[Federal Register: January 27, 2003 (Volume 68, Number 17)]
[Proposed Rules]
[Page 3842-3847]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27ja03-28]
[[Page 3842]]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 35
[Docket No. PL03-1-000]
Proposed Pricing Policy for Efficient Operation and Expansion of
Transmission Grid
January 15, 2003.
AGENCY: Federal Energy Regulatory Commission, DOE.
ACTION: Notice of proposed policy statement
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SUMMARY: The Federal Energy Regulatory Commission (Commission) proposes
a new pricing policy for the rates of transmission owners that transfer
operational control of their transmission facilities to a Regional
Transmission Organization (RTO), form independent transmission
companies (ITCs) within RTOs, or pursue additional measures that
promote efficient operation and expansion of the transmission grid. The
proposed policy would create rate incentives that reward RTO and ITC
formation and grid investment, because independent regional grid
operation and coordination will improve grid performance, reduce
wholesale transmission and transactions costs, improve electric
reliability, and make electric wholesale competition more effective in
ways that benefit all customers. We invite comments on the proposed
policy statement.
DATES: Comments are due March 13, 2003.
ADDRESSES: Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426.
FOR FURTHER INFORMATION CONTACT: Stephen Pointer (Technical
Information), Office of Markets, Tariffs and Rates, Federal Energy
Regulatory Commission, 888 First Street, NE., Washington, DC 20426,
(202) 502-8761.
Andre Goodson (Legal Information), Office of General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426, (202) 502-8560.
SUPPLEMENTARY INFORMATION:
I. Introduction
1. The Federal Energy Regulatory Commission proposes a new policy
for the rates of transmission owners operating within a Regional
Transmission Organization (RTO). Because they are independent of market
participants, RTOs and Independent Transmission Companies (ITCs) make
competitive wholesale electric markets more efficient, fair,
trustworthy, and cost-effective. This new policy will reward
transmission owners for joining RTOs and turning their assets over for
RTO operation. It will reward transmission owners for forming ITCs or
taking other measures which make their transmission facilities
operationally independent from the activities of other market
participants. It will reward transmission owners for pursuing
additional measures to operate and expand the transmission grid
efficiently in ways that solve RTO-identified system needs using either
classic transmission investments or innovative technologies. However,
only transmission owners which participate in RTOs will be able to take
advantage of these incentives. This policy will promote competitive
wholesale electric markets, reduce wholesale electric costs and improve
electric reliability.
II. Summary of Proposed Incentives
2. Under this proposed policy: (1) Any entity that transfers
operational control of transmission facilities to a Commission-approved
RTO would qualify for an incentive adder of 50 basis points on its
return on equity (ROE) for all such facilities transferred; (2) ITCs
that participate in RTOs and meet the independent ownership requirement
(discussed below) would qualify for an additional incentive equivalent
to 150 basis points applied to the book value of facilities at the time
of the divestiture; and (3) we also propose a generic ROE-based
incentive equal to 100 basis points for investment in new transmission
facilities which are found appropriate pursuant to an RTO planning
process.
III. Background
A. Order No. 2000
3. We adopted Order No. 2000\1\ to encourage voluntary and timely
formation of RTOs. Order No. 2000 found that transmission facilities
can be operated more reliably and efficiently when coordinated over
large geographic areas, and that RTOs would achieve this result by
establishing: regional transmission pricing and the elimination of rate
pancaking; improved congestion management; more accurate estimates of
available transmission capacity (ATC); more effective management of
parallel path flows; more efficient planning for transmission and
generation investment; and improved grid reliability. It concluded that
RTOs would help eliminate the opportunity for unduly discriminatory
practices by transmission providers, reduce the need for overly
intrusive regulatory oversight, and instill trust among competitors
that all are playing by the same rules.
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\1\ Regional Transmission Organizations, Order No. 2000, 65 FR
809 (Jan. 6, 2000), FERC Stats. & Regs. ] 31,089 (1999), order on
reh'g, Order No. 2000-A, 65 FR 12,088 (Mar. 8, 2000), FERC Stats. &
Regs. ] 30,092 (2000), aff'd sub nom. Public Utility District. No. 1
of Snohomish County, Washington v. FERC, 272 F.3d 607 (D.C. Cir.
2001).
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4. Order No. 2000 recognized that realization of ``effective and
efficient RTOs is dependent in large measure on the feasibility and
vitality of the stand-alone transmission business.''\2\ It also found
that transmission pricing reforms may be needed to facilitate both RTO
formation and the formation of stand-alone transmission businesses such
as ITCs. The order discussed various innovative rate options and
identified specific innovative rate mechanisms that we would consider
for entities that meet the minimum characteristics of RTOs.\3\ In
identifying the specific innovative rate mechanisms (including
performance-based rates) that we would consider for entities that meet
the minimum characteristics of RTOs, Order No. 2000 neither prescribed
a specific transmission pricing method nor guaranteed approval of any
particular innovative pricing proposal. All innovative pricing
proposals should be fully justified:
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\2\ Order No. 2000 at 31,170.
\3\ See Sec. 35.34(e) of our regulations, 18 CFR 35.34(e)
(2002) (innovative rate treatments for RTOs).
The [a]pplicant [for innovative rate treatments] must explain
how the proposed rate treatment would help achieve the goals of
RTOs, including efficient use of and investment in the transmission
system and reliability benefits to consumers; provide a cost-benefit
analysis, including rate impacts; and explain why the proposed rate
treatment is appropriate for the RTO proposed by the Applicant. This
means that filings under section 35.34(e) must be complete and fully
explained; must demonstrate that the resulting rates are just,
reasonable, and not unduly discriminatory or preferential; must
identify how the rate treatment promotes efficiency and what
benefits result; and must demonstrate that the rate treatment does
not impede the RTO from meeting the minimum characteristics and
functions required under Order No. 2000.\4\
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\4\ Id. at 31,171.
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B. Experience since Order No. 2000
5. Order No. 2000 called for RTOs to be in operation across the
nation by December 2001. While the industry is making significant
progress in the development of RTOs and we have preliminarily approved
seven RTO proposals, only two of those have become fully approved
RTOs--Midwest
[[Page 3843]]
Independent Transmission System Operator, Inc. (Midwest ISO), which
began operating in early 2002, and PJM Interconnection, L.L.C.
(PJM).\5\ Moreover, while we have found that ITCs would be instrumental
in achieving the goals of Order No. 2000, only one ITC--Michigan
Electric Transmission Company, LLC (Michigan Transco)--is currently
operating.
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\5\ See PJM Interconnection, L.L.C., 101 FERC ] 61,345 (2002).
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1. Innovative Rates for Independence
6. To date we have approved incentive rates for RTO participation
and additional levels of independence on a case-by-case basis. In
International Transmission Company,\6\ we conditionally approved a
transmission rate moratorium based on the transmission component of
bundled retail rates, and recovery of an amount necessary to hold the
seller harmless from the income tax consequences of the divestiture of
transmission assets, subject to the company becoming a fully
independent transmission company (with no active or passive ownership
by market participants) and fully participating in a Commission-
approved RTO by a date certain.\7\ We stated:
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\6\ 92 FERC ] 61,276 (2000), reh'g pending (International
Transmission).
\7\ The rates were approved to become effective prior to the
date certain, but were subject to refund if RTO participation and
independent ownership were not both achieved by that date.
We are cognizant of the risks [International Transmission
Company] has assumed under this proposal and believe that its
willingness to bear the financial risks of failing to meet the
conditions [of Commission approval] is an example of the different
approach to the transmission business that we can expect from a
stand-alone transmission company. We also believe that accelerated
development of independent stand-alone transmission businesses will
lead to an accelerated transition to competitive, regional bulk
power markets and is in the best interest of consumers.\8\
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\8\ 92 FERC at 61,917.
7. In Trans-Elect, Inc., et al.,\9\ a newly formed ITC, we
conditionally approved a rate moratorium based on the transmission
component of bundled retail rates, effective upon the transfer of
operational control of transmission facilities to an approved RTO.\10\
Further, we approved rate recovery of an amount equal to the value of
deferred taxes on the seller's books at the time of the sale associated
with the difference between tax and book basis of transmission plant,
with cost recovery over twenty years beginning January 1, 2006, as long
as Michigan Transco joins and remains in a Commission-approved RTO.
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\9\ 98 FERC ] 61,142, order on reh'g, 98 FERC ] 61,368 (2002)
(Trans-Elect).
\10\ The transaction involved a transfer of Michigan Electric
Transmission Company, LLC (Michigan Transco) from Consumers Energy
Company to Michigan Transco Holdings, LP, an entity with no active
or passive ownership interests in market participants. These
facilities would be managed by Trans-Elect Michigan, LLC, managing
member of Michigan Transco Holdings, LP and a subsidiary of Trans-
Elect, Inc. (Trans-Elect), an independent, for-profit transmission
company.
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8. In Midwest Independent Transmission System Operator, Inc.,\11\
we permitted an upward adjustment of 50 basis points to the proxy
group's ROE midpoint for use by all participating transmission owning
utilities, and left open the possibility of additional upward
adjustments, based on the Midwest ISO's level of operational
independence:
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\11\ 100 FERC ] 61,292 (2002), reh'g pending (Midwest ISO).
There are, however, policy reasons to make upward adjustments--
particularly with regard to the level of operational independence
that the Midwest ISO provides. In this case, we will make an upward
adjustment of 50 basis points from the proxy group midpoint for the
turning over of operational control of transmission facilities. We
will consider providing additional upward adjustments for greater
levels of independence.\12\
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\12\ 100 FERC at P 31.
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2. Merchant Transmission
9. We have conditionally approved rates, terms and conditions for
service over merchant transmission facilities. The basic features of
the rate treatments allowed for merchant transmission facilities
include negotiated rates with the project sponsor assuming all market
risk associated with the project and all capacity initially allocated
through a fair, non-discriminatory and transparent open season process.
Additionally, we required that operational control of the facilities be
turned over to an RTO adjacent to or containing the geographic area of
the proposed facility and that service be provided under the OATT of
the RTO.
10. For example, we conditionally approved the rates, terms and
conditions proposed by TransEnergie U.S. Ltd. (TransEnergie) for
service over three proposed merchant transmission projects.\13\ The
first project, the Cross-Sound Cable (CSC) Interconnector, uses an
undersea high-voltage direct current (HVDC) cable system to connect the
New England Power Pool (NEPOOL) regional transmission system in
Connecticut to the New York Independent Transmission System Operator
(NYISO) transmission system on Long Island. We also authorized
TransEnergie to provide service over a merchant transmission facility,
the Harbor Cable interconnector project, an underground and undersea
HVDC transmission cable system that would connect the PJM and NYISO
transmission systems.\14\ Finally, we authorized TransEnergie's
proposal with Hydro One Delivery Services, Inc., to provide
transmission service over the Lake Erie Link, which is planned as an
underwater HVDC transmission system connecting the Ontario Independent
Electricity Market Operator to either PJM or the Midwest ISO.\15\
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\13\ TransEnergie U.S., Ltd., 91 FERC ] 61,230, orders on
compliance filing, 91 FERC ] 61,347 and 93 FERC ] 61,289 (2000).
Additionally, the CSC project facilities were integrated into the
NEPOOL regional transmission system operated and administered by ISO
New England, Inc., through amendments to the NEPOOL Tariff and
Restated NEPOOL Agreement. New England Power Pool, 99 FERC ] 61,338
and 100 FERC ] 61,259 (2002).
\14\ TransEnergie U.S., Ltd., 98 FERC ] 61,144 (2002).
\15\ TransEnergie U.S., Ltd., 98 FERC ] 61,147 (2002).
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11. Similarly, we conditionally approved the rates, terms and
conditions proposed by Neptune Regional Transmission System, LLC,
(Neptune) for service over its planned merchant transmission
facilities.\16\ Neptune proposed to build in four stages several
thousand miles of undersea high-voltage direct current transmission
lines and associated facilities to connect Maine, New Brunswick and
Nova Scotia with capacity-constrained markets in Boston, New York City,
Long Island, and Connecticut.
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\16\ Neptune Regional Transmission System, LLC, 96 FERC ]
61,147, order on reh'g, 96 FERC ] 61,326 (2001), order on motion for
clarification, 98 FERC ] 61,140 (2002).
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12. We also conditionally authorized a proposal by Northeast
Utilities Service Company (NUSCO) to construct a merchant transmission
project consisting of a 330 MW direct current cable under Long Island
Sound, Connecticut-Long Island Cable.\17\
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\17\ Northeast Utilities Service Company, 98 FERC ] 61,310
(2002).
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3. Western Orders
13. We issued a series of orders (Western Orders) to remove
obstacles to increased energy supply in the West in response to the
severe electric energy crisis facing California and the Western United
States during 2000-2001.\18\ The Western Orders waived prior notice
requirements and granted authorization of market-based rates for
wholesale
[[Page 3844]]
power sales from generation used primarily for back-up and self-
generation, authorized the resale of load reductions at wholesale at
market-based rates, waived prior notice requirements for wholesale
contract modifications to facilitate demand-side management, permitted
demand side management costs to be treated consistently with other
types of incremental and out-of-pocket costs, and allowed premiums on
equity returns and accelerated depreciation for projects that increase
electric transmission capacity and could be in service by November 1,
2002.
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\18\ See Removing Obstacles to Increased Electric Generation and
Natural Gas Supply in the Western United States, 94 FERC ] 61,277,
further order on removing obstacles to increased energy supply and
reduced demand in the Western United States and dismissing petition
for rehearing, 95 FERC ] 61,225, order on reh'g, 96 FERC ] 61,155,
order on reh'g, 97 FERC ] 61,024 (2001).
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4. SMD NOPR
14. On July 31, 2002, we issued a notice of proposed rulemaking
that proposed a framework to remedy remaining undue discrimination in
the provision of interstate transmission services and in other industry
practices.\19\ The SMD NOPR also proposed to create ``seamless''
wholesale power markets that allow sellers to transact easily across
transmission grid boundaries, through the implementation of
standardized transmission service and spot markets and through the
elimination of rate pancaking, among other things. Because of their
regional scope and configuration, we believe that RTOs can most quickly
and efficiently implement standardized transmission service and spot
markets and most effectively eliminate rate pancaking.
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\19\ Remedying Undue Discrimination through Open Access
Transmission Service and Standard Electricity Market Design, 67 FR
55,451, FERC Stats. & Regs. ] 32,563 (2002) (SMD NOPR).
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15. The SMD NOPR points out other concerns identified by market
participants through formal complaints, hotline calls, public
conferences, and pleadings. Market participants complain about the
difficulties they have experienced in gaining equal access to the
transmission grid to compete with vertically integrated utilities.
Market participants also complain that companies that own both
transmission and generation under-invest in transmission because the
resulting competitive entry often decreases the value of their
generation assets. Much of this problem is directly attributable to the
remaining incentives and ability of vertically integrated utilities to
exercise transmission market power to protect their own generation
market share. Independent transmission providers and owners, operating
under a common set of rules, would solve these problems.
16. The SMD NOPR noted that we have long recognized that the ITC
business model can bring significant benefits to the industry:
Their for-profit nature with a focus on the transmission
business is ideally suited to bring about: (1) Improved asset
management including increased investment; (2) improved access to
capital markets given a more focused business model than that of
vertically integrated utilities; (3) development of innovative
services; and (4) additional independence from market
participants.\20\
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\20\ See SMD NOPR at P 132.
It concluded that these characteristics of ITCs can have
significant benefits for the implementation of Standard Market Design,
particularly in the areas of development of transmission infrastructure
and structural independence from market participants.\21\
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\21\ Id.
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17. The SMD NOPR also proposes that independent transmission
providers institute locational marginal pricing to provide market
participants with efficient price signals. We expect such price signals
to facilitate efficient operation and expansion of the grid; but these
price signals alone will not achieve efficient grid operation and
expansion in many cases. ITCs would be more likely to relieve
congestion through transmission investment than a company that benefits
from the value of generation in constrained areas.
18. This proposed policy statement supports the SMD NOPR and Order
No. 2000 goals of RTO formation and participation and a standardized,
independent competitive wholesale electricity market by creating
incentives for RTO participation, independent transmission operation,
efficient transmission system operations and new transmission
construction and technology investment.
5. Energy Infrastructure Conferences and Reports
19. Beginning in the fall of 2001, we have held four regional
conferences on energy infrastructure issues to explore the near- and
long-term needs for additional electric transmission facilities in each
area of the country and the challenges to timely identification,
permitting and construction of those facilities.\22\ Several notable
reports have been issued on these topics.\23\ It is clear that over the
past decade, investment in the nation's transmission infrastructure has
not kept pace with load growth or with the increased demands brought
about by industry restructuring, including open access transmission
service and regional service provided by ISOs and RTOs.\24\ The result
has been increased transmission congestion, which is evidenced by a
dramatic increase in low ATC postings and use of Transmission Loading
Relief (TLR) procedures,\25\ and in significant energy price
differentials between regions.\26\
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\22\ See transcripts of the Western Conference held on November
2, 2001 (Docket No. AD01-2), the Southeast Conference held on May 9,
2002 (Docket No. AD02-13), the Northeast Conference held on January
31, 2002 (Docket No. AD02-6), and the Midwest Conference held on
November 13, 2002 (Docket No. AD02-22). These transcripts, along
presentations made at the conferences, are available on our website,
http://www.ferc.gov /electric/infrastructure.htm.
\23\ See, e.g., Transmission Planning for a Restructuring U.S.
Electricity Industry, prepared for Edison Electric Institute by Eric
Hirst and Brandon Kirby, June 2001 (EEI Report); Conceptual Plans
for Electricity Transmission in the West, Report to the Western
Governors' Association, August 2001; Financing Electricity
Transmission in the West, Report to the Western Governors'
Association, February 2002; National Transmission Grid Study, United
States Department of Energy (DOE), May 2002 (DOE Grid Study).
Cambridge Energy Research Associates is working on a similar study.
\24\ See EEI Report at 5-8; DOE Grid Study at 7.
\25\ In the Southeast, the incidence of TLRs increased 354
percent from the summer of 1999 to the summer of 2000. See Staff
Report to the Federal Energy Regulatory Commission on the Bulk Power
Markets in the United States (Nov. 1, 2000), available at http://www.ferc.gov
/electric/bulkpower/southeast.pdf, at 3-38. In the
Midwest, the incidence increased 472 percent over the same time
period. See Staff Report to the Federal Energy Regulatory Commission
on the Bulk Power Markets in the United States (Nov. 1, 2000),
available at http://www.ferc.gov /electric/bulkpower/midwest.pdf, at
2-32. See also DOE Grid Study at 5-7.
\26\ See DOE Grid Study at 16-18; Electric Transmission
Constraint Study, Staff Report to the Federal Energy Regulatory
Commission (December, 2001), available at http://www.ferc.gov /
calendar/commissionmeetings/Discussion--papers/12-19-01/e-
1xproject%20cm--121901--presentation% 20v3.ppt.
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IV. Discussion
A. A Clear Policy is Needed
20. We are committed to achieving the goals envisioned by Order No.
2000 and the SMD NOPR. Accordingly, we are proposing incentives to
promote the efficient operation and expansion of the transmission grid
through the development of independent RTOs and ITCs. We also propose
incentives for the construction of grid enhancements or employment of
innovative operating practices that should yield improved performance
of the transmission grid and a more competitive wholesale electricity
market. Many of our orders to date on transmission rates have been
targeted more toward ``hold harmless'' provisions to protect a utility
from adverse ratemaking consequences due to transfer of its facilities
to an RTO or ITC and have not resulted in true incentive
[[Page 3845]]
rate mechanisms.\27\ Other rate orders have been narrow and fact-
specific, including Trans-Elect, where our allowance of a positive
monetary incentive was based, in part, on unique circumstances
involving stipulations with the affected transmission-dependent
utilities and the relevant state commission. Similarly, the incentives
we provided in the Western Orders were premised on circumstances unique
to California and the Western United States during 2000-2001. Our goal
with this proposal is to provide the regulatory certainty the industry
needs to move forward.
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\27\ For instance, this is true of the allowance for amounts
necessary to hold a seller of transmission assets harmless from the
income tax consequences of the divestiture, as approved in
International Transmission.
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21. While significant benefits from competition are expected to
result from RTOs and ITCs, these benefits will be shared among end-use
customers and generators, among others. To assure that transmission
owners receive benefits from RTO formation, we believe that it is
reasonable to allow an adjustment to be applied to the rates of
transmission owners participating in an RTO, or in an ITC within an
RTO, as discussed further below.
22. Similarly, significant benefits from increased competition and
improved reliability will occur from the construction of needed grid
expansions and from other measures that make additional transmission
capacity available to market participants. Therefore, it is reasonable
to encourage investments in grid capacity expansion by adjusting the
rates of transmission owners for investment in certain new transmission
facilities that will be under operational control of RTOs and for other
actions that result in additional transmission capacity under RTO
management being made available to market participants.
23. We believe that this policy could encourage the industry to
achieve an independent and regional approach to transmission and to
adopt other measures to improve the performance of the transmission
grid.
B. Incentive Policy
1. RTO Participation and ITC Formation
24. We propose to provide generic ROE-based incentives to
transmission owners that participate in RTOs, and ITCs under RTOs.
Under this proposed policy, any entity that transfers operational
control of transmission facilities to a Commission-approved RTO would
qualify for an incentive adder of 50 basis points on its ROE for all
such facilities transferred.
25. ITCs that participate in RTOs and meet the independent
ownership requirement (discussed below) would qualify for an additional
incentive equivalent to 150 basis points applied to the book value of
facilities at the time of the divestiture. Such ITCs would be allowed
to recover, through transmission rates, a lump sum dollar amount
calculated on the basis of a 150 basis point ROE adder. The lump sum
dollar amount would be determined at the time of divestiture but would
be amortized and recovered over the period during which the incentive
is applied. Recovery of the lump sum dollar amount would yield the same
amount, after taxes, on a present value basis, as the increase in
after-tax returns resulting from application of the ROE adder to
current rate base over the period during which the incentive is
applied.
26. An ITC will qualify for the incentive based on independent
ownership by becoming a participant in a RTO. There must be no active
or passive ownership interests in the ITC by market participants and no
financial interests by the ITC or its employees in any market
participant. For the purpose of applying this independent ownership
criterion, ``market participant'' is defined in 18 CFR 35.34(b)(2) with
respect to the RTO in which the ITC participates.\28\
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\28\ Order No. 2000 requires case-by-case review of passive
ownership proposals to determine if they are adequately independent
by design, and also requires follow-up compliance audits to ensure
that independence is fully realized. Even so, passive ownership
arrangements may not give market participants adequate confidence
that transmission service is being provided without undue
discrimination. Because of the resources required for case-by-case
review and compliance audit, and potential for continued perception
of undue discrimination, we do not believe that extending additional
incentives for independent ownership to passive ownership
arrangements is justified.
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27. The ROE-based lump sum incentive for independent ownership
would apply prospectively to ITCs.\29\ We have already provided an
incentive for creation of an ITC for the Michigan Transco system in
Trans-Elect. We recognize that parties may be currently negotiating
divestiture of transmission assets to form ITCs.\30\ To avoid delaying
such transactions, we propose to permit the parties to any divestiture
to an ITC filed with us within 6 months of adoption of this policy
statement to propose either the allowance tied to deferred taxes that
was approved in Trans-Elect or the ROE-based lump sum payment incentive
for independent ownership proposed herein.
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\29\ Our incentive for RTO participation would be available to
public utilities that have already turned over operational control
of their facilities to a Commission-approved RTO, but have not yet
received the incentive of 50 basis points.
\30\ Two transactions have recently been filed and are currently
pending our review. Illinois Power Company, et al., (Illinois Power)
filed in Docket No. EC03-30-000, et al., for, among other things,
the sale of all of Illinois Power's right, title, and interest in
its jurisdictional transmission facilities and related assets.
Additionally, ITC Holdings Corporation et al., filed in Docket No.
EC03-40-000, et al., for approval of DTE Energy's sale of
International Transmission Company.
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28. To encourage timely participation in RTOs and formation of
ITCs, we propose a deadline of December 31, 2004, to qualify for these
incentives. A public utility would qualify for the RTO incentive adder
as soon as it has transferred operational control of its transmission
facilities to an approved and operating RTO, and would be authorized to
receive the incentive for RTO participation until December 31, 2012,
with such recovery contingent upon continued participation in a
Commission-approved RTO. A public utility that has divested its
transmission facilities to an ITC would qualify for the ITC incentive
adder once the ITC has transferred operational control of its
transmission facilities to an approved and operating RTO and meets the
independent ownership criteria, and would receive the incentive for
independent ownership until December 31, 2022, with such recovery
contingent upon continued independence from market participants and
continued participation in a Commission-approved RTO.
29. We seek comment on any clearly defined levels between these two
levels of independence (i.e., RTO participation and ITC formation
within an RTO) that could merit incentives above the basic 50 basis
point incentive proposed for RTO participation. For example, if the ITC
directly employs all of the people who work on the transmission system,
it will operate with greater independence than if it were staffed by
employees of transmission owners affiliated with market participants.
Should such behavior be encouraged?
2. Enhanced Grid Performance
30. We also propose a generic ROE-based incentive equal to 100
basis points for investment in new transmission facilities which are
found appropriate pursuant to an RTO planning process.
31. We are especially interested in encouraging investment in new
technologies that can be installed relatively quickly (i.e., do not
require the long siting process for procurement of new rights-of-way,
have designs that accommodate modular and portable
[[Page 3846]]
application, and may be environmentally benign). Such technologies
include: (1) Improved materials that allow significant increases in
transfer capacity using existing rights-of-way and structures; (2)
equipment that allows greater control of energy flows, enabling greater
use of existing facilities; (3) sophisticated monitoring and
communication equipment that allows real-time rating of transmission
facilities, facilitating greater use of existing transmission
facilities; and (4) other measures. Such technologies appear to offer
significant promise to expand grid capacity, reduce congestion, improve
reliability, and enhance wholesale competition without great cost or
delay. We seek comment on what we can do to encourage investment in
such technologies, what criteria we should use to determine that a
technology investment merits an incentive, and how to structure such
incentives. For example, these technology options may not always be
considered in RTO expansion plans, so a requirement that new investment
be made pursuant to the RTO planning process could foreclose the use of
many promising technologies.
32. We realize that the most timely and cost-effective ways to meet
demand for additional grid capacity will not always be additional
transmission facilities; rather, they may be innovative operating
practices, such as operation of facilities beyond traditionally
accepted limits, distributed generation, demand response or demand-side
management. We invite comments on what actions other than investment in
new facilities should receive incentives, what form those incentives
should take, and how we can encourage them.
33. We also would like suggestions on how to measure improved
performance of the grid. What additional guidance or assurances are
needed from us in order to encourage actions that result in improved
grid performance?
34. We want to ensure that market solutions prevail where
appropriate. Are additional measures needed to facilitate and encourage
merchant transmission to relieve the nation's transmission bottlenecks?
35. We seek comments on whether the proposals set forth in this
policy statement strike an appropriate balance. Are there additional
incentives or incentive levels consistent with pricing for a monopoly
service? Should we consider alternatives to ROE-based incentives such
as accelerated depreciation for investment in critical transmission
facilities? Finally, we seek comments on whether the duration of the
proposed incentives is appropriate.
3. Implementation
36. Once the final policy statement has been issued, eligible
public utilities would need to make a filing pursuant to section 205 of
the Federal Power Act and receive Commission authorization to receive
the proposed incentives. Unlike the innovative rate proposals in Order
No. 2000, we would not require that public utilities file a cost-
benefit analysis to qualify for the incentives associated with RTO
participation and divestiture of transmission assets.\31\
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\31\ We expect that transmission expansions undertaken via the
RTO planning process would not need an additional cost-benefit
analysis. However, we seek comments on what analysis, if any, should
be required to qualify for the incentives for other measures to
promote efficient operation and expansion of the transmission grid.
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37. The ROE-based incentives would be subject to a cap on the
overall ROE, including incentive adders, equal to the top of the range
of reasonable ROEs for a proxy group consisting of the investor-owned
transmission owners participating in the relevant RTO whose shares are
publicly traded. We note that the sum of these incentives, totaling 300
basis points,\32\ would have resulted in an overall ROE within the zone
of reasonableness established for the Midwest ISO Transmission Owners
in Docket No. ER02-485-000. We believe that these incentives will
encourage RTO participation and independent ownership in a timely
fashion and that customers will benefit from an independent and
regional approach to the provision of electric transmission service.
The additional incentives proposed for new investment in transmission
facilities, in combination with RTO system expansion planning, should
encourage long-overdue investment in new transmission, increase the
number of generators who can compete in the market place, improve
efficiency and reliability, and ultimately lower the costs paid by
customers for electricity.
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\32\ For new transmission investment constructed pursuant to an
RTO planning process and then subject to divestiture to an ITC, the
total incentive premium provided by this proposal would be the sum
of 50 basis points for RTO participation plus 150 basis points for
ITC formation plus 100 basis points for transmission enhancements.
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38. The incentives proposed here are not the only ones we will
consider. Public utilities may continue to submit other innovative rate
proposals in accordance with 18 CFR 35.34(e)(1). We will determine the
reasonableness of such proposals on a case-by-case basis. However, we
clarify that the proposed ROE incentives are intended to encourage RTO
and ITC participation and new investment and not to serve in lieu of
innovative rate mechanisms that hold utilities harmless from adverse
rate effects from the transfer of their facilities to an RTO or ITC
within an RTO (e.g., innovative rates based on bundled retail rates or
an allowance for amounts necessary to hold a seller of transmission
assets harmless from the income tax consequences of the divestiture).
V. Comment Procedures
39. We invite interested persons to submit written comments on the
proposals in this notice, including any related matters or alternative
proposals. Comments are due 45 days from the date of publication in the
Federal Register. Comments must refer to Docket No. PL03-1-000, and may
be filed either in electronic or paper format. Those filing
electronically do not need to make a paper filing.
40. Documents filed electronically via the Internet can be prepared
in a variety of formats, including WordPerfect, MS Word, Portable
Document Format, Rich Text Format, or ASCII format, as listed on our
Web site at http://www.ferc.gov, under the e-Filing link. The e-Filing
link provides instructions for how to Login and complete an electronic
filing. First time users will have to establish a user name and
password. We will send an automatic acknowledgment to the sender's E-
Mail address upon receipt of comments. User assistance for electronic
filing is available at 202-502-8258 or by E-Mail to efiling@ferc.gov.
Comments should not be submitted to the E-Mail address.
41. For paper filings, the original and 14 copies of such comments
should be submitted to the Office of the Secretary, Federal Energy
Regulatory Commission, 888 First Street, NE., Washington, DC 20426.
42. All comments will be placed in our public files and will be
available for inspection in our Public Reference Room at 888 First
Street, NE., Washington, DC 20426, during regular business hours.
Additionally, all comments may be viewed, printed, or downloaded
remotely via the Internet through the Commission's Homepage using the
FERRIS link, as explained below.
VI. Document Availability
43. In addition to publishing the full text of this document in the
Federal Register, we provide all interested persons an opportunity to
view and/or print the contents of this document via the Internet
through the Commission's Home Page (http://www.ferc.gov) and in FERC's
Public Reference Room during normal business hours (8:30 a.m. to 5
[[Page 3847]]
p.m. Eastern time) at 888 First Street, NE., Room 2A, Washington, DC
20426.
44. From the Commission's Home Page on the Internet, this
information is available in the Federal Energy Regulatory Records
Information System (FERRIS). The full text of this document is
available on FERRIS in PDF and WordPerfect format for viewing,
printing, and/or downloading. To access this document in FERRIS, type
the docket number excluding the last three digits of this document in
the docket number field.
45. User assistance is available for FERRIS and the Commission's
Web site during normal business hours from our Help line at (202) 502-
8222 or the Public Reference Room at (202) 502-8371 Press 0, TTY (202)
502-8659. E-Mail the Public Reference Room at
public.referenceroom@ferc.gov.
By direction of the Commission.
Magalie R. Salas,
Secretary.
[FR Doc. 03-1699 Filed 1-24-03; 8:45 am]
BILLING CODE 6717-01-U