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Kelly: FERC Transmission Policy Should Cover All Business Models

The transmission policy that FERC crafts should apply to every business model that could build transmission, Commissioner Suedeen Kelly said last Tuesday in an appearance before a meeting sponsored by the National Energy Marketers Association (NEMA). "We don't need to favor one over another -- we need them all," she said.

She said that FERC's approach to transmission should "recognize the risk that each business model undertakes and should provide the appropriate return for that risk and maybe we should look broader at risk than we have in the past."

Addressing new business models in transmission, Kelly said that "the very fact that we have seen new business models arrive to build transmission only confirms that the traditional ones are having difficulty accomplishing the task."

With respect to merchant transmission, she said that such projects need contract-based investment "and there's frankly just not much opportunity for this in this industry. That's not how we provided transmission in the past and there aren't many opportunities to do it now."

Kelly noted that like merchant transmission, independent transmission companies' (ITC) mission is also to link supply and demand. ITCs "have a couple of other factors going for them. They have no internal competition for capital. They do transmission. And they operate on a tariff-based investment model, which is helpful since that's basically how we do it in the United States."

But without having the traditional obligation to serve and before ITCs own any transmission assets, "in most states, they don't have the right to build transmission unless the incumbent utility wants them to, and that's a big challenge." Also, ITCs need rate certainty, "particularly since their tariff-based, in order to assure their investors that they can recover their investment."

Meanwhile, Kelly highlighted the fact that a number of states -- particularly in the West -- are moving to set up transmission authorities. Just last month, the governor of Kansas signed into law a measure that will create an electric transmission authority for that Midwestern state.

Kelly said that state transmission authorities also face barriers. "They face the public barrier of just getting the transmission authority created. They face the continual accountability in the legislative forum for appropriating" funds, she added. Also, the state authorities "don't have a regional mission. They have an economic development mission."

As for other points related to FERC's development of a transmission policy, Kelly said that to the extent that vertically-integrated, investor-owned utilities "participate in transmission projects that bring cheaper generation into their territory and put their generation at some risk, perhaps we should recognize that."

Kelly said that to the extent that a transmission owner is an ITC and does not have revenue diversity, "perhaps that's a risk-enhancing factor."

The Commissioner also believes that FERC's transmission policy "should eliminate or reduce the current disincentives that exist still. For example, high up-front capital costs. We can't eliminate the high up-front capital costs, but perhaps we can and should give more reassurance that those capital costs will be recovered."

Meanwhile, Kelly pointed out that there's also long at-risk time between transmission investment and the return. "I think our policy should address that and eliminate the disincentive that exists because of that and the fact that there is a disincentive to invest in transmission versus generation because of the long time that it takes to earn a return on that investment," she said.

FERC's approach to transmission also needs to "better foster integration of the grid -- whether inside or outside an RTO [regional transmission organization]," Kelly said. FERC needs to "look at ways to have a regional approach, even when an RTO doesn't exist." The Commission should also "be supportive of RTOs like PJM that wants to make their process of regional planning more inclusive, better, more effective and include public power as part of it."

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