By Ann de Rouffignac
HOUSTON, Oct. 10, 2001 — The move toward a few large regional transmission organizations (RTOs) as mandated by the Federal Energy Regulatory Commission is likely to raise consumer electricity rates in the near term, a Southern Co. executive said.
Allen Franklin, Southern’s CEO, raised doubts about requirements to join large RTOs during a Wednesday hearing before the House Subcommittee on Energy and Air Quality.
The subcommittee questioned industry players about electricity transmission policy and recent FERC actions on the formation of RTOs. The organizations are supposed to facilitate transactions to move power among consumers in geographic regions making electricity markets more efficient.
But Franklin said RTOs will be a “hard sell” in a low cost state.
“Few people have said that RTOs will lower cost of transmission,” said Franklin. “Instead they are likely to get your lower cost generation exported out of state.”
The cost of developing RTOs will also be expensive. A small RTO is likely to cost at least $100 million, he said. A larger transmission organization like the California Independent System Operator and its companion market the California Power Exchange cost $600 million to get going, Franklin said.
“Initially rates will have to go up,” he said. “In the long term, a larger regional transmission organization should theoretically lower generation costs that would offset the initial RTO costs.”
But $200 to $300 million will be hard to justify even with long term benefits in the states that still approve utility rates for Southern’s customers. Franklin said if states where Southern operates don’t go along with the RTO idea, it will be a financial “disaster” for Southern.
Another reason that Southern opposed the FERC RTO concept concerned the pricing of transmission. FERC has proposed that pricing within an RTO would be the same whether a transaction moved power 1 mile or several hundred miles.
This type of pricing will generate distortions in the electricity market, Franklin said.
That kind of pricing is why a huge amount of generation is being built along the Gulf Coast where it is close to lower cost natural gas but far from the load centers, he said. This means that transmission line congestion will automatically be created when all that power is moved to serve the load centers, he explained. More transmission lines will have to be built and that is difficult and costly.
“Distance pricing should be used and FERC is familiar with the way that works,” he said.
Consumer rates could also be negatively impacted if RTOs take on the form of a for-profit transmission organization, said Michael Travieso, Office of People’s Counsel, Baltimore, Md.
“I am opposed to a for-profit RTO. That will raise the cost of capital for transmission just as it did for generators. If there is incentive rate making to recover capital costs, that will lead to excessive earnings and higher costs to consumers,” he said.
The subcommittee heard additional negative testimony from public power entities such as municipally owned utilities and cooperatives.
“We oppose FERC jurisdiction over our bundled service to our customers,” said Robert Johnson, CEO Municipal Electric Authority of Georgia. “If FERC controls the use of our facilities, we can’t serve. Maybe the obligation to serve needs to go to FERC. They wouldn’t like that.”
Public utilities own generation, transmission, and distribution and sell electricity as a bundled product to customers at the least cost. Under state laws and mandates they have an “obligation to serve” all their customers in their territories. RTOs mean they would lose company control over their transmission systems and possibly get bumped off their own transmission systems forcing them to buy higher cost generation to serve customers.
The committee is drafting RTO legislation. But some congressmen said the committee should wait to draft legislation until the US Supreme Court decides on FERC’s jurisdiction in the competitive electricity markets.
The Supreme Court recently heard oral arguments in the case that challenges FERC’s alleged jurisdiction in states that reject the entire idea of a competitive electricity market. It is not known when the court will issue an opinion.