Michael J. Zimmer
Baker & McKenzie
The recent FERC notice of rulemaking (NOPR) on regional transmission organizations (RTOs) continues the elusive public policy debate on structuring new transmission business of the future. Unfortunately, in certain sectors this focus may be somewhat misdirected by FERC while Congress avoids discussion of critical issues related to transmission siting and pricing. This avoidance by Congress and FERC converts these central issues to a secondary priority. Moreover, the timeframes associated with the proposed NOPR may be too protracted and cause further delay in deregulation of the electric industry, which commenced in 1989. When coupled with stranded cost recovery, state retail regulation, the pendency of federal legislation, and implementation of proposed NOPR requirements, it appears likely that a restructured electric utility industry will not occur until the 2003-2005 timeframe. This will fully happen over 15 years after the initiation of the public policy debate on restructuring and lags by a substantial degree the pace and degree of implementation in other industries such as airlines, telecommunications, trucking, and natural gas.
When FERC proposed in 1985 the restructuring of the natural gas industry with Order Nos. 436, 500 and 636, market response to facilitate those initiatives was driven by over 20,000 miles of new natural gas pipeline projects that were proposed. These pipeline projects provided important infrastructure support to backfill and infill the national pipeline system to ensure the integrity and reliability of natural gas pipeline service to operate in a deregulated fashion and move beyond service to traditional native customers. This strategy facilitated and supported the achievement of open access and development of necessary pipeline capacity to ensure success for FERC`s regulatory program. Key gas pipeline projects were conceived and developed in the Lower Gulf, Northeast, Midwest and California, which ensured success and full implementation of deregulation in the natural gas industry within less than 10 years. This foresight paved the way for gas-fired generation as the fuel of choice into the next millennium.
The continual lack of focused discussions on the desirability of altering the siting for new transmission capacity is stark in comparison. Little public policy debate is focused on this critical pivotal issue recently highlighted in comments by the current chairman of CMS Generation William T. McCormick. McCormick noted the inordinate debate on structure of transmission service defies the real major issues focusing on transmission siting. This necessity to reform the statutory regime for transmission siting is as critical as the reform of the natural gas industry and the enactment of the critical provisions of the Natural Gas Policy Act of 1978 which removed the dual intrastate and interstate market for natural gas. This issue is similar since it would focus on removing the dual conflict of intrastate limitations and regulation of transmission and render that issue clearly a matter of federal jurisdiction. Inclusion of public power entities, Bonneville Power Administration and Tennessee Valley Authority, would complete the national process. In comparison, could one imagine separate regulation of the trucking industry state by state? Could one imagine operation of airline service as a matter of local state commerce, as opposed to interstate commerce? How would one be in a position to develop the interstate highway system if every state had a potential veto power over critical interstate links to the system? Transmission capacity deserves nothing less in our public policy review and debate.
The issue could also be complemented with further incentives and support for transmission pricing by FERC. Transmission pricing should ensure fair recovery of costs while providing critical development of economic and price signals to ensure market-based support for public policy objectives. Other opportunities exist that perhaps could explore separate exemptions of ownership for transmission under Public Utilities Holding Company Act (PUHCA) to facilitate private involvement; the development of a separate qualifying transmission program built upon the provision of certain federal and state exemptions to facilitate private power market development of necessary transmission facilities for the future (and ensure that the job is not left to a constrained and dominated marketplace), and greater flexibility for merchant plants to develop their own transmission lines in key corridors with minimal regulation.
Finally, certain incentives should also be explored to promote distributed generation as an enhanced transmission and distribution (T&D) system. This could serve as a potential independent market power tool to provide enhanced transmission development through distributed generation resources strategically located in control areas to free up capacity over existing lines. This would entail support for accelerated interconnection capabilities, just and reasonable standby and backup power rates, exemptions from necessary federal and state laws, improved depreciation, other tax incentives, and better access for distributed generation within power pools and independent system operators (ISOs). If necessary, facilities serving this role could be limited in size and scope to projects that do not exceed 100 MW, which could provide these useful T&D benefits for the future.
While the public policy debate has focused on retail competition, stranded cost recovery, and the form of management and ownership of transmission resources, this debate needs to shift to accelerate and promote the encouragement of market-based strategies that are impaired and impeded by lack of proper focus on key questions. If provided, private power resources harnessing the marketplace and forms of competition could be marshaled to provide part of the transmission system solution as well as promote a market that ultimately would find divestiture and consolidation of transmission resources and siting and development of new transmission lines an attractive growth and building opportunity of the future. This would complement and supplement our national deregulation goals for wholesale power generation and evolving state retail competition goals to review and provide successful market competition for the future.
Zimmer is a partner with Baker & McKenzie`s Global Project Finance Practice Group-U.S. Energy Projects Group. He is based in Washington, D.C.