are otherwise stymied by the ability of TOs to favor their own generation assets and frustrate the Commission’s goal of comparability. Thus, EPSA applauds this policy initiative since it serves as a “carrot” to entice TOs to comply with the policy intent of Order No. 2000, which is to move TOs’ transmission assets to the operational control of independent authorities. Additionally, the Policy Proposal allows the Commission to reward TOs for forming an ITC or taking other measures that make TOs’ transmission facilities operationally independent from the activities of other market participants.
The Commission has undertaken a positive policy approach and fundamental step to encourage involvement with or the formation of an RTO and/or ITC. Adopting and implementing the Policy Proposal should significantly help in persuading utilities that have not joined a RTO or opted for forming an ITC to do so.
However, the Commission’s Policy Proposal needs to go farther and ensure that RTOs have the incentive to take all prudent, timely and efficient steps to enact and implement the critical elements of the Commission’s proposed SMD, including independent grid operation, an ability to engage in long-term bilateral contacts, a voluntary short-term spot market with transparent pricing, a day-ahead and forward market, regional transmission planning, locational marginal price signals, financial transmission rights, comparability tariffs, market monitoring, and market mitigation rules. It is only when these critical market design elements have been implemented that the true benefit of regional markets and the Commission’s RTO policy will render economic benefits to consumers.
II. The Policy Proposal Needs To Promote Standard Market Design
A. The Policy Proposal should consider implementation and timing issues related to RTOs and market structures
Some areas of the country, notably the West and Southeast, have made the slowest progress towards RTO development and EPSA is hopeful that the Policy Proposal will accelerate RTO development in those regions. However, experience has shown that the development of an independent RTO is simply the first step in the elimination of discriminatory access to the grid and the organization and administration of competitive wholesale markets for power. Because RTOs are dependent upon the membership of the transmission owners for their existence, RTOs’ ability to change and respond to market participant’s needs has often been cumbersome. Consequently, RTOs have had to overcome a natural resistance to implementing critical elements of the Commission’s plan for improving non-discriminatory access to the transmission grid. The concern here is that without incorporation of incentives to implement proven market structures into this Policy Proposal, many of the existing and proposed ISO/RTOs and single company ITPs will be rewarded with increased returns, without concomitant assurance of consumer benefits. In short, the Policy Proposal needs to ensure that it supports and furthers the Commission’s dual goals of independent control of the transmission grid and organization and administration of efficient market structures.
For example, to identify and reduce congestion it is not enough to use physical Transmission Loading Relief (TLR). Instead, associated congestion costs must be identified through the use of LMP and congestion pricing mechanisms. These market mechanisms bring into play the investment pricing signals necessary to overcome congestion. Thus, the implementation of essential market structure elements is necessary to ensure that congestion costs will provide the locational signals needed by RTOs/ITCs/ITPs and market participants to initiate investments to relieve congestion.
For that reason, EPSA believes that the Commission’s Policy Proposal incentives for transmission owners should be bifurcated upon the occurrence of two events: (1) the joining of an RTO or an ITC by the transmission owner; and (2) when significant elements of the Commission’s market structure vision have been implemented or at least approved for date certain implementation.
III. The Policy Proposal Needs To Promote Efficient Transmission Expansion
A. Regional planning processes must be promoted
As the Policy Proposal recognizes, not every proposed transmission investment is appropriate or should be rewarded with an incentive. Thus, the Policy Proposal ties incentives to investment in new transmission facilities that are “found appropriate pursuant to an RTO planning process.” It should be clear that it is only those projects that have been selected and authorized, after the RTO has solicited and evaluated alternative solutions for meeting its reliability and congestion relief objectives, that will be rewarded with the proposed incentives. The wholesale power grid exists to provide reliable service to customers and to facilitate a competitive wholesale market for new and existing market participants. Thus, to achieve these goals, the RTO planning process must recognize the full range of potential supply and demand solutions and make decisions that impact the wholesale transmission grid in a balanced manner. System standards for the operation of the grid, new transactions or products, reliability and a liquid market with the ability to attract new entrants should be considered for the new incentives contemplated by the Commission in its Policy Proposal.
With transmission line construction lead times of from ten to twenty years in many cases, transmission congestion may be solved more easily, quickly and at less cost by adding new generation or by upgrading existing generation capacity. The Commission should consider incentives that go beyond physical transmission solutions; for example, by encouraging generators to build and operate capacity where transmission constraints may be better solved by new generation capacity.
Thus, installation of generation or implementation of demand response programs that assist in eliminating congestion should also be eligible for incentive returns if they help solve transmission infrastructure deficiencies. While a premium over ROE is directly applicable to a cost-based regime, there may be other ways to incent generation or demand response to relieve congestion or increase reliability not addressed through market mechanisms like LMP. These could include resource adequacy payments or other funding mechanism. It is important that the full range of potential solutions to infrastructure deficiency problems, i.e., demand side response, generation, and transmission be allowed to compete on a level playing field and that incentive pricing initiatives do not discriminate in favor of any one technology to the competitive disadvantage of the others.
B. Proposed projects must be complete to be eligible for incentives
The Policy Proposal asserts that significant benefits from increased competition and improved reliability will occur if the construction of needed grid expansions occurs along with other measures that make additional transmission capacity available to market participants. Thus, the Policy Proposal allows the Commission to encourage investment in transmission grid capacity by adjusting upward the rates of return for the TO’s transmission facilities that will be under the operational control of a RTO.
EPSA concurs that investment in efficient transmission is stalled and should be promoted. However, the Commission’s Policy Proposal needs to ensure that the appropriate needed transmission expansion occurs.
Investors see significant risk regarding investment in energy projects such as transmission expansion. Therefore, investors considering transmission expansion projects need to see commensurate reward for their commitment of capital. At the same time, transmission projects are typically long-term in nature and the long-term nature of such projects increases the likelihood the project will not be completed or, if completed, that the market conditions that were relied upon to justify the project at its inception may have changed dramatically by the time the project is placed in commercial service. As such, the Policy Proposal should link investor’s capital commitment with completion of the project. The incentive should not be fully committed on the front-end of a project without any accountability regarding its completion. EPSA therefore believes that the Commission should be promoting policies that financially reward investors who are able to complete needed new and appropriately sited transmission expansions.
The Commission should also consider whether there are smaller, incremental investments that can also be included in the Policy Proposal to improve transmission throughput and facilitate markets. For example, a generic incentive of 100 basis points could be granted to encourage new investment in facilities or technologies that can be installed relatively quickly. Such projects may include those that result in significant increases in transfer capacity in existing structure and right-of-ways, use of equipment for greater control for energy flows and a greater ability to monitor and measure the capability of the grid in real-time along with other metering measures. Other measures may include the ability to significantly expand grid capacity, reduce congestion, improve reliability and enhance wholesale competition without greater cost or delay, which could be considered for the same generic incentive of up to 100 basis points on the requested return on equity for those enhanced facilities.
C. The Commission should allow alternative incentive mechanisms
The Commission should also provide for flexibility in allowing transmission companies to propose appropriate alternative incentive mechanisms that may, in some cases, better reflect their needs. Some transmission companies may need to mitigate their project’s long-term financing risk by obtaining cash flow from the project’s inception and incentives other than higher ROEs may sometimes be appropriate. For example, in some cases, utilities may find it more advantageous to expense, rather than capitalize, the pre-certification costs associated with the siting new transmission facilities. Allowing for accelerated depreciation would improve financial flexibility and promote additional investment. Furthermore, allowing full abandoned plant cost recovery for investments directed by an RTO/ITP or ITC could facilitate transmission investment by reducing uncertainty associated with the RTO planning process.
IV. The Policy Proposal Should Be Indifferent In Rewarding All Forms Of Independent Transmission Ownership And Operation
EPSA has stressed the importance of appropriate market structures to the establishment of competitive wholesale markets, which in turn benefit electricity consumers. In prior comments to the Commission regarding the split of functions between RTOs and ITCs, EPSA stressed the importance of the RTO having responsibility for certain functions or, at very least, having the authority to delegate that responsibility. Therefore, EPSA is indifferent with respect to the corporate form of an independent transmission operator, but is concerned about which entity has responsibility for specific market functions. Consequently, EPSA is concerned that the Commission is awarding a higher equity incentive to ITCs in this proposal compared to other forms of transmission organizations, despite the absence of any empirical evidence that an ITC can run a LMP market, provide greater operational independence, or ensure comparable markets better than would another transmission organization such as an RTO.
The Commission has proposed a deadline of December 31, 2004 under which an entity may qualify for these rate of return incentives. The entity would be authorized to receive the incentive for any operational transfer until December 31, 2012. However, an ITC would receive the incentive for a longer period of time—until December 31, 2022. Again this shows a preference for the ITC business model, despite no guarantee of added independence or other forms of competitive market enhancements.
EPSA submits that the Commission should be consistent in this Policy Proposal and offer the same reward for whatever type of independent transmission organization to which an unaligned TO may opt to transfer or divest its transmission assets. This consistency would embolden the primary and laudable aspect of the Policy Proposal, to encourage RTO membership and, in turn, independence of the RTO.
Under the SMD NOPR, the Commission proposes that LMP calculated by ITPs will provide an efficient price signal to all market participants. Regardless of the organization operating the transmission system and market – under LMP, the price signals will be the same. Consequently, independence of the RTO/ITP and implementation of SMD concepts, such as LMP, will ensure efficient grid expansion decisions. Despite these factors, the Policy Proposal suggests that ITCs will be more likely to remove congestion costs through transmission investment than an RTO implementing LMP. Consequently, as noted above, the Commission should consider rewarding the implementation of LMP regardless of the type of transmission organization, rather than assuming ITC formation can best remove congestion.