Transmission Solution: Joint Ownership
By: Alice Clamp
Public power participation in planning and building transmission can help create a robust system that meets everyone’s needs.
Twenty years ago, the U.S. electric transmission grid seemed to be humming along nicely. Investment in transmission was running well ahead of investment in generation. About the same time, a conjunction of circumstances in Indiana led to the creation of a joint transmission system owned by a public power joint action agency, a generation and transmission co-op, and an investor-owned utility.
“It happened because PSI—later bought by Cinergy—needed money,” said Raj Rao, president of the Indiana Municipal Power Agency, one of the system’s owners. PSI had sunk nearly $3 billion in its Marble Hill nuclear plant before pulling the plug on the project. But for PSI’s cash crunch, the transmission arrangement would not have happened, said Rao.
Fortunately for Indiana electricity consumers, it did. And today, said Rao, “we have no congestion, no complaints.”
That’s hardly the case in other parts of the country. One reason is declining investment in the grid. “We’ve been underinvesting in transmission for 20 years, while the growth in demand rose exponentially,” said Commissioner Nora Brownell of the Federal Energy Regulatory Commission. “It’s a classic imbalance of supply and demand.”
One reason for the decline in transmission construction has been the difficulty of siting new lines, says Roy Thilly, CEO of Wisconsin Public Power Inc. “It’s the most unpopular thing a utility does,” he said. “Utilities were allocating their resources elsewhere.”
IMPA’s Rao points to the independent system operators (ISOs) as a contributing factor. Until recently, he said, ISOs were focusing on the short-term market. “FERC created ISOs to take care of transmission, but they forgot their core business.” He sees a transmission landscape with dependent utilities on one side—munis, co-ops, small IOUs—and the monopolist on the other. “The monopolist is trying to retain power.”
That’s a view shared by William Gallagher. “The generators have got control and don’t want to see transmission built,” said the general manager and CEO of Vermont Public Power Supply Authority and the 2005-06 chairman of the American Public Power Association.
A Greener Grid
There’s plenty of coal in Wyoming. But there’s wind, too. And geothermal resources. Under an ambitious transmission project known as the Frontier Line, electricity from renewable energy facilities as well as coal-fired plants would flow through Utah and Nevada to California.
The project, proposed by the governors of the four affected states, is seen as a way to stimulate the development of the vast renewable resources in Wyoming and Utah.
Meanwhile, in California, two large public power entities—the Southern California Public Power Authority and the Los Angeles Department of Water & Power—are proposing a new 800-mile transmission line from Utah to Southern California. The line, which would carry not only coal-generated power but electricity from geothermal, wind, solar and landfill gas-fired generation, is intended to complement the Frontier Line.
In New Mexico, Gov. Bill Richardson has asked the state Legislature to create a Renewable Energy Transmission Authority. The authority would market electricity from wind, solar, geothermal, hydro and biomass facilities as well as fuel cells powered with renewables. Richardson said California is “hungry for clean energy,” which New Mexico could provide if it had the transmission.
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There’s another issue, too, said Brownell. Inadequate planning. “That’s a major flaw in the system.” Planning doesn’t tend to be regional in nature, “but markets are regional, whether we like it or not,” she said. This regional nature is very healthy, but it requires an independent look at all the options on the table. “Candidly, I think the planning process should be more independent than it is today,” she said. “It needs to be inclusive of all options, and it needs to be inclusive of many players at the table.”
A seat at the table—Getting a seat at the table is key, and that requires ownership, said Robert Johnston, CEO of MEAG Power, the municipal joint action power supply agency in Georgia. “If you have an ownership share in the transmission system, the joint planning process gives you a say in what’s built,” he said.
There’s only one way to ensure that transmission will be built—separate transmission companies, said VPPSA’s Gallagher. “You don’t have a tug-of-war between generators that want to protect their investment and utilities that want twice the rate of return.”
Brownell said FERC has encouraged such companies. She points to a variety of models—International Transmission Co. in Michigan, American Transmission Co. in Wisconsin, Trans-Elect in California. “Whatever the model, the idea of independent companies changes the economic incentives.” Their only business is transmission, she said. And their only interest is giving as much access as possible. “They invest more in transmission because they want to be as efficient and customer-friendly as possible.”
Brownell said she agrees with the public power world. “It’s terrific to have partnerships. It brings the customer and market discipline to the table.”
Some public power utilities are working to buy into the transmission system.
In Wisconsin, public power utilities negotiated their way into a transmission-only company. In 1999, when IOUs in the state asked the governor to relax their state holding company asset cap, Wisconsin Public Power Inc. proposed a trade-off. The cap could be relaxed if the IOUs divested their transmission assets to a company whose sole business is transmission, a company with a public obligation to provide a robust system, said WPPI’s Thilly. “One of the provisions we—WPPI and other munis—wrote into the statute was the right to buy into the company at net book cost,” said Thilly. The company—American Transmission Co.—has been very successful, he added.
Thilly pointed to another model that works—the one in Indiana. “In a shared system, municipal utilities fund their share of the lines,” he said. He acknowledged that this model might be easier to achieve, because nobody has to divest transmission assets. Instead, the system is built to meet the needs of all loads on the system, said IMPA’s Rao. “Because we do planning together, we don’t differentiate by load at the planning level. The planning stage is totally blind to whose load it is.”
In Georgia, an IOU, a transmission-only cooperative, a municipal utility and MEAG Power set up an integrated transmission system back in the 1970s. MEAG’s Johnston said he would put the state at the top in terms of having a functional system that works well. “We jointly own this grid, and more importantly, we jointly use it,” he said. MEAG Power owns 10 percent of the system, said Johnston. “But we can use 100 percent of it to serve our native load.”
While the system operates within the state of Georgia, Johnston said he sees no reason why it could not function in a multi-state arrangement. It would be more complicated because there would be more state regulators involved and because of interconnection issues, he said. But structurally, there is no reason the model could not work on a multistate scale.
In the western United States, distances are great and loads too large for even large companies to take on a transmission project alone, said Robert Kondziolka, manager of transmission planning for Salt River Project in Phoenix. “Utilities have had to work together to succeed and spread the risk,” he said.
Utilities in the West inherently recognize that it makes sense to share the cost of a transmission project, to have a participatory project that meets the needs of many, said Dan Hawkins, SRP senior project manager for the new Palo Verde to Browning transmission lines. Not only do such projects provide a financially viable alternative, with several participants bringing money to the table, but they also address regulatory concerns by focusing only on essential transmission needs, by focusing on common facilities, he said. The result? “We get better use from the transmission that is built.”
RTOs: A Constraint on Choice
The RTO—regional transmission organization—suffers from an identify crisis, according to Roger Gale, president and CEO of GF Energy. “It’s neither fish nor fowl. It doesn’t have the drive of a private company, it doesn’t have the social responsibility of public ownership of transmission.”
Gale sees other drawbacks, too. It’s hard for public power utilities and cooperatives to be players, he said. The RTO is dominated by larger players.
An RTO also limits options, said Robert Kondziolka, manager of transmission planning for Salt River Project. “If a utility is embedded in an area with an RTO, opportunities [for alternative transmission arrangements] are greatly diminished or nearly impossible.” And once a utility is in an RTO, it can’t take a different approach, he said.
An RTO may be structured to invite public power ownership, said Bob Johnston, CEO of MEAG Power. But so are jointly owned transmission companies. “And in an RTO, there’s another layer of authority and bureaucracy that must be dealt with, which may diminish some value of ownership,” he said. “We struggle to see the cost benefit of RTOs.”
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SRP is one of more than 20 participants in CATS—the Central Arizona Transmission System—which is examining long-term transmission requirements in the central part of the state. As part of that effort, several new transmission lines are planned over the next seven to eight years.
A choice of models—“We have concluded that there is no one ultimate model that works for all people in all areas,” said SRP’s Kondziolka. “In the desert Southwest, the joint participation model has been very successful. It provides the greatest leverage for small players in getting involved as part owners and getting regional needs met with fewer projects.”
FERC is concerned about the different business models that entities could use to develop transmission capacity, said David Meyer, acting deputy director of the Department of Energy’s Office of Electricity Delivery and Energy Reliability. “My personal view is that it’s helpful to have a broad menu of possible options. What works in one part of the country doesn’t in another part.” A broader choice improves the chances of finding a workable solution, he said.
Once found, the solution must be nurtured, said SRP’s Kondziolka. “It’s hard to create big organizations that work from day one,” he said. Any new group needs time to evolve.
But greater ownership of the grid is likely, said Roger Gale, president and CEO of GF Energy, a Washington, D.C.-based energy consulting firm. “Eventually, I think we’ll see private or public entities owning large parts of transmission.”
Making it happen—Public power utilities can get the ball rolling for regional solutions by taking part in the transmission dialogue, said Jim Pope, general manager of the Northern California Power Agency. “Propose to build major transmission lines. Like the Transmission Agency of Northern California process for Path 15 in central California, this should generate joint participation in large projects and set the standard for such participation.”
MEAG’s Johnston agreed. “If somehow public utilities can get invested in the grid, that will go a long way toward solving their problems.”
Several large utilities in the Midwest are again looking at a joint system model, said WPPI’s Thilly. “There’s a benefit in having munis and co-ops in the system. They lend support to the need for and the siting of lines, and they provide political support.” They also provide financial support, said VPPSA’s Gallagher. “Public power systems have unlimited ability to finance, as long as it’s a sound venture. We can finance whatever you want to build. Let us come in, and we’ll provide a stable base of dollars. Eventually, we’ll neutralize our load ratio share, and put in correspondingly more dollars, if that’s the problem.”
IMPA’s Rao agreed. “People say that there’s not enough money to build transmission,” he said. “But most of the munis in the country would like to put money into transmission to ensure reliability.” That approach worked in Indiana, and Terry Huval, director of the Lafayette Utilities System, would like to negotiate the same kind of arrangement in Louisiana with Entergy. “The Indiana model is a practical and simple process,” he said, noting that it has taken what has traditionally been good utility practice and incorporated it with several companies sitting at the table.
“Openness gives everyone more comfort that decisions are made for the right reasons,” said Huval.
After Hurricane Katrina devastated Entergy’s New Orleans division, Lafayette offered to invest in Entergy’s transmission system to provide the company with cash to rebuild, Huval said. He is hopeful that Entergy will accept the Lafayette offer. “It’s very likely that the cost for debt service associated with a cash investment would be more than offset by the savings from not having to pay transmission access rates year after year,” he said.
IMPA’s Rao calls it a great marriage. “I think Entergy should consider letting Lafayette have some ownership. This will provide needed money to Entergy and transmission to Lafayette Utilities.”
Can’t be a crap shoot—But it will take more than cash to create a grid that serves everyone. That’s one reason APPA and other organizations pushed for a provision in the Energy Policy Act of 2005 that requires FERC to establish procedures for long-term contracts for generation and the transmission rights that go along with them, said VPPSA’s Gallagher. “We’re in the business of serving retail customers,” he said. “We need long-term contracts for transmission rights to act as hedges against short-term markets.” Otherwise, he said, “you’re always in a crap shoot. And we’re not in the crap shoot business.”
FERC should focus on joint participation/ownership projects to get transmission built in the country, said Northern California Power Agency’s Pope. “Regular processes are not working and have not worked for at least two decades. An effective joint transmission planning process might have led to the timely expansion of Path 15, critical transmission infrastructure in central California that could have seriously reduced the impacts of the California energy crisis if it were built much earlier.”
FERC’s Brownell said the commission cannot give advantages that might harm the market. “But in our transmission pricing policy draft, there are the tools to get transmission built and encourage new models,” she said. Lafayette’s Huval said the agency’s commissioners have taken an interest in the utility’s approach to Entergy. “What we’re doing is consistent with the type of activity that FERC would like to see,” he said.
But some, like SRP’s Kondziolka, do not want to see centralized planning. “I don’t believe there should be a top-down directive from a centralized planning group. It just doesn’t work that way,” he said.
In any case, Kondziolka does not expect FERC to be a key player for a while. Under the Energy Policy Act of 2005, the Energy Department is required to issue a national transmission congestion study by August 2006. Based on that study, and public comments, the secretary of energy may designate selected geographic areas as National Interest Electric Transmission Corridors. Following DOE’s action, states would process applications to build proposed transmission facilities. FERC backstop authority would kick in if the state process fails to provide a transmission solution, he said.
“The purpose of the study is to get a better sense of the areas with the most serious needs,” said DOE’s Meyer. “We will identify areas where needs are especially acute or we have good reason to believe they will become acute. We want to build on existing processes. Active efforts are under way to identify regional needs and regional solutions.”
If state siting authorities don’t act on a project proposed for one of the designated corridors within a year, FERC has the option of exercising backstop siting authority.
FERC is beginning to draft what the application process might look like, said Brownell. “We feel a sense of urgency about transmission and we want to be ready to go when the first applications come in,” she said.
VPPSA’s Gallagher thinks FERC understands that dramatic differences are needed in how the market is viewed. “No market can work if it doesn’t have the ultimate consumer in mind.” He’s confident that the commission “will do the right thing.” And MEAG’s Johnston believes FERC “is willing to look at more individual issues, such as ownership.”
In the meantime, a couple of public power executives have suggestions for the commission. “When FERC modifies the standard transmission tariff, we think that it should impose a joint planning requirement,” said WPPI’s Thilly. “There should be a requirement to plan for the needs of all those dependent on the system. If you’re not at the table, it’s a black box.”
IMPA’s Rao thinks FERC should punish those companies that should—but don’t—build transmission. “The agency should say: ‘I’ve given you an 11-13 percent rate of return. But if your transmission system isn’t robust, your rate of return will be 3 percent.’ FERC should punish those who are creating constraints.”
“That’s an intriguing suggestion,” said Commissioner Brownell. “I wish I had thought of it two years ago.” It’s an idea that gets to a growing trend of disinvestment, she said. “In some systems, people have islanded themselves, so their generation gets preference.”
One challenge for monopoly markets, said Brownell, is that with more opportunities, “you have got to change the mind-set and the culture and how you reward and how you punish people.”
Tomorrow’s grid—Many public power utilities would like to see regional transmission systems jointly owned by all load-serving entities that depend on them, said WPPI’s Thilly. “Everybody would provide investment capital, supporting the system and earning an equivalent return. That would ensure that the grid is planned for everybody’s needs, not just those of one entity.”
That’s a “wonderful solution,” said Commissioner Brownell. While FERC shares this vision, she added, “it’s not ours to impose. But it would be unfortunate for the country if we weren’t willing to look at new ways of doing business.”
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