Transmission Expansion: Risk and Reward in an RTO World

 

Some thoughts on who should take the lead and how to set up financial incentives.

One of the most interesting questions that arises from federal restructuring of the electric grid, with regional transmission organizations (RTOs) and a standard market design (SMD), concerns the risk of building transmission in an RTO environment.

In the traditional setting, without RTOs, and with utilities controlling generation, transmission, and distribution, state regulators are involved in both the permitting and the rate making. If development costs should become stranded for a lack of permits before construction begins (NIMBY comes to mind), the utility can recover its sunk costs on showing a good-faith effort to obtain the necessary authorizations. And once construction begins, a tracking account (AFUDC-allowance for funds used during construction) will allow the utility to accrue a return on investment until such time as the asset qualifies as "used and useful" and is added to the rate base.

By contrast, investors lack a proven road map in the case of RTOs, where transmission is unbundled and the case lies within the jurisdiction of the Federal Energy Regulatory Commission (FERC). Utilities might well harbor concerns that transmission development costs could end up stranded.

Nevertheless, a careful look at the risk involved reveals a hint of policy taking shape in a variety of novel cases.