Tuesday, November 20, 2001
Competition for electricity begins Jan. 1
Energy changes bring debate

Whether transmission of electricity should be handled by nonprofit or for-profit companies is one issue.

By LOIS CALIRI
THE ROANOKE TIMES

   Turning the lights on at home and at work is easy. Making sure they stay on is another story in a deregulated market. Then, there are the questions of whether the utilities or the companies that manage their transmission lines should remain independent of each other, and who profits. In a competitive market, such as the one starting Jan. 1 in Virginia, consumers will be able to shop around for the best deal, sign a contract with the company of their choice and have the energy delivered to their residence or business.

    But competitive suppliers need a way to move their electricity across a vast network of transmission lines, likened to the interstate highway system. So federal regulators have told utilities to give control of their transmission systems to what are called regional transmission organizations, or RTOs.

    RTOs, run by independent operators, would make the system available to anyone buying and selling power. The independent operators also would be in charge of avoiding brownouts or blackouts.

    American Electric Power, the dominant supplier of electricity in Southwest Virginia, and eight other utilities have proposed creating an RTO, pending federal approval.

    Under an RTO plan, no single utility can influence how the lines are operated or prevent competitors from accessing their wires. If the transmission grid is operated openly and fairly, competitive suppliers can sell to wider regions, resulting in lower prices for consumers, even when the demand for electricity is high, federal regulators say.

    Until a few weeks ago, the Federal Energy Regulatory Commission wanted to create four giant RTOs, each covering a region of the country - Northeast, Southeast, Midwest and West.

    Some state regulators balked at that idea, arguing that the feds had usurped their control and that the giant RTOs could cost consumers more.

    If transmission systems were connected to create larger ones, the required upgrades could translate into higher electric bills, the state regulators argued. And consumers could end up paying for new transmission lines in other states, including AEP's proposed 765,000-volt line which would run from Wyoming County, W.Va., to Jacksons Ferry, pending federal approval.

    Some utilities did not like the giant RTO plan because they have already invested millions in start-up costs to form smaller RTOs.

    FERC recently abandoned its plan to have four super RTOs, asking utilities and state regulators for their input.

    The RTO proposed by the nine utilities including AEP would be called Alliance Transco. This RTO would run like a private business, operating at a profit.

    Alliance Transco would hire an independent company, England-based National Grid, to run the day-to-day operations of its 51,400 miles of transmission lines in 11 states, stretching from Missouri to Virginia.

    National Grid's subsidiary in the United States, National Grid USA, has agreed to invest up to $1 billion in start-up costs. The investment secures a stake in the alliance for National Grid. The money can be used to build new lines and to buy lines from companies in the group.

    Alliance Transco resembles what former FERC chairman Curt Hebert envisioned under deregulation: for-profit entities that would attract investors.

    There is much anxiety, however, among industry observers who question just how independent Alliance Transco would be when eight of the nine utilities would still own their transmission lines. They also question who will profit. These are questions FERC still has to answer.

    The State Corporation Commission, in its filing with FERC, said Alliance Transco has done nothing to set up an independent governing body.

    "Either you want to be in the transmission business or not," SCC spokesman Ken Schrad said. There's also the unanswered question of whether the state or the federal government will decide if new transmission lines will be built.

    If reliability - making sure there is enough electricity to meet customer demand - is the primary goal of an RTO, then competitors must be assured the RTO will allow them to move their electricity across the transmission lines on a nondiscriminatory basis, the SCC said. The SCC questioned whether Alliance Transco would have an inherent bias toward accommodating transactions that make use of the lines it owns.

    "An RTO needs to be independent in both reality and perception," the SCC said.

    The SCC also questioned how National Grid will share or split its profits with the utilities, especially when it could buy transmission lines from the utilities in Alliance Transco.

    "The bottom line: Is money influencing decisions or is reliability and efficiency influencing the decisions?" Schrad asked.

    AEP's vice president of public policy, Stuart Solomon, said the alliance has met the independence criteria by appointing National Grid, an experienced operator of transmission systems, to manage the alliance's transmission lines. Although utilities in the alliance will turn over the day-to-day operations of their transmission lines to National Grid, utility officials will still have input in the decision-making process, Solomon said.

    The utilities that still own transmission lines will receive revenues from the transmission rates that are regulated by FERC, Solomon said.

    Generally speaking, state regulators and public utilities favor nonprofit independent groups managing RTOs, because they would be more neutral regarding transmission access, said Will McNamara, director of Electric Industry Analysis. Investor-owned utilities like AEP support for-profit RTOs - like Alliance Transco - because they are more attractive to investors.

    FERC is under the direction of a new chairman, Patrick Wood, who has expressed concerns about for-profit models, which represents a dramatic departure for the commission, McNamara said. Among them, public utilities are not allowed to join transcos, for-profit transmission companies.

    On the other hand, proponents of transcos say nonprofit RTOs won't be able to secure financing from Wall Street, McNamara said.

    For-profits have gained the attention of industry observers such as Sam Randazzo, an attorney in Columbus, Ohio, who represents large industrial users and consumer advocates in the Midwest, among others.

    He said the details in these plans have generated so much controversy that it's hard to tell when Alliance Transco may become operational.

    It's troubling, for example, that Alliance transmission owners, such as AEP, want National Grid to manage the day-to-day operations of the transmission system at the same time National Grid is a player in the market, Randazzo said. National Grid sells electricity in New York, he added.

    "It is possible for a regional transmission organization to be independent if the RTO does not own transmission lines," he said.

    Randazzo said users of the transmission lines could end up paying more if National Grid buys these power lines from the utilities, such as AEP, at a premium. National Grid may ask FERC for permission to charge more to recoup its investment. This may result in AEP's shareholders obtaining additional value at the expense of transmission customers. For-profit transmission companies have been debated in other states as well, including Florida. Last week, the Florida Public Service Commission said Florida utilities should set up an independent operator that would control the transmission wires, but not own them.

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