Kiss the cook: How to be a T&D gourmet

Fiona Woolf, CMS Cameron McKenna

In most countries the experience in developing transmission systems has proved to be extremely difficult, not only because of the strong adverse reaction of local interests but also for a variety of other reasons. The restructuring and reform of electricity industries around the world has added to the difficulties of ensuring that transmission capacity is adequate.

There has been a perception of over-investment in transmission that has resulted in regulators discouraging further investment and reducing rates of return on transmission.

In some countries, such as the U.S., utilities that expanded their transmission capacity to allow imports or exports would have found that any profits that they made would have been rebated to their customers under rate of return regulation (representing a surplus over allowed costs). They had no incentive to expand their systems to increase sources of supply or to reduce congestion costs.

Use choice ingredients

It can be demonstrated that, if the right ingredients and preparation methods are chosen, transmission will attract investment and become a vibrant business. Much depends on:

“- the cooks (ISOs, RTOs, transcos, independent transmission companies);
“- whether the open barbecue of the market place or the oven of regulation is used;
“- the essential ingredients from the design of the trading arrangements or the wholesale market;
“- the most appealing flavors of transmission pricing and transmission rights;
“- the raising agent (how market forces are captured);
“- the setting agent (how transmission is regulated);
“- the preparation (a redesigned planning coordination process);
“- timing—critical in all recipes (how the siting and permitting processes should be made more efficient without a radical redesign of the existing framework);
“- presentation (attracting constructive participation and taking into account the concerns of landowners and local communities).

If the transmission system is used efficiently, it may not need to be expanded at all. The key to efficient use lies in the principles of market design and transmission pricing. The most important ingredient is to get the prices right. Transmission pricing with no locational signal will result in inefficient use of the transmission system. The best solution is to use locational marginal pricing but many jurisdictions have been reluctant to introduce it, preferring what they regarded as a simpler solution in the form of zonal prices, which, in most cases, has produced a variety of difficulties. Transmission rights are also a key ingredient to hedge volatility of transmission prices.

The recipes for transmission expansion should allow both regulated and merchant expansion to flourish side by side. The potential advantages of the market-based approach is that it should lead to transactional, financing and technical innovation and solutions that result in speed and lower costs.

The market is more likely to respond to opportunities to build small-scale projects and DC lines interconnectors where power flows can be controlled. Where a large network project is needed and it is difficult to reach agreement with the specific categories of users or beneficiaries, the market may fail to respond, in which case a recipe is needed for efficient regulated transmission.

Taste test

There are new recipes for regulators who worry that needed transmission expansion is not happening. FERC has discovered that inviting the industry to come up with its own ideas within the existing regulatory framework has met with little success.

What is needed is incentive or performance-based regulation. It enables investors to earn more, in return for taking on more risk, within their core competences to reduce cost to the consumer and to relieve regulatory burden. The price and revenue cap approaches, focus on short-term efficiency gain but there is are recipes for adapting them to attract long term investment.

The permitting process is unpalatable to investors and is a mess in most countries. The two main reasons are the nature of the process itself and the number and strength of the local objections.

It is possible to create some good recipes for an efficient system to reconcile the impact of transmission projects on local communities and the environment with the national, regional and local interests of electricity consumers. For example, the regulator can be given the role of determining need, from which certain powers flow and the local agencies can deal with the routing.

One of the most important skills of a contemporary chef is presentation. Local interests must be presented with the project early and be empowered to participate constructively, rather than being alienated in some adversarial dispute resolution or hearing.

Consensus building and mediation have been successfully used for resolving issues in land use disputes and provide a tool for arriving at better solutions that would allow transmission expansion projects to be implemented. This approach creates opportunities for “win-win solutions” and joint gains that are more likely to be capable of implementation and that avoid “lowest common denominator” agreements.

Because it is entirely ad hoc, if there are legal or regulatory constraints, mediation can transend the boundaries. It is superior to a public hearing or enquiry where the outcome is unknown, because mediation will establish at the outset what everyone is striving for.

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Using this cooking paradigm, it is possible to create recipes for small scale controllable flow (DC) projects, large scale controllable projects and AC radial lines, small scale AC network projects and large scale AC network projects. The outcome of the cooking process will be a transmission system that reduces congestion and other costs for the consumer, improves reliability and competition, creates access to cheaper sources of generation and reduces the potential for the abuse of market power. The cost to society will be small by comparison to the benefits that are gained. Under-investment in transmission costs society much more than marginal over-investment.

Woolf is a senior energy partner with CMS Cameron McKenna and has been specializing in electricity restructuring for over 14 years. She can be contacted at fiona.woolf@cmck.com.

“Global Transmission Expansion and Recipes for Success” by Fiona Woolf is published by Pennwell (ISBN 0-87814-862-0) and can be purchased by calling 1-800-752-9764.

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