Draft comment letter to FERC on RTO NOPR
[Comment period has ended]
The Council is requesting comments this draft by
close of business August 6, 1999. Please address all comments to Wally
Gibson, Northwest Power Planning Council, 851 SW Sixth Avenue, Suite 1100,
Portland, OR 97204, or send e-mail to wgibson@nwcouncil.org.
Introduction
The Northwest Power Planning Council (Council) has an ongoing interest
in the development of a competitive wholesale power market and the
development of a transmission system that, through open access and
efficient pricing based on economic principles, will best support that
market. We have actively participated in the discussions leading up to the
draft proposal for IndeGO (a proposed Northwest ISO which ultimately did
not gain enough support to go forward to a formal proposal to the
Commission). In addition, the Council is an active participant in several
committees of both the Northwest and Western Regional Transmission
Associations (NRTA and WRTA).
General comments
The Council welcomes the efforts of the Commission to further the
development of RTOs. The Council believes the minimum required
characteristics and functions proposed for RTOs in the NOPR are necessary
to enhance the development of a competitive power market and ensure a
reliable and efficient transmission system.
Comments on specific standards and
issues
The Council has several issues that it would like to address in detail.
The first is the issue of rate pancaking, cost shifting and its impact on
the ability to form an RTO in the Northwest. The second is the potential
conflict between efficient pricing and the incentive ratemaking proposals
in the NOPR. The third is the appropriate state role in RTO governance.
The fourth is the appropriate scope and configuration of an RTO. These are
addressed below.
1- Rate Pancaking and Cost Shifting
Proposed standard: The RTO tariff must not result in
transmission customers paying multiple access charges to recover capital
costs over facilities that it controls (i.e., no pancaking of transmission
access charges). (? 35.34(j)(1)(ii)).
Related issue: The Commission proposed allowing flexibility in
ratemaking for RTOs (NOPR, ?F) and specifically requested comments about
the use of license plate pricing (access fees paid by load serving
entities based on the fixed transmission costs of the local utility) as a
long-term measure (NOPR, ?F(1)), which would eliminate cost shifting for
practical purposes.
Comment: The standard requiring the elimination of rate
pancaking is appropriate and the Council supports it, as it would be
embodied in a pricing approach with a single access fee and
congestion-management pricing. However, the derivation of the access fee
gets to the heart of a difficulty in forming an RTO that is perhaps
peculiar to the Northwest.
The Northwest is distinguished by the high fraction (well over half) of
its transmission owned by non-jurisdictional utilities, primarily the
Bonneville Power Administration. The presence of Bonneville, as well as
the large number of publicly owned utilities, means that the formation of
any Northwest-wide RTO (which the Council believes represents at least a
minimal reasonable market-determined area) will require the voluntary
assent of the non-jurisdictional utilities. Further, these
non-jurisdictional parties would largely not be subject to the incentives
the Commission proposes to offer to jurisdictional utilities.
The IndeGO effort proposed a ten-year phase-in from company-specific
license plate access fees to license plate access fees averaged over local
pricing areas (along with an annual cap in the rate of increase). The
resulting cost shifts, even with a long phase-in period, were too much for
key parties to accept and were a major factor in the failure of IndeGO to
form. This demonstrated that minimization or elimination of cost-shifting
is key to RTO success in the Northwest.
Moreover, the definition of what would go in to such an access fee
should be broader than suggested by the NOPR. Transmission cost shifting
implicates not just a utility's capital costs, but also its O&M expenses
(which can be inversely related to capital costs, e.g., to the extent O&M
is a function of the age of the system) and its net wheeling revenue or
expenses. Large net wheeling revenues can substantially offset the
capital-related costs of a system as seen by the customers of the local
utility. Thus, the total of these three represents the transmission cost
that utilities and state regulators look at when judging whether a
proposal causes cost shifting for the utilities they represent or
regulate.
The solution, multiple company-specific license plate access fees
within an RTO, could lead to some inefficiencies compared with a single
RTO-wide access fee, for instance, the possibility of "bus shopping" by
loads based on sunk, historic costs rather than incremental costs.
However, the most important features for transactional efficiency, prices
that closely reflect congestion costs and are largely independent of sunk
costs would be maintained. These are the elements that will lead to the
most efficient decisions going forward and best meet the requirements of
Function 1 to "employ a transmission pricing system that will promote
efficient use and expansion of transmission and generation facilities."
Recommendation: The Commission should accept company-specific
license plate rates of indefinite duration in any Northwest RTO in order
to get to the desirable goal of eliminating rate pancaking as well as the
other benefits of an RTO.
2- Performance-based Regulation and Efficient
Pricing
Issue: The Commission is interested in applying
performance-based regulation (PBR) to RTOs, including price or revenue
caps, price incentives or performance standards. (NOPR, ?F(3)).
Comment: The Council is does not take a position on the merits
of for-profit vs. non-profit RTOs. We believe that each has strengths and
limitations. We do, however, have comments on the application of
performance-based regulation and certain other incentive-based regulation
as applied to for-profit RTOs. We believe that there is a potential for
compromising or eliminating the economic advantages of congestion pricing
systems, if performance-based regulation is not well thought out.
The Council supports a pricing scheme that would charge a utility's
fixed costs (plus historic net wheeling costs -- see discussion under cost
shifting above) as a fixed access charge, unrelated to current
transactions and thus invariant with current transaction volumes. A
load-based access charge would be one good approach, though variations
have been suggested and could be acceptable. The only variable charges for
individual transactions in such a scheme would be a congestion charge
(which could often be zero) and a charge for losses. Congestion charges
could be by bus or aggregated into zones, depending on the circumstances
of particular RTOs. This general kind of approach is used by the
California ISO and would have been proposed by IndeGO, among others.
This approach meets the NOPR's proposed Minimum Function No. 1 that the
RTO "employ a transmission pricing system that will promote efficient use
of and expansion of transmission and generation facilities"
(?35.30(j)(1)). It also meets the somewhat expanded criteria of Order No.
888's ISO principles that pricing policies be set to "promote the
efficient use of and investment in generation, transmission and
consumption."
The traditional form of performance-based ratemaking is price-cap
regulation. By fixing prices at an initial level that provides a
reasonable return to investors, and only allowing prices to change by some
measure of general inflation less expected productivity improvements,
price cap regulation creates incentives for management to improve
productivity beyond built-in levels, to cut costs, and to increase sales
levels where the marginal revenue is greater than the marginal cost. The
incentive to increase throughput necessarily depends for its
effectiveness, however, on the individual transaction price recovering
some portion of (and up to a full allocation of) fixed costs as well as
variable costs, because that increase in fixed cost recovery beyond the
established base level is the reward that is at stake. The incentive to
cut operating costs can work both with this form and with a form where
total access fees (rather than transaction prices) are fixed in advance
and rewards come from the savings in reduced operating costs.
The form of price-cap regulation that requires a fixed cost component
in transaction prices to work will work at cross purposes with the
transactionally efficient prices previously described and with the
requirements of Function 1 and will distort the price signals given to
users of the transmission system.
Revenue-cap regulation, a modification of price-cap regulation, was
original devised to ensure that deliberate reductions in sales volume,
through demand-side management and conservation programs ordered by
regulators, did not reduce the company's return and thus it eliminated a
disincentive the company faced to support those kinds of programs. The
Commission faces a different kind of issue here, calling into question the
appropriateness of this response. In any case, it too usually depends for
its effectiveness upon the price reflecting not just congestion costs and
losses but also some component of fixed cost, though it too could be set
up to work with fixed access fees. Like price-cap regulation it is
potentially incompatible with the efficient transmission pricing the
Commission seeks and the Council supports.
Recommendation: The Commission should not seek to implement any
forms of PBR that would conflict with or dilute the effects of the
efficient pricing that it requires in Function 1.
3- State Role
Proposed Standard: An RTO must have a decisionmaking process
that is independent of control by any market participant of class of
participants (?35.34(i)(1)(ii)).
Issue: How should the Commission view proposals for state
government participation in RTO governance?
Comment: Representatives of state governments, including the
Council, participated actively in the discussions about IndeGO and
continue to participate in the various western regional transmission
associations. The various state entities have different requirements on
the level of their own participation in RTOs.
Recommendation: The Commission should not set restrictive rules
on the type of state participation in RTO governance, but should allow the
states to propose to the Commission the kind of roles they view as
appropriate, e.g., voting members of a stakeholder board, ex
officio status on an independent board, and so forth.
4- Appropriate Scope and Configuration of an RTO
Proposed Standard: The RTO must serve an appropriate region. The
region must be of sufficient scope and configuration to permit the RTO to
effectively perform its required functions and to support efficient and
nondiscriminatory power markets (?35.34(i)(2)).
Comment: The specific factors the Commission raises for
consideration in the application of this standard are all appropriate
ones. A large enough geographic scope for an RTO is key to enabling it to
achieve the benefits that the Commission seeks. Many of the issues,
including especially those of pancaking, parallel flow effects,
reliability, seamless access to diverse power markets and the ability to
respond to congestion with market-based solutions would generally be made
more tractable the larger the scope of the RTO, provided the scope is
within the technical limits for reliably controlling the system. For
instance, the Comprehensive Review of the Northwest Energy System,
sponsored by the four Northwest Governors and completed at the end of
1996, called for the creation of a Northwest-wide ISO, including the
assets of the Bonneville Power Administration.
Recommendation: The Commission should express a preference for
larger and wider-scope RTOs rather than smaller and narrower-scope, within
any technical limits on reliably controlling the transmission system.
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