The Limits of FERCAiis Authority

By Lewis Tagliaferre | May 15, 2004
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New utility business regulations could affect you

Is electric transmission a natural monopoly or not? Does the Federal Energy Regulatory Commission (FERC) have authority over states and utilities to order restructuring and regulation of transmission systems? Do answers to these questions affect your business? The answers to all three could be “yes,” so it might be worthwhile to keep an active file on these developments on your desk.

The federal government may have a strong case for monopoly regulations to assure reliable transfers of power from producers to users. Because the transmission grid is an interconnected system, events in one state can have dramatic effects on another part of the grid in another state. For a natural monopoly such as electricity transmission, some analysts say the obvious models are pre-deregulation electrical utilities, businesses vigorously regulated in exchange for a guaranteed rate of return. After the blackout last summer, the emphasis at FERC shifted from spurring competition to improving reliability. The solution adopted by FERC is a system of up to 10 interconnected federally regulated Regional Transmission Organizations (RTOs) to own and operate the interstate system.

On March 3, FERC reaffirmed its July 2003 rule amending Order No. 888 that sets standard procedures and agreements for the interconnection of merchant generators larger than 20MW. A ruling on smaller generators is pending. The rule requires the approximately 176 investor-owned public utilities that own, control or operate interstate transmission service to offer nondiscriminatory, standardized interconnection service to merchant generators. “Interconnection plays a crucial role in bringing much-needed generation into national energy markets to meet the growing needs of electricity customers,” the commission said in standing by the legal and policy considerations.

The commission made it clear that the transmission provider has the option to charge the interconnected generator a transmission rate that is the higher of the incremental cost for the network upgrades required to interconnect its generating facility or an average embedded cost rate for the entire transmission system (including the cost of the network upgrades).

The Commission emphasized that allowing transmission providers to charge the higher of an incremental cost or an embedded cost ensures that other transmission customers, including the transmission providers’ native load, will not subsidize network upgrades required to interconnect merchant generation. “This policy recognizes that all customers benefit from a stronger transmission infrastructure, more reliable service and more competitive power markets,” the commission said. Even utilities that have opposed FERC oversight of reliability are facing public support for greater government involvement in transmission.

“Just because we haven’t asserted [authority over reliability] doesn’t mean we don’t have it,” said Pat Wood, FERC chairman. Wood insisted FERC has the authority to order utilities to form RTOs, adding that the commission will continue to use its power to push utilities to participate in the controversial RTO process. Yet Wood acknowledged the agency will be undermined in its RTO push if Congress passes the energy bill, since the bill prohibits FERC from requiring utilities to join RTOs. Electric cooperatives, municipal utilities, the federal power marketing administrations, the Tennessee Valley Authority and Texas utilities are outside FERC’s jurisdiction. But that will not stop RTO formation altogether. Utilities still can voluntarily form regional markets, and “voluntary is a good thing,” Wood said. He noted the Commission has a history of using incentives from market-based rates to quick merger approval to get reluctant industries to follow new rules. “We can make voluntary [participation] very attractive.”

FERC gave preliminary approval in February to a new RTO in the U.S. Southwest, bringing to three the total number of agency-approved transmission groups. Arkansas-based Southwest Power Pool Inc.(SPP) has 48 members, including investor-owned utilities, cooperatives and independent power producers. Its members serve over 4 million customers in Arkansas, Kansas, Louisiana, Mississippi, Missouri, New Mexico, Oklahoma and Texas.

In March, an administrative law judge affirmed the FERC decision to order American Electric Power Co. Inc. to join a mid-Atlantic transmission grid despite objections of Virginia and Kentucky. In the closely watched case, FERC last year ordered AEP to join the PJM Interconnection, LLC grid to meet conditions of its 2000 merger with Central and South West Corp.

Officials in Virginia and Kentucky complained FERC has trampled on their right to regulate utilities operating within state boundaries. Both states have passed laws and regulations that would bar AEP from joining the PJM grid. FERC Judge William Cowan found that because AEP had voluntarily sought to join PJM, “the states’ argument on this point carries no weight.” Cowan’s decision must be approved by FERC commissioners before it takes effect. EC

TAGLIAFERRE is proprietor of C-E-C Group. He may be reached at 703.321.9268 or [email protected].


About The Author

Lewis Tagliaferre is proprietor of C-E-C Group. He may be reached at 703.321.9268 or [email protected].

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