encouraging signs for transmission investment

Finally, some encouraging signs for investment in transmission.

At the time of this writing, the Senate and House are about to meet in conference to draft a comprehensive energy bill. We at the Edison Electric Institute are hopeful they will produce a final bill that includes a number of much-needed reforms to stimulate transmission investment.

And the Federal Energy Regulatory Commission took another step toward encouraging investment when it issued its recent policy statement that clarifies the terms under which it would allow independent transmission companies (ITCs) to have market participants as passive owners.

Of course transmission siting delays and difficulties will also need to be addressed to boost spending. FERC and the states-both of which have jurisdiction over the grid-will need to develop a more effective partnership. This is particularly important for developing regional transmission projects to serve the country’s emerging wholesale electricity markets. But greater legislative and regulatory certainty are vital precursors to transmission spending. The industry is poised to make substantial investments in the grid. We now need the certainty to help make that happen.

The time to build transmission has certainly never been more pressing. The North American Electric Reliability Council has found that in the last five years the volume of transmission transactions has increased by 300 percent. Last year, the number of transactions that could not be completed because of congestion increased almost eight-fold.

Edison Electric Institute’s members-from vertically-integrated utilities to stand-alone transmission companies-are building transmission lines to ease this congestion and are prepared to build more. Between 1999 and 2003, for example, utilities invested more than $17 billion on transmission. Taken together over that period, this represents a 12 percent annual growth rate. Total circuit miles of high-voltage and extra-high voltage transmission lines (188 kV and above) owned and operated by shareholder-owned utilities increased 2.8 percent annually over this period. Looking ahead, preliminary data indicates that utilities have invested, or are planning to invest, $28 billion more through 2008-a 60 percent increase over the previous five years.

Even with this new spending, though, the continually growing demand for electricity, coupled with the expanding number of wholesale market transactions, means that even more investment will be necessary. Recent estimates indicate that just to maintain the country’s transmission adequacy at its 2001 level more than $50 billion in new investment during the next 10 years will be needed.

needed reforms

The energy legislation in Congress can help to promote this needed investment. We are advocating that Congress enacts-and FERC adopts-a durable framework that assures that those who are willing to invest in the grid will be able to fully recover their investment, along with their cost of capital, through electricity rates.

Broadly, transmission pricing should include:

“- The regulatory certainty that assures full recovery of all prudently-incurred costs;

“- Construction work-in-progress costs being recovered under customer rates to improve a utility’s cash flow and its rate stability;

“- The provision for alternative transmission pricing and cost recovery approaches to support those states that have renewable energy resource goals, but lack siting flexibility;

“- Accelerated depreciation in ratemaking to improve financial flexibility and promote additional transmission investment;

“- No rate “pancaking”-charging customers multiple access fees between and within regional transmission organizations;

“- The ability to recover the costs of transmission projects that were approved through an independent system operator or regional transmission organization planning process but then later must be abandoned; and

“- Flexibility for transmission providers to propose various approaches for funding transmission construction, including “participant funding,” which would help to ensure that those who create transmission costs would bear their fair share of those costs.

In addition to approving these regulatory reforms, Congress can also stimulate investment in the grid by repealing the Public Utility Holding Company Act (PUHCA) and transferring consumer protection authorities to FERC and the states. PUHCA is an outdated federal law that hinders expansion of needed transmission and generation facilities. We encourage Congress to also reduce the depreciable lives of electricity transmission assets from 20 years to 15 years. This would give the assets tax treatment that is similar to other major capital assets.

Delays in siting transmission are another discouragement to transmission investment. Congress can expedite this process by authorizing the U.S. Department of Energy to become the lead agency to coordinate and set deadlines for the federal environmental review and permitting process. It would also be beneficial if federal intervention was possible when states cannot, or will not, act on applications to build transmission to relieve critical transmission bottlenecks. Congress should also grant FERC very limited “back-stop” siting authority to site transmission lines in these interstate areas.

FERC and the states

In its new policy statement PL05-11, FERC said it would consider proposals involving passive minority participation of up to 49 percent ownership by a single market participant. FERC will also consider applications in which multiple market participants owned greater than 49 percent of the applicant’s equity. FERC said it would limit ITC applicants proposing passive ownership rights for market participants from exercising 5 percent or more of the voting rights.

Although we appreciate the new policy statement by FERC, we caution the Commission not to favor one corporate structure or business model over another. Many structures and business models-including ITCs-can coexist in a competitive wholesale marketplace, provided there are fair rules in place for all market participants. FERC should stimulate the behavior it wants to see, and then let the market determine the best business model.

Congressional and FERC action alone, unfortunately, are not enough to ensure transmission investment-states must support these measures as well. As part of retail restructuring, more than 20 states have imposed caps or freezes on the rates paid by retail customers. Such caps and freezes can discourage utilities from investing in transmission since there is no mechanism to recover these investments. In other states where restructuring has not occurred, there may not be rate mechanisms in place that will allow prompt and assured recovery of the costs of transmission incentives.

Conflicting federal and state regulatory policies often result in unrecoverable, trapped costs, which also discourage investment. FERC and the states must work together closely to ensure that the necessary regulatory mechanisms are in place to allow for the full recovery of all prudently incurred costs, and to avoid any situations where an investment is put at risk due to it being approved by one regulator and not another.

Tomorrow’s electricity markets will need a strong and reliable transmission network. Legislative and regulatory policies that increase certainty are vital signposts on the road to getting it built.

James Fama is executive director of energy delivery at the Edison Electric Institute, www.eei.org.

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