by Roger Feldman -- Bingham, Dana L.L.P.
The Mayor’s office on North Capitol Street sent word to the owners of Transmission Park the other day that control of their antique agglomeration of rides, with quirky loop flows and multiple charges for moving from booth to booth, had to pass to a few big new owners (ultimate identity still unknown) who would modernize it. In our town, that kind of news does not go down without a fight.
A Walk in the Park
The full business and regulatory ramifications of FERC’s July 12 proposed quartering of the continent into four RTOs (Docket No. RTO1-2-000) required no microscope for power players to discern. The Enron Chief of State (uh, sorry, Staff) immediately proclaimed the significant expansion of the industrial markets to 80-90% within a relatively short period of time, laying the predicate for the opening of retail markets. Interregional seamlessness reigns in a land where rates are pancaked no more.
The NARUC regulators, seeing the ultimate skewering of their fiefdoms afoot, invoked the shibboleths of data collection to determine proper RTO size and the need for federalist deference, both to the states and to the tribal "stakeholders" in the power system (which stakeholders FERC now seems to hold in lighter regard).
The terrible "TOs" (as FERC confusingly dubbed the current Transmission Owners) knew what was up as well. Their carefully constructed havens for regional operation – not to mention their significant expenditure for compliance with earlier FERC coordinative ISO arrangements – were subject to be scrapped. Even more fundamentally, the new order essentially mandated the unbundling of transmission assets from the traditionally integrated utility model (and perhaps signaled the requirement of ultimate divestiture). The full subtlety of separation of nominal asset ownership from operational control as propounded by Order No. 2000 came into focus for them. (TO be or not TO be, that seems to be the question.)
And for the public power community, nothing less than deer in the headlights time, as the drumbeat becomes louder for national integration of all transmission assets. (After all, isn’t TVA a "sister agency" to FERC?)
For the FERC, seemingly, it was a matter not of federal-state balancing or niceties of respect for administrative law precedential reliance but of triumphal economic inevitability:
"(L)arge RTOs will foster market development, will provide increased reliability, and will result in lower wholesale electricity prices. However, these savings will be delayed, perhaps significantly, if RTOs are permitted to develop incompatible structures and systems…"
God took seven days to make the world (inclusive of scheduled downtime); FERC will allow 45 days to realign oversight of the flow of its electrons under the guidance of its Administrative Law Judge.
Fixing Up the Park
Somehow in the respective epiphanies of the parties as they walked around the Order, sight seems to have been lost of the two mundane problems at the root of the current electricity crises: the unsuitability of the current grid to service the new patterns of transmission envisioned by deregulation, and the unsuitability of the current regulatory system to pay for its technical upgrade. (In other words: the Park has to be fixed up and it’s going to cost money.)
As the August issue of Technology Review points out, deregulation has orphaned the transmission business (from its "TOs"), uncoupling the lines that deliver electricity from revenue-producing power plants. To date, owning transmission is a business few want any part of. This is particularly unfortunate, because an important part of the technical fix for the national transmission system – besides just building new lines (no small regulatory feat) – is in the new potential of power electronics. Specifically, through the use of improved thrysistors (which, like transistors, turn the flow of electrons through an integrated circuit on and off, but are more efficient for handling big power loads because, unlike transistors, once turned on they stay on), power can be effectively "pumped" from a congested line to a less-congested line, thereby significantly not only improving the efficiency of power flow but making it safe to draw significant volumes of extra megawatts from distant
sources. ("Long distance wheeling," as Park attendants call it.) But, as the Technology Review article points out, "Rapid deregulation has swept away the old rules without offering coherent alternatives for who should run the network and how they will get paid for it – making it an especially tough time to market advances offered by power electronics." (emphasis added)
This is the question which FERC is implicitly promising to answer with its new RTO fusion program, but for which it has provided scant guidance to date, beyond promises of sufficient incentive rate relief for TOs that enter RTOs. It has allowed itself to be beguiled by promises of for-profit transco RTOs – and even the possibility of public securities markets for them some day, as in the case of the Alliance’s proposals. It also has not squarely faced the possibility of increasing monopolization of third party control of the nation’s grid and the issues related to third party construction of improvements to it. It has thus created little certainty that the necessary new power electronics can be paid for. A monopolist that meets the RTO’s independence standard is still a monopolist; an incentive rate is still not a cost-of-service rate that covers the capital improvements really needed. The anomalous possibility, therefore, is created that the rate-paying public will have to pay significant unbypassable charges to for-profit transcos, in addition to fully loaded genco charges, in order to make possible ultimate realization of the projected future wonders of competition and lowered rates through the long distance delivery of competitive market power, which deregulation is supposed to confer.
As a believer in competition as ultimately more efficient than monopoly, one wants to believe this. As a realistic assessor of the history of regulation and the propensity of oligopolists (both generation and transmission) to game systems, one is put in mind of a variation on Keynes acute observation that: "In the long run we are all dead (or in California)."
In sum, FERC needs to be devoting as much attention to the future of thrysistor acquisition as to the stitching of trader seams for the benefit of wholesale trading. It needs to focus on the fact that utility governance is about corporate finance as well as purported market independence. If TOs are not to be, how will RTOs bring us the power electronics solution to electricity transport? What the folk at City Hall need to understand is this: KOing control of Thrysistor Park does not equal a TKO of the Park’s renovation problems.
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years. In particular, he has analyzed and executed a wide variety and substantial value of project financings. He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration. He is a graduate of Brown University, Yale Law School and Harvard Business School.