Transmission Companies Don’t Deserve Preference

It’s been more than a year since Massachusetts Attorney General Martha Coakley, several other consumer advocates and groups across the region, including PowerOptions, filed a complaint at the Federal Energy Regulatory Commission (FERC) urging it to lower the fixed rate of return on equity (ROE) earned by the transmission owners (TOs) in New England. (The TOs are essentially the dozen or so utilities in the region who own and maintain the transmission grid, the largest being Northeast Utilities and National Grid.) That rate of return, set in 2006, is 11.14 percent. In the complaint filed in October 2011, the Attorney General recommended a reduction to 9.2 percent, which would reduce the revenue TOs receive from consumers by approximately $113 million annually.

The FERC set the complaint for investigation but first tried to expedite resolution of the case through settlement procedures. After all, it is a narrow issue and one that lends itself well to settlement. Given what investors can earn on alternative investments, it was obvious to most people that even 9.2 percent was a generous return and the current 11 percent rate was excessive. Obvious to everyone, apparently, except the TOs.

Settlement efforts failed and the case is now in full-blown litigation – costing consumer advocates and the TOs thousands in legal and consulting costs, not to mention the delay in reducing transmission rates from this excessive return.

While a refund obligation is accumulating, the refund period ends on January 1 unless another complaint is filed by new parties. The delay tactics of the TOs are clear: Keep the process going until the parties either give up or the limitation on the refund period takes the sting out of the outcome. They may also have some fantasy that, by the time the case gets before the Commission, the economy will have bounced back and the current return will be justified.

Whatever their rationale, this posture is outrageous. But more importantly, it’s shortsighted given the changes coming to the transmission construction rules under FERC’s policy edict in its Order 1000.

Order 1000, among other things, takes away from incumbent transmission companies the exclusive right to build all new projects. The FERC has recognized that so-called merchant transmission companies have the potential to build new projects at or below the cost of utility transmission companies. Indeed, several have done so already across the country. The TOs have taken umbrage with this approach. In New England, the TOs recently lost their attempt to get members of the New England Power Pool to support an ISO Order 100 compliance filing which preserved the incumbency preference. Eighty-three percent of NEPOOL opposed the TOs proposal – the only votes in favor were from the TOs themselves.

Perhaps there would be some sympathy among the other market sectors if the TOs were not being so pernicious on the return on equity docket. How can they not see the connection between these two dockets? Can we really trust that they would build projects for the same or less than merchant companies who are willing to garner a return based on the market cost of capital as opposed to the excessive return the TOs are sitting on? Their stubbornness on the ROE can lead no one to think otherwise. They cannot be trusted to do right by customers.

The regional transmission rates have been escalating at an astronomical rate – they have quadrupled since 2007. Sure, we are playing catch-up after a long hiatus of little or no new construction but all the more reason the ROE the TOs earn should be based on current financial market criteria. Order 1000 opens the door to needed competition in the regional planning and construction process. The TOs may think they are being clever on the ROE issue but they risk losing the business of the future.

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