Establishing coherent policy
ON MAY 19, 2011, THE FEDERAL ENERGY Regulatory Commission (FERC) issued a Notice of Inquiry, or NOI, asking industry opinions on how to approach future transmission incentives. (FERC in 2006 had issued Order No. 679, relating to incentives for transmission projects.)
The FERC NOI uses the phraseology, "given the significant changes in the electric industry and FERC's experience in applying Order No. 679." We asked former FERC commissioner Suedeen G. Kelly-who served on the commission from 2003 through 2009, and is now an energy-industry specialist at the Washington, D.C.-based law firm Patton Boggs-for some transmission insights.
What factors should FERC consider in evaluating an application for transmission build-out incentives?
KELLY It depends on the objectives. When the commission announced Order 679 in 2006, it was responding to the Energy Policy Act of 2005, which authorized the commission to provide incentives for transmission.
Frankly, the commission couldn't reach a consensus in Order 679 about what the goal of transmission incentives should be. So what the commission passed was an order that simply didn't answer that question. Effectively, what FERC was saying is, we'll work this out on a case-by-case basis.
But really, there still isn't a coherent policy that's come out of it. So that's what this current commission seems to be trying to accomplish.
What obstacles are faced by transmission developers, and what incentives are best suited to addressing those obstacles?
KELLY Again, it all depends on each project.
What's interesting to me is that the industry has changed. When Congress passed the Energy Policy Act of 2005, it was a statute that had actually been negotiated in about 2003. So the provisions in that statute were dealing with the world as we knew it in 2003.
There was concern that not enough capital was going into transmission relative to generation. Also, the concern was that we needed enough transmission to ensure that these new competitive generators could get to market, and we were seeing "congestion"-or, in other words, not enough transmission.
But by 2006, when the commission implemented its order, we were starting to get more build-out of transmission. So the debate was, "Do we need incentives now for building out transmission?" And some commissioners thought, "Yes," and some commissioners said, "It should be tailored to different kinds of projects."
As we've seen this incentive program implemented from 2006 till now, the industry has changed even more. The new public policy issue is transmission for getting to new renewables, to reach renewables and bring them to market.
How should the commission consider changes in cost estimates?
KELLY The question is: When a utility says it's going to cost $800 million to do this transmission project, should the commission use that cost estimate?
If the commission then awards "construction work-in-progress"-allowing the utility to start recovering investment costs while construction proceeds-should the commission hold the utility to the cost estimate as a cap, as an alternative way of containing costs?
The argument on the other side is: If that's the approach the commission takes, everybody's going to say, "It's only an estimate-you never know how much it's really going to cost." So if that's the commission's policy, you're going to send a signal that people should highball the cost estimates.
What other factors should the commission consider in implementing the law?
KELLY We have to ask: What's the commission's goal going to be?
Should the commission look at a project and say, "How risky is this? How hard is it to get permits? How difficult is it to build? Should we give incentives to help overcome particular barriers and difficulties associated with the particular project? Or do we look at what the project is going to accomplish from a public policy perspective?" In other words, is this-from a public policy perspective-the kind of project we want to incentivize or maybe even reward? Say, reaching renewables, or bringing in Canadian hydro, or building a tie-line to Canada, or a project that has the potential to interconnect the three grids.
Or a third possible way the commission could approach this is the way it approaches the building of natural gas pipelines, which is to say, "It's all important-the build-out of pipelines is an infrastructure we want to encourage." So the commission could say, "At this stage in the evolution of our grid, we just need more transmission, and we want to encourage it. So we're going to give incentives to every transmission project."
How do you view future electricity transmission-in 2015, or 2020?
KELLY It has to do with, "Where are we headed?" We usually build transmission because we need more transmission. But if we don't need more generation or need to move generation from one place to another, we don't need more transmission.
Having said that, however, there are states that are pursuing renewable portfolio standards: Texas, California, Colorado, New England to an extent, New York to an extent are pursuing bringing new generation on line. And we are also seeing the potential for replacement of existing generation with new generation. So we will need transmission.
Is there one point you'd like to make that we haven't discussed?
KELLY The one point I'd like to make is that achieving a consensus on what we are trying to accomplish with transmission is, first, the key to a good transmission policy and, second, the most difficult thing to achieve.
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