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FERC Holds Off on Transmission Pricing Policy; Taking Closer Look at Passive Ownership

FERC last Wednesday held off on releasing a much-anticipated final transmission pricing policy statement in order to further explore and flesh out issues related to passive ownership and independence.

"The Commission's discussion today was a discussion about where we all are on these issues and there is agreement that what we want to do is speak to the passive ownership issue and define it so that these companies will know exactly what we will say yes to going forward," FERC Chairman Patrick Wood told reporters following the Commission's open meeting.

FERC in January 2003 issued a draft transmission pricing policy statement, and it is now closing in on completing a final transmission pricing policy statement. The agency had placed a docket related to the matter on the agenda for its open meeting, but held off on issuing a final policy statement Wednesday.

At the meeting, Wood noted that the pending comprehensive energy bill includes a section requiring the Commission to establish by rule incentive-based -- including performance-based -- rate treatments for transmission of electric energy for both reliability and economic reasons. FERC must establish this rule within one year of enactment of the legislation.

"This mandate requires the Commission to do a pretty comprehensive rulemaking on these issues pretty soon anyway," Wood noted. "My general thought was the Commission's going to have this on its plate hopefully soon and that we ought to focus instead on what are the things that between now and then are not really clear."

He noted that Commissioner Joseph Kelliher has raised the issue of whether there is "some other way that we can actually look at passive ownership, some other way that we can define independence, that can satisfy our concerns about having independence for some of these institutions or some of these companies that get additional incentives or [are] allowed to do more nontraditional rate treatment, but still allow for a bit more of the companies to stay, at least as a dividend recipient from what is considered a relatively stable revenue source."

Wood said that he has been watching the situation in Wisconsin "with interest, as an investment vehicle and as a means of developing new transmission. That there is an opportunity there to allow a market participant to retain a passive ownership share in the resulting conglomerated company, but yet not have control."

FERC "spoke to this obliquely" in a recent order involving ITC Holdings and its plans for an initial public offering (IPO) of stock. "They wanted some guidance from the Commission about would any of this trading jeopardize the independence adders that we had given them in the prior order." FERC "spoke to a 5% maximum on voting rights in that context and I thought that was a pretty good template there," the Commission chairman said.

"This particular issue on passive ownership is one that I think we could provide some guidance on," Wood added. "It may allow for some industry development between now and the time that the Commission does the full, comprehensive rule that would be required under the law."

On the issue of passive ownership, Commissioner Nora Brownell said she was "probably the most reluctant in the building, but I've gotten increasingly comfortable with something like 49% passive ownership structure, keeping the 5% voting structure, with, I think, some provisions that we would want to see in the partnership agreements that would guarantee that passive really remained passive. Otherwise, I think we're being intellectually dishonest."

For his part, Kelliher said that he thinks there's "broad agreement among the...members of the Commission that underinvestment in transmission is a national problem and that we need to develop some kind of national solution for that."

FERC and Congress agree that "transmission underinvestment is a problem," he said. "There's an agreement that transmission pricing reform can help [to] be part of a solution to that problem. There's also agreement that some federal siting authority is part of the solution to that problem. So we're really moving in the same policy direction as Congress, but as the chairman said it probably makes sense to wait a little bit, be a little patient and see what the disposition of the energy legislation is."

Addressing transmission companies (transcos), Kelliher agrees with Wood "that that's an area where we can probably act sooner rather than later and to revisit some of the positions the Commission has taken with respect to transcos in the past."

He said FERC "should revisit our policy and try to reinforce the success that we've seen so far with transcos, both affiliated and independent transcos."

Kelliher said that transcos "really now, in terms of market size, are almost [in] the exact same position as independent power was in 1978 when PURPA was enacted. Transcos right now own about 3% of the grid and so far, we think they have proven to be a success -- a successful vehicle to secure investment in transmission and there's lesser concerns about vertical market power exercise that result from transco formation, both affiliated and independent."

Commissioner Suedeen Kelly said she is "probably the least patient of the four of us in wanting to develop a transmission pricing policy."

Kelly said that "fostering the expansion of transmission is a goal of all of us on the Commission, and should Congress not pass the energy bill I trust that we will forge ahead in coming up with a policy, even if we aren't required to by the law." In the meantime, she said FERC should continue to make "this a front burner issue."

Wood asked Commission staff to pull "something kind of short and sweet together that talks about what independence means in the context of this passive ownership issue."

At a press briefing following the open meeting, Wood said that the final policy statement will say "this is where the Commission wants people to go. You're invited to come in and go this route. Basically kind of telling people, this is what we'll say yes to."

The statement "will talk about independence and the things that I heard my colleagues say where nobody has more than a 49% interest in it -- financial interest -- and nobody has more than a 5% voting interest."

Wood noted that since the draft policy statement was issued, "we've done a bunch of case law. So what I just suggested we do today is just let the case law stand for what it stands for and then clarify this one issue..."

Wood, Brownell and former Commissioner William Massey "were pretty strict on the independence issue, on any passive ownership shares. So I would characterize this as yes, as a shift for me."

That shift is "based on watching how well the ATC [American Transmission Co.] is putting line miles in Wisconsin, getting congestion issues resolved, which are important now that the MISO's up and operating. They have to get congestion issues resolved."

Meanwhile, Wood also noted that the pending energy legislation includes a provision that may offer "some opportunities there to maybe crack open" the trapped cost issue that has perhaps "retarded" the power sector, "particularly the vertically-integrateds, from doing some of these investments for fear of not having cost recovery."

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