Ashley C. Brown

This article examines how the cost of transmission of power is to be incorporated in the utilities ratebase in a competitive bulk power market. The topics include a call for public discussion and debate, who should bear the risk of residual revenue responsibility for transmission assets, are actual costs and uses reflected in the allocation of responsibility for transmission revenues, and how can transmission pricing be used to reduce the likelihood of anti-competitive behavior by those entities owning both generation and transmission facilities.

The recently passed Energy Policy Act has intensified the need to resolved long-standing problems between federal and state regulatory systems. Various means of coordination are open but benefits will be lost if we don't get moving.

The difference between the pricing of transmission services for retail customers and the
pricing for wholesale customers could hardly be more striking.. Retail customers still pay
for transmission in exactly the same way that they have done for generations, namely through bundled retail rates. There are no unbundled retail transmission tariffs as such. Rates are based on the classic, time-honored methodology of cost of service regulation, namely capital investment minus depreciation times rate of return, plus expenses. The rate is then adjusted to account for customer class differences.

With one or two possible exceptions related to future transmission services, wholesale
customers generally pay, or at least have the option to choose to pay, an unbundled,
transmission-specific rate and then choose their supplier from the marketplace. The
transmission price will at least reflect the discrete costs of providing transmission-specific
services or, depending on the pricing system employed in the locality the service is being
rendered, may well be reflective of all costs actually being incurred on the system, including
congestion costs. In short, transmission-specific price signals are, with a few possible
exceptions, given solely to wholesale customers. They are not conveyed to retail customers
either directly or indirectly.

The essay sets out what electric markets might look like if the pricing proposed in value of solar studies were adopted for every resource.

 

EXECUTIVE SUMMARY

The passage of the Energy Policy Act in 1992 ushered in a new competitive era in the U.S. electricity industry. The task ahead for both state and federal regulators is to make the regulatory changes that are a necessary part of these changes in the industry in a coherent fashion.

• There is no way to achieve coherence in transmission policy without formal cooperation between federal and state regulators. Congress should urge these regulatory bodies to begin this process, in order to address issues of transmission pricing, unbundling of services, siting, access, and planning.
• Who should bear the risks of a transition to a more competitive industry? This is clearly a question of policy, and should be treated as such. As a matter of policy, the jurisdiction which is responsible for creating stranded assets should be the one which deals with its consequences. I applaud the California and Michigan commissions for dealing with this issue explicitly as part of their proposals. The FERC has done the same in its recent NOPR, but has left unclear the issue of possible preemption of state jurisdiction.
• Registered holding companies are currently shielded from competition by the ability to pick the regulatory forum to which they turn for decisions, and by judicial determinations which insulate self-dealing from market forces. The proposed "fix" to the Ohio Power case, now before the Congress, is a step in the right direction. However, there are still gaps and overlaps between federal and state jurisdictions that need to be addressed. In order to supervise transactions involving registered holding companies, the FERC and state PUCs need to work together. If the Congress is unwilling to codify the Pike County doctrine, it should urge the FERC to adopt it explicitly as a formal doctrine of regulatory federalism, andmake rulings that are consistent with multiple layers of jurisdiction.

The Congress must encourage the FERC and the state commissions to exercise statesmanship on these issues, rather than continuing to engage in bureaucratic turf battles.