Managing Rising Transmission Costs

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July 2014

As transmission costs continue to rise, transmission-dependent AMP, its members and their public power allies are at work developing and implementing strategies on a variety of fronts to manage them.

While several factors are contributing to the increase, foremost among them is that as generation becomes less profitable, the investor-owned utilities are eyeing transmission as a growing source of revenue. Profit, it appears, has joined improved reliability and efficiency of the grid as key goals of transmission construction.

“In these times, with power prices dropping – due to the rise of fracking and the growing availability of natural gas, among other factors – the investor-owned companies have watched their dividends shrink as generation prices fall,” said AMP President/CEO Marc Gerken. “The FERC (Federal Regulatory Energy Commission) still allows full cost recovery on transmission, so utilities are shifting their investments to where returns are virtually certain. The increased costs of this investment are pushed down to load – to transmission-dependent entities like AMP and our members.”

Lisa McAlister, AMP deputy general counsel – FERC/RTO affairs, agreed. “Generation is not profitable in the market right now, especially compared to transmission, which is incentivized with a guaranteed return on investment, with ROEs (return on equity) in the 10 to 13 percent range. Moreover, given the regulatory uncertainty and market volatility on the generation side, the investor-owned utilities look for transmission fixes to constraints rather than build new generation.”

FERC, which is responsible for setting transmission rates, is incentivizing the construction effort by allowing extra-high ROEs in transmission rates. That has helped spur a substantial investment in transmission construction projects by investor-owned utilities such as Ameren, Xcel, AEP, and FirstEnergy, which has embarked on a four-year $4.2 billion effort to upgrade and build new transmission facilities.

Edison Electric Institute (EEI), the national trade association representing this country’s investor-owned electric companies, reported that total transmission investment by its members in 2013 was expected to reach a new peak of about $17.5 billion. That was an 18 percent increase over the total $14.8 billion investment members made in 2012. The 2014 report, “Transmission Projects at a Glance,” also said that EEI members plan to invest at least $60.6 billion in transmission – spread across more than 170 projects – through 2024.

In part because of FERC’s actions on setting ROE, credit rating agencies hold a favorable view of investments in transmission. For example, in an announcement late last year on FirstEnergy’s increasing strategic focus on transmission investment as its “major growth vehicle,” Moody’s stated: “We view investment in transmission assets positively as they typically earn a strong FERC-approved return in excess of 11%, generate predictable cash flows and have minimal operating risk.”

Also contributing to rising transmission costs are efforts by the Regional Transmission Organizations (RTOs) to plan for the growth of a reliable and efficient grid.

“The RTOs include the regional transmission expansion planning (RTEP) process to alleviate constrained flowgates, which also promotes transmission new builds and upgrades,” said Pam Sullivan, AMP senior vice president of marketing and operations. “These costs are passed onto the loads.”

PJM’s RTEP, for instance, is a collaborative process that identifies transmission system additions and improvements on a 15-year planning horizon. Projects must be approved by the PJM Board following an open and extensive review process. Once a project is approved, transmission developers submit proposals to PJM to build it.

Declining generation revenue, increasing construction and an accommodating FERC may well be the key drivers behind rising transmission costs, but they are far from the only ones, according to John Twitty, executive director of the Transmission Access Policy Study Group, commonly referred to as TAPS.

TAPS advocates for a robust transmission grid and competitive wholesale electric markets that will bring real benefits to consumers. It represents members in more than 30 states – including joint action agencies, individual municipal systems, some state and regional organizations of municipal utilities, one rural electric cooperative and one investor-owned utility.

AMP is among its members, with Jolene Thompson, senior vice president, member services and external affairs, currently serving on its Board of Directors, as chair of the Legislative Committee and as a member of the Finance Committee. Chris Norton, AMP’s director of market regulatory affairs, is a member of the organization’s Regulatory Committee.

“You can’t put your finger on just one item driving transmission costs up,” Twitty said. “There are four or five factors – all incrementally adding costs.”

The factors he cited were:

• The move to generate and deliver more renewable energy has resulted in more transmission construction to move wind, solar and other renewable energy from the more remote areas of the country, where it is often generated, to markets in population centers.
• The regulatory environment has become tougher, adding more barriers to overcome, which adds more costs to transmission projects. This includes right-of-way acquisition, which has become increasingly contentious.
• Creating the Regional Transmission Organizations (RTO) and Independent System Operators to control and manage transmission in the U.S. and portions of Canada required developing structures, processes and procedures that have added costs.
• The growth of transmission technologies, such as advanced monitoring systems that help increase grid reliability and flexibility, means greater costs.
• The need for grid security – both cyber and physical – is growing. Cyber has received the bulk of attention in recent years, particularly as Congress has wrestled with legislation. However, the focus on physical has been elevated since the April 2013 incident at PG&E’s Metcalf Transmission Substation near San Jose, Calif. In an early morning attack that appeared to be planned, unidentified shooters using rifles knocked out 17 transformers. It took PG&E 27 days to get the substation back online.

Strategies for managing transmission costs

RTO/FERC monitoring, intervention

AMP, the American Public Power Association (APPA), TAPS and other industry organizations, as well as major energy users, are working both jointly and separately on efforts that would help control rising transmission costs.

In general, AMP and its allied organizations support prudent transmission construction that will strengthen the grid and accommodate expansion, but continue to challenge FERC over its practice of allowing transmission owners and builders additional return on equity, also known as incentive pricing.

Maintaining that the cost of the builds must be balanced with the benefits, AMP believes FERC should not be including these expensive adders, McAlister said.

Building behind-the-meter generation

With regulatory solutions to rising transmission costs an uncertainty as the struggle continues in that arena, AMP is focusing on controlling its destiny with the strategy of building behind-the-meter solar and natural gas generation in its member communities. Not only does this reduce transmission costs, but it is a cost-effective way to add new generation capacity and on-peak energy.

“AMP is proceeding with the development of behind-the- meter gas generation and solar installations to reduce members’ transmission cost by reducing 1 CP (coincident peak) and capacity costs by reducing 5 CPs,” said AMP’s Sullivan.

The lower the coincident peaks – which reflect the highest electricity demand – the less a utility pays for its capacity obligation. The “5 CPs” are established on five separate hours during June, July, August and September containing the highest peak load on the PJM system.

AMP, who developed the Napoleon Solar Facility in 2012, is now performing evaluations of additional potential member sites and developing site layouts and construction cost estimates. AMP plans to begin the member subscription process later this summer.

“AMP is participating in the RTO stakeholder processes and intervening in proceedings before FERC to challenge proposals that would reduce the value of, or effectively prohibit building, new member resources— like behind-the-meter generation – that help produce transmission savings,” McAlister said. “Of course, behind-the-meter generation also provides enhanced reliability for our members.”

Joint ownership

Joint ownership of transmission facilities is certainly an option that TAPS and other transmission-dependent organizations are advocating. Opening ownership to all load-serving entities offers a variety of benefits for both participants and consumers, TAPS maintains. It would produce a better-planned, more-efficient system as well as facilitate resolution of cost allocation issues, among other advantages.

To encourage transmission owners’ participation, TAPS has been urging FERC to establish a number of enticements, including tying equity incentives to the applicant’s willingness to share ownership in a project. While FERC has touted the benefits of public power participation in joint ownership in its rulemakings, it has yet to take the actions TAPS is recommending.

That is not to say there haven’t been joint ownership successes. Twitty pointed to the example of CapX2020, whose participants consist of 11 investor-owned, municipal and electric cooperative utilities in four north Midwestern states. It has a number of projects, jointly owned by subgroups of its members and totaling between $4 billion and $7 billion, that are planned over multiple phases to help strengthen the transmission system serving them.

Unfortunately, such arrangements are not as common as TAPS would like to see.

“We continue to push for joint ownership of transmission as a way to buffer costs,” Twitty said. “It’s getting a lot of attention, but not a lot of tangible wins.”

AMP is open to the possibility of joint transmission ownership, but finding the right project and the right partner may be difficult, at least in the short term.

“Transmission owners do not appear to be out looking for partners right now,” McAlister said.

To learn more about the issue of supplemental transmission projects, visit the supplemental transmission page of the AMP website. To stay up to date on these issues, visit www.amppartners.org and follow AMP on Facebook, LinkedIn and Twitter.