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Transmission Independence and Investment Pricing Policy for Efficient Operation and Expansion of the Transmission Grid FERC Docket Nos. AD05-5-000 and.

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Presentation on theme: "Transmission Independence and Investment Pricing Policy for Efficient Operation and Expansion of the Transmission Grid FERC Docket Nos. AD05-5-000 and."— Presentation transcript:

1 Transmission Independence and Investment Pricing Policy for Efficient Operation and Expansion of the Transmission Grid FERC Docket Nos. AD05-5-000 and PL03-1-000 Technical Conference Remarks of Nick Winser Group Director, UK and US Transmission

2 2 Part I Where are we now?

3 3 US Transmission Grid Needs Improvement  US Investments are falling behind the rest of the world.  US Investments are not keeping up with needs.  There is substantial fragmentation of grid ownership and management.  This has a substantial impact on customers

4 4 US Investment vs. UK Investment  US planned investment 2004-8 is 4.6 $M/GW/yr (High voltage only)  This compares to UK equivalent planned investment of 16.5 $M/GW/yr  UK outspending US by 360%  This continues trend of last 4 years where UK outspend US by 350%

5 5 Worldwide Investment Rates  Compared to US rate of < $5 M/GW/yr:  European countries planned investment 2004-8 $7-12 M/GW/yr  New Zealand planned investment 2004-8 $22 M/GW/yr  Investment being made generally under a regulated, independent transmission model

6 6 Is US Investment Keeping up with Need?  Congestion is still generally rising  PJM congestion costs per MWHr have increased on average 64% per year and have totaled $2.193 B over the period (1999 – 2004)  NY congestion costs have increased on average 50% per year over three years period totaling $1.5 B over this period (2001 – 2003).  NE constraint costs are roughly $200 M a year which includes reliability compensation to generators.  In comparison, UK congestion levels reached above $350 M/year during the 1990’s, and through incentives mechanisms have been managed down to less than $50 M/year.  US Reliability is significantly worse than international comparators  0.0066% energy unsupplied vs. European average of 0.001%

7 7 US Transmission is fragmented  Hundreds of transmission owning entities  Over 100 separate control areas  51+ regulators

8 8 Customer Benefits of Transmission Investment  Standalone / independent Transmission companies likely to invest more than vertically integrated companies in general.  Transmission costs only 5-6% of delivered price, but can have bigger effect on the (much larger) wholesale cost of power  In New England economic benefits of Regional Plan transmission are $150M / yr in addition to reliability benefits  Cost of 100 basis point adder on total new investment ($2bn) = $16M / yr

9 9 Major Impediments to Transmission Investment  Structural Issues – Fragmentation & Vertical Integration  Lack of effective regional planning  For both reliability and economics  Including facilitation of fuel diversity such as renewable.  Lack of clear demarcation between transmission as market platform and market products  Rate uncertainty – cost allocation and sufficiency of returns  Divided jurisdiction: PUHCA; Siting; Cost trapping

10 10 Part II Where do we need to go?

11 11 Ideal Market Structure MARKET OPERATOR Independent Administrator Stakeholder Input on Market Rules SUPPLY/ GENERATION TRANSMISSION Fully competitive No requirement for RMRs Limited need for regulatory oversight or market monitoring Independent platform for market For profit, but regulated and under regional planning Operational and ownership synergies

12 12 Ideal Market Structure (cont.)  Get the Basics Right  secure system operation  competitive wholesale & retail markets without market power mitigation fixes  economic benefits to customers  adequate investment for long term asset/system health  RTOs are a good start, but not end state  International Experience  Not-for-profit transmission administration proving inefficient due to inability to exploit ownership/operations synergies and lack of cost accountability.  Merchant transmission model is working in limited niche, and re-regulating transmission everywhere else

13 13 Transmission Platform  Characteristics: independent, for-profit, asset-owning, regionally planned, regulated  Benefits  More transmission will be built  Smarter, more efficient grid management  Greater assurance of open access  More competitive markets

14 14 Part III How do we get there?

15 15 Transmission – Key objectives  Reliability  High availability/low disconnections  Proactive asset replacement  Efficiency  New investment to enhance system  Operational enhancements to mitigate congestion  Cost-effective performance  Facilitate markets  Nondiscriminatory access and approach  Expand scope of markets & mitigate need for RMR

16 16 How do we get there?  Step 1: Stimulate Transmission Investment  Action needed now to improve system  Step 2: Move towards improved Transmission Business structure  Move towards independence and consolidation  Step 3: Self-sustaining incentives  Large independent transmission entities can be incentivised to deliver enhanced performance with Performance Based Rates  Incentives can be targeted on customer benefits

17 17 Adequate Incentives  Incentives for transmission investment  Ensure return at high end of range of reasonableness  Should reflect prompt and full recovery of investment  Does not need to be tied to RTO if appropriate planning  Incentives for independence and consolidation  Reward moves in the right direction based on end-state market structure  A sliding scale is needed to reflect moves which may vary based on particular facts and circumstances

18 18 Forms of incentives  ROE based  Others  PBRs  Tax incentives and hold harmless  Recovery acceleration  CWIP in rates

19 19 Ensuring transmission is a viable business  Greater functionality for transmission focused companies  Regional planning -- both reliability and economic  Recognition that TX is a market platform -- not a market product  Clarify cost allocation/cost recovery  Share vision and policy advice with Other Regulators -- Congress and States

20 20 Improve the Grid How it all fits together ROE Adders; CWIP; Accelerated Depreciation ROE Adders; Tax Incentives and Hold Harmless PBRs Business Structure Self-sustaining incentives General policy ensuring that transmission is a viable business

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