FERC Builds On Efforts To Help CA, West

FERC last Wednesday said it would implement several additional measures in an ongoing effort to unsnarl the rat's nest of problems that continues to hound wholesale electricity and natural gas markets out West. By a vote of 3-0, the Commission reaffirmed several actions, including allowing premiums on equity returns and accelerated depreciation for projects that increase electric transmission capacity in the short term, to address energy-related difficulties facing California and the western part of the country.

In a March 14 order (see NGI, March 19), the Commission said that it would move immediately to streamline regulatory procedures for wholesale electric power sales, expedite the certification of natural gas pipeline projects into California and the West, and urge all licensees to review their FERC-licensed hydroelectric projects in order to assess the potential for increased generating capacity. At the same time, FERC used its March order to solicit comments on a series of economic incentives aimed at ensuring upgrades to the western transmission grid. The Commission also sought input on a proposed 10-year depreciation for projects that increase transmission capacity in the short term and a 15-year depreciation for upgrades involving new rights-of-way that can be in service by Nov. 1, 2002. Using those comments as a starting point, last week's ruling implements additional actions to help increase energy supply and delivery and decrease electric energy consumption in western markets.

"Perhaps the most prominent feature of this order is the offer of equity return premiums and accelerated depreciation to encourage the construction of new or upgraded electric transmission capacity at the earliest date possible," said Commissioner Linda Breathitt. She noted that the order uses a baseline return of 11.5% and a maximum premium of 200 basis points above that. "The measure is designed to provide the highest incentive to transmission owners of projects that increase capacity the soonest --- the 200 basis points --- and going down on a sliding scale after that," Breathitt added.

In addition, she noted that the order also establishes several criteria that will be used to determine which projects may even qualify for incentive treatment. "Eligible projects must be completed by certain deadlines and the applicants must demonstrate that the projects are alleviating present constraints in the electric grid," Breathitt said. For projects that are currently under way, she continued, an applicant must demonstrate that its construction schedule was accelerated in response to the incentive program.

Breathitt acknowledged she expects that the limited application of the premiums to projects built within the specified time frames will have "little impact" on transmission rates. She pointed out that the estimated costs of most of the potential projects that were identified in response to FERC's March order are "quite small" in comparison to a utility's total rate base. "The real benefits of the incentive measure will become apparent when the de minimus increases in transmission rates are leveraged against an even greater reduction in the commodity costs," the commissioner asserted.

For his part, Commissioner William Massey concurred with FERC's order and said he supports the measures regarding energy supply that the order adopts. He noted that these measures include extending and broadening temporary waivers of qualifying facility standards, facilitating market-based rate authority for sales from backup and self-generation at business locations, authorizing customers to sell load reduction at wholesale and at market-based rates and facilitating wholesale contract changes to allow demand-side management. Many of these same actions were authorized by FERC last year in its May 2000 reliability initiative, Massey noted. "They were good ideas last year and they're good ideas now," he stated.

Massey pointed out that the impediments to increasing transmission most often mentioned are difficulty getting facilities sited and inadequate returns. The commissioner, noting that FERC currently has next to no jurisdiction to site transmission facilities, argued that Congress should give the Commission siting authority for transmission as it currently has for pipelines. As for returns on equity, Massey said he supports FERC's move to allow fully compensatory risk-based returns on equity that are sufficient to attract needed new transmission investment. "I have some concerns about simply stating new, substantially higher rates of return for electric transmission in this order," he went on to say, noting that the highest rate would be 13.5%. "Nevertheless, that rate of return is generally in line with pipeline rates of return and I am willing to support it in this order because of the emergency that we face out West and I want us to leave absolutely no stone unturned," Massey stated.

The commissioner said he was also troubled by what he called FERC's "refusal" to consider uniform interconnection standards. "I have spoken about that often and regularly and I renew my call for the Commission to generically consider uniform interconnection standards for electric generation," he said. Although he acknowledged that this subject should be looked at in a different proceeding at the Commission, Massey also emphasized that FERC "should do so soon."

Chairman Curt Hebert noted that the Commission's action comes against the backdrop of a 2001 summer assessment by the North American Electric Reliability Council (NERC) issued last week that predicts California's energy problems this summer will be worse than expected. Hebert pointed out that the report projects that California will experience 260 hours of rolling blackouts this summer due to a supply shortfall that could reach as much as 5,000 MW during peak demand periods. "These are daunting and dire numbers," Hebert said. "I'm very proud to state that the Commission is not sitting by idly, while temperatures and electrical demands increase," Hebert said at a later point. "To the contrary, the Commission is doing everything within its power to ease the strain on the western grid, right now and in the longer term," he added.

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