In your September 2003 column, you discussed who will pay for the improvements needed within the electric utility system to maintain or improve reliability. There was the traditional stockholder vs. ratepayer discussion, but I believe that the question is much more fundamental than that.
It’s very easy to identify what improvements need to be made. Those improvements have been known about for many years, and are on the wish list of most every planning engineer within the country. It’s also very easy to determine who will pay for the improvements. Capital improvements are traditionally placed in the rate base, are funded by the stockholders, and are paid for over time by the ratepayer. There’s no indication that this traditional mechanism won’t be used for this work as well. The real question is whether or not utilities will be allowed, at the end of the construction, to place the facilities in their rate base.
Over the last 25 years or so, state utility commissions around the country have enjoyed retroactive decision-making capabilities. How many power plants have been constructed under the blessing of the overseeing regulatory agencies and a prolonged approval process, only to have the utilities be denied being able to place those “approved” plants in the rate base? The original growth rates considered during that approval process turned out to be too high, and the plant is now considered “not to be needed”, and that the decision to build it wasn’t “prudent”. These retroactive approvals occur sometimes 10 years after the original approvals were given. Never mind that these same commissions thought that this work was prudent work 10 years prior! Utilities were then left “holding the bag”, and stockholders in particular. Based upon that past history, what utility executive in his right mind would approve a major expenditure that he absolutely doesn’t have to have “right now or die”??
Lets face it, utility executives have been well taught to have a very short timeline in their decisions. Most executives don’t last 10 years in their position, and a good portion of them don’t last 5 years. If they can survive this year without a disaster, they’re happy. If a disaster hits and they can blame someone else for it, they’re happy as well. Forward thinking and long-term planning is frought with disaster for utility executives. It’s expensive, shows no immediate payout, stirs the political waters, and is a good way to lose that year-end bonus.
How many utilities had to declare bankruptcy because of forward thinking that drove decisions to build expensive power plants? This process has driven, in part, the overwhelming construction of natural gas-powered turbine plants, with almost no coal plants being constructed. Coal is widely known to be cheaper to operate, but because it takes so much longer to build, the risk of utility commissions retroactively denying it from the rate base is much higher. This same process has virtually stopped the construction of new transmission lines. New transmission lines are expensive, not politically popular, can be used against you in an open market, and they may not be able to put them in the rate base when done.
If, in hindsight, the work wasn’t needed right away, that’s part of the hazard of living in the real world. Sometimes money is spent too early, or could have been spent better somewhere else. Hindsight is 20/20. Foresight can be a bit fuzzy. Without foresight you crash into things and hurt yourself needlessly.
I believe that in order to break free the investment logjam within the electric utility sector, several steps must be taken.
1. End the retroactive approval process to put major capital expenditures in the rate base. If a utility commission approves the construction of a power plant, transmission line, major substation, or distribution automation, then the approval has at that point been given to place it in the rate base when the work is completed. Investors must have a surety that the work will be paid for. No sane utility executive will bet his career on the project otherwise.
2. Harmonize and combine approval processes for the siting of new transmission lines and other major facilities. FERC or some other authority must have siting and approval capabilities for major facilities. They already do it for pipelines; I see no difference for major electrical power facilities. What may be in the best interest for one state, may be against the best interest of another state. The decision-making power must reside outside of states to determine what’s in the best interest of the region or country. States and local jurisdictions should have input, and be able to voice their concerns, but sometimes work must be done that is not the most pleasant to the local people.
3. FERC or Congress must establish minimum reliability standards by which each ISO must operate. The ISO (possibly through FERC) must have the ability to mandate to member utilities improvements which must be made.
4. ISOs must include all utilities interconnected on an AC basis. If one ISO is firmly tied to another ISO, then one can drag down the other, loop flows and system disturbances will occur from neighbor ISOs without any control. The ISO must control the entire backbone electrical network, and not just a portion of it.
I feel that these changes must occur before any real work will begin to solve the problems imbedded within the electrical utility system in this country.
Bountiful City Light & Power