Academic journal article Contemporary Economic Policy

Improving U.S. Transmission Expansion Policy through Order No. 1000

Academic journal article Contemporary Economic Policy

Improving U.S. Transmission Expansion Policy through Order No. 1000

Article excerpt

I. INTRODUCTION

The problem of providing incentives for sufficient transmission investment to support competitive electricity markets has long been an area of concern both in the regulatory arena, spearheaded by efforts of the Federal Energy Regulatory Commission (FERC), and among economists, dating back at least to Hogan's (1992) seminal work on financial transmission rights (FTRs). In spite of all the attention the problem has garnered, it still remains as intractable as ever, though. Indeed, FERC recently introduced another effort to spur transmission expansion, Order No. 1000 (FERC 2012).

Order No. 1000, like Order No. 890 (FERC 2007) before it, views planning as vital to transmission infrastructure development, arguing that the former helps in identifying more efficient solutions than the market alone. Order No. 1000 thus attempts to improve the effectiveness of the regional transmission planning process promulgated in Order No. 890, in order to promote efficient transmission development. FERC's expressed aim in Order No. 1000 is to promote the development of transmission facilities identified in the planning process to satisfy reliability standards, reduce congestion, and enable compliance with public policy requirements established by state and federal laws and regulations.

While faulting Order No. 890 for containing inadequate transmission planning and cost allocation requirements, Order No. 1000 contains flaws of its own. This article argues that the cost allocation principles contained in Order No. 1000 are too vague to promote efficient and cost-effective development of new transmission facilities. Section II begins by providing a review of FERC transmission polices designed to promote transmission expansion in the environment of restructured energy markets. Section II further critiques the level of specificity contained in Order No. 1000. Section III provides a model for a cost allocation methodology which complies with the order's cost allocation principles. Section IV concludes.

II. U.S. TRANSMISSION EXPANSION POLICY

A. Review

FERC has been concerned about the ability of the deregulated electricity industry to undertake sufficient investment in transmission facilities since at least 1996, when it issued Order No. 888 (FERC 1996). This order focused on removing impediments to competition. The order required public utility transmission providers to offer third parties access to their transmission systems on the same or comparable basis, terms, and conditions, as they offer themselves. Additionally, it required these utilities to publish their available transmission capacity on their transmission system on an OASIS (open-access same-time information system).

FERC reasoned that these reforms were necessary because vertically integrated utilities (VIUs) have the incentive to limit third-party access to their transmission systems, giving their own generation a competitive advantage. FERC hence proposed functional unbundling--VIUs selling off their generation assets--to remove their incentive for undue discrimination.

To advance electricity market competition, Order No. 888 encouraged the formation of independent system operators (ISOs). An ISO's main function is real-time management of a regional transmission grid. FERC required ISOs to be independent of their market participants, removing the motive for transmission discrimination. FERC reasoned that ISOs would rely on price signals to ensure efficient transmission investment.

In 2000, FERC sought to improve upon Order No. 888 by issuing Order No. 2000 (FERC 2000). In this order, FERC maintained that Order No. 888's guidance was insufficient to achieve a transmission network adequate to meet the increased stresses competition placed on the transmission system. Specifically, FERC pointed to decreased coordination between generation and transmission, merger activity, entry of power marketers and independent power producers, efforts to introduce retail competition, and increasing electricity trade brought about by competition as necessitating transmission grid expansion. …

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