Profit Without Costs

Whatever its virtues, use of a "rolled-in" approach alone is not adequate in all situations, particularly where some assets are used by the utility solely for the benefit of one customer.⁷

In Battle Creek the court ultimately upheld the decision to roll-in the cost of the Trunkline Gas Supply Co. expansion primarily because the expansion facilities would be part of "an integrated Trunkline system and that the expansion w[ould] benefit the entire system."⁸

However, the issue of how an expansion ultimately benefits a system would remain troubling to the court. In Algonquin Gas Transmission Co., the court⁹ provided further guidance on how an expansion benefits a system. Algonquin reached a settlement with its customers where the parties agreed to incrementally price part of the expansion. The commission, however, exercised its section 5 authority and ordered the roll-in of Algonquin's facilities costs. The commission justified its decision by finding that Algonquin operated "an integrated system in which all its facilities are interdependent and required to support the system." They noted as well that incremental facilities located along Algonquin's main line "are the type of facilit[ies] benefiting all customers which the Commission traditionally requires to be rolled in."¹⁰

On Appeal

Algonquin appealed FERC's order on settlement. In reaching its decision, the court was seriously troubled and found the talk about the benefits of the facilities was "conclusionary" and the order revealed "less than careful consideration of the benefits that actually flow to the customers who will bear the financial burden of the facilities cost roll in."¹¹ The court went on to say, "The roll-in order discusses only one instance of a concrete, discernible benefit resulting from an identified portion of the incremental facilities."¹² The court's criticism noted, "the Commission's order contains only the most general and cursory discussion of any benefits flowing to the pipeline's customers from other facilities the cost of which the Commission rolled into Algonquin's rates. … [The Commission] rolled in the cost of all facilities without conducting a sufficiently detailed inquiry into the question of whom they benefit. ... The Commission's indiscriminate approach does not carry its section 5(a) burden of producing substantial evidence to support its finding that the continuation of the incremental rate structure would be unjust and unreasonable."¹³

The court added, "It became apparent that the Commission's position is that systemwide benefits exist primarily because the Commission says they do. An agency's unsupported assertion does not amount to substantial evidence. Instead, to support the facilities' cost roll-in on remand, we direct that the Commission undertake an analysis of the benefits flowing from each of the incremental facilities to Algonquin's customers. Only when the Commission outlines with reasonable particularity the system-wide benefits, which each new facility produces, will the roll-in of that facility's cost be supported by substantial evidence as required under section 5(a) of the Natural Gas Act."¹⁴

The court's direction for greater system benefit specificity came the same time as a series of expansions by the Great Lakes Gas Transmission Co. The commission's orders in these proceedings required incremental pricing.¹⁵ Clearly the commission was becoming more receptive to arguments regarding the impact of rolled-in costs on captive customers. As Opinion No. 367 stated:

The basic test has always involved a weighing of costs and benefits. However, in the past, the Commission took a broader view regarding the value of system expansion to existing customers than we have in recent cases. This is, in part, because the increased costs to existing customers resulting from rolled-in pricing were generally relatively small compared to the obvious systemwide benefits in the form of increased capacity, reliability, and flexibility. However, more recently, the Commission's focus on the value of the benefits of expansion to systemwide customers has intensified as costs have risen considerably in relation to the benefits.¹⁶

The new test the commission developed was called the "commensurate benefits" test. As FERC said in Opinion No. 367, the pipeline had to "specifically address and justify rolled-in rates by showing that systemwide benefits to existing customers are commensurate with the increase in rates."¹⁷ When the commission found the benefits did not equal or exceed the costs, rolled-in pricing was rejected.

Costs and Benefits

The commission's new approach to pricing ultimately was brought before the U.S. District Court in D.C.¹⁸ In TransCanada Pipelines Ltd., a number of petitioners alleged the commensurate benefits standard was an unexplained departure from the commission's traditional practice to grant roll-in requests when the pipeline could show the added facilities would be completely integrated into the mainline system and the facilities would provide some systemwide benefits.¹⁹

The commission responded that its analysis in these types of cases had always included the weighing of costs and benefits and that the commission "subjected the claimed benefits to a more rigorous scrutiny because the magnitude of the projects threatened a massive shift of costs onto existing customers."²⁰ Additionally, the commission argued that the commensurate benefits test was essentially required by the court's own decision in Algonquin.

The TransCanada Court remanded the Great Lakes orders to the commission, but hinted its preference for rolled-in pricing, noting its concern that incremental rates could result "in a multitiered system under which the various classes of customers would each pay a separate rate ... [and that the Commission] should consider on remand whether the rate differentials and administrative costs produced by such a system can be squared with the Act."²¹

Following the remand in June 1994, FERC held a public conference that November and sought comments from all sectors regarding appropriate pricing policies. By May 1995, the commission had digested those comments and issued its "Pricing Policy for New and Existing Facilities Constructed by Interstate Natural Gas Pipelines."²² In this policy statement the commission noted it was attempting to address two goals: "To provide the industry with as much upfront assurance as is possible with respect to the rate design to be used for an expansion project," and "to provide for a flexible assessment of all the relevant facts of a specific project." In addition, FERC said, "specific attention should be paid to efforts to minimize significant rate shocks on existing shippers that may be produced from rolling-in the costs of expensive projects."²³

To provide upfront assurance, FERC moved the pricing determination from a section 4 proceeding to a section 7 certificate proceeding. To minimize rate shocks, FERC said it would base its pricing decisions on an evaluation of the system-wide benefits of a project and their rate impact on existing customers. Again addressing the uncertainty issue, FERC stated it would establish a presumption for rolled-in rates when the rate effect on existing customers was not substantial (i.e., not greater than 5 percent). This presumption, of course, would be rebuttable with existing customers retaining the opportunity to show the system benefits did not warrant even the less than 5 percent rate increase.²⁴ When the rate impacts exceeded the 5 percent threshold, the rolled-in presumption did not apply and the pipeline was required to show the proposed benefits were proportionate to the rate impact.²⁵

Responding to court criticism of its commensurate benefits test, FERC argued in determining whether a proposed project warrants the use of rolled-in pricing, it would "look to the extent to which the new facilities are integrated with the existing facilities and to the specific system benefits produced by the project. The Commission recognizes the benefits from individual projects may be varied. As a general matter, however, the pipeline seeking rolled-in pricing must specifically identify the system benefits, describe the value of the benefits to its existing customers, and demonstrate, with particularity, how the expansion project will provide the claimed benefit."²⁶

FERC also stated that if rolled-in pricing was approved, it wanted to see efforts made to moderate the rate shock to existing customers. Specifically, it wanted to see efforts made at proper sizing before a planned expansion (including the use of capacity release and open seasons). The commission itself suggested that expansion shippers could make a contribution in aid of construction to recover the cost of constructing a portion of the proposed facilities or that costs be rolled-in gradually. FERC specifically asked the involved parties in cases where the expansion facilities have greater benefits for some types of customers than others, to see if there might be rate design remedies, such as seasonal rates or change in zone boundaries that could reduce the rate impact on customers benefiting less from the expansion.²⁷

New Standard

While in its 1995 policy statement the commission was clearly more sensitive to the concerns that argue against the use of rolled-in rates, a 1999 policy statement took those concerns and changed the whole prism through which the issue was typically analyzed. As the 1999 policy statement noted, "Many urge that there is a need for the Commission to authorize new pipeline capacity to meet the growing demand for natural gas. At the same time, others already worried about the potential for capacity turnback, have urged the Commission to be cautious because of concerns about the potential for creating a surplus of capacity that could adversely affect existing pipelines and their captive customers."²⁸

What came out of the policy statement was a new standard for the industry: Could planned expansion capacity stand on its own without rolled-in treatment? As the commission noted:

A number of commenters submit that the existing presumption in favor of rolled-in rates for pipeline expansions sends the wrong price signals with regard to pricing new construction. They urge the Commission to adopt policies such as incremental pricing for pipeline projects or placing pipelines at risk for recovery of the costs of construction. They submit that such a policy would reveal the true value of existing capacity and properly allocate costs and risks.²⁹

A proper allocation of costs and risks and the protection of recourse shippers-all of these were part of the commission's goals for the 1999 Policy Statement.

An effective certificate policy should further the goals and objectives of the Commission's natural gas regulatory policies. In particular, it should be designed to foster competitive markets, protect captive consumers, and avoid unnecessary environmental and community impacts while serving increasing demands for natural gas. It should also provide appropriate incentives for the optimal level of construction and efficient customer choices."³⁰

Interestingly enough, after decades of rolled-in precedent, FERC found that the best way to accomplish its goals for a deregulated marketplace was to abandon its presumption for rolled-in pricing. The commission then went on to note the drawbacks of its previous policy presuming rolled-in pricing:

As the industry becomes more competitive the Commission needs to adapt its policies to ensure that they provide the correct regulatory incentives to achieve the Commission's goals and objectives. All of the Commission's natural gas policy goals and objectives are affected by its pricing policy, but directly affected are the goals of fostering competitive markets, protecting captive customers, and providing incentives for the optimal level of construction and efficient customer choice. The current pricing policy focuses primarily on the interests of the expanding pipelines and its existing and new shippers, giving little weight to the interests of competing pipelines or their captive customers. As a result, it no longer fits well with an industry that is increasingly characterized by competition between pipelines.

The current pricing policy (rolled-in) sends the wrong price signals, as some commenters have argued, by masking the real cost of the expansions. This can result in overbuilding of capacity and subsidization of an incumbent pipeline in its competition with potential new entrants for expanding markets. The pricing policy's bias for rolled-in pricing also is inconsistent with a policy that encourages competition while seeking to provide incentives for the optimal level of construction and customer choice. This is because rolled-in pricing often results in projects that are subsidized by existing ratepayers. Under this policy the true costs of the project are not seen by the market or the new customers, leading to inefficient investment and contracting decisions. This in turn can exacerbate adverse environmental impacts, distort competition between pipelines for new customers, and financially penalize existing customers of expanding pipelines and of pipelines affected by the expansion.

Under existing policy, shipper's rates may change for a number of reasons. These include rolling-in of an expansion's costs, changes in the discounts given other customers, or changes in the contract quantities flowing on the system. As a customer's rates change in a rate case, it is generally unable to change its volumes, even though it may be paying more for capacity. This results in shippers bearing substantial risks of rate changes which they may be ill equipped to bear.³¹

The commission stated that it would then seek "to balance the public benefits against the potential adverse consequences of an application for new pipeline construction." Specifically, when a certificate application was filed, the threshold question would be "whether the project can proceed without subsidies from their existing customers. … This will usually mean that the project would be incrementally priced."³²

As the commission quite clearly stated, "Existing customers of the expanding pipeline should not have to subsidize a project that does not serve them."³³

After the threshold issue had been addressed, there would be a determination whether adverse effects of the proposal had been eliminated or minimized. If residual adverse effects remained, the commission would then balance the public benefit against the adverse effect on three main groups: existing customers of the expanding pipeline, existing pipelines in the market and their captive customers, and landowners and communities affected by the proposed route.

When assessing the benefits of a pipeline proposal, the 1999 Policy Statement noted that, "the Commission's focus is not to protect incumbent pipelines from the risk of loss of market share to a new entrant, but rather to take the impact into account in balancing the interests. In such a case the evidence of benefits will need to be more specific and detailed than the generalized benefits that arise from the availability of competitive alternatives. The interests of the captive customers are slightly different from the interests of the incumbent pipelines. The captive customers are affected if the incumbent pipeline shifts to the captive customers the costs associated with its unsubscribed capacity. Under the Commission's current rate model captive customers can be asked to pay for unsubscribed capacity in their rates. ... Whether and to what extent costs can be shifted is an issue to be resolved in the incumbent pipelines' rate case, but the potential impact on these captive customers is a factor to be taken into account in the certificate proceeding of the new entrant."³⁴

The 1999 Policy Statement remains FERC's definitive guidance on the pricing of natural gas expansions. It seems very compelling that the commission found that the most effective way to protect customers, the industry, and competition was to let go of the presumption for rolled-in rates. This presumption, born at a time when the industry was highly regulated, did not translate to a competitive marketplace where only the most economic expansions should be tolerated by the American consumer. The marketplace creates the incentives for siting of expansions, and accurate pricing signals ensure the correctness of those decisions.

Gas Precedent

The electricity industry is in a transition that sees wholesale competition alongside traditional regulated utility operations. Entergy remains a vertically integrated public utility with a continuing responsibility to provide its native load customers with reliable electric service at a regulated price.

Regulation in this environment can create a tension between competitive and regulated industry sectors, particularly with respect to transmission pricing policies. For example, who should pay for the cost of facilities needed to connect and integrate merchant plants with the transmission system? The answer to this question is even more important if the generation capacity that is being built far exceeds the load in the region for the foreseeable future. Such surplus capacity has the potential of creating a similar amount of excess transmission capacity, which, under a rolled-in pricing scenario, increases the cost to captive customers.

A brief history of commission orders that address a series of difficult transmission pricing issues shows the commission has generally followed the pricing principles previously discussed in the natural gas industry. In general, all of these decisions pass the fairness test by assigning the costs to the customer who uses, and therefore benefits from, the specific transmission components. These decisions assign equally certain costs to the native load customers and other costs to the merchant generators, and they represent improvements on the traditional and administratively convenient rolled-in pricing policy. As discussed below, the commission is now at a crossroads with respect to the issue of participant funding for grid expansion caused by the explosion of new merchant generators.

Beginning in Public Service Company of Colorado,³⁵ the commission explained its pricing policy of allowing either its traditional average cost pricing (rolled-in) or an incremental cost methodology. The order states, in pertinent part that:

Our new model is completely consistent with our traditional model except that it now permits pricing grid service on the higher of the grid's average or incremental costs. The result is that the transmission customer pays for all grid facilities at a price equal to or higher than the native load. In the context of our traditional cost-of-service model, this is the equivalent of allocating to the new transmission customer the transmission revenue requirement sufficient to compensate the utility for the expansion of the system. Simply put, it is part of the "cost allocation" process. Thus, by requiring that the new transmission customer pay a rate which is the higher of embedded cost (i.e., a rolled-in rate including the expansion cost) or incremental cost (i.e., expansion cost revenue requirement divided by the new customer's units of service), the new transmission customer is paying an amount that is at least equivalent to a pro rata share of the sum of the cost of the existing grid and the cost of expansion facilities. There are no existing facilities which are being used free of charge and there can, therefore, be no subsidy.

In 1992, when the commission articulated this pricing policy, public utilities were still providing bundled service (generation and transmission) and the assignment of costs between generation and transmission was not particularly important. It is easy to understand why all transmission facilities, including those facilities needed to integrate a generation plant, were treated as part of the transmission grid and rolled into the bundled rate. Not only was this policy administratively convenient, but at the time there was not a strong motivation to refine this approach.

In 1996, the commission issued Order No. 888, which dramatically changed the industry by requiring, among other things, the unbundling of transmission and wholesale generation services. As a result of this fundamental change, the precise assignment of generation and transmission costs for ratemaking became a critical fairness issue. Following Order No. 888, the commission re-examined its traditional rolled-in policy and recognized that certain components must be treated differently.

For example, in 1998, the commission ruled in Kentucky Utilities Company³⁶ that generation step-up transformers should no longer be treated as transmission plant when developing an open-access transmission rate. Instead, the commission reasoned that this plant provides a generation service and that the costs of these facilities should be charged to the customers using the generating facilities. As a result of this more precise cost recovery methodology, the cost associated with each step-up transformer is now directly assigned to the generator to which it is connected. This represented a departure from the traditional rolled-in pricing policy and recognized that certain transmission facilities need to be tied to the generation they serve.

Expanded Use

By anyone's standard, this decision resulted in a fair and equitable pricing outcome. More recently, the commission expanded this sole use or direct assignment policy to include all facilities that interconnect generating units (both merchant units and units owned by the utility) to the transmission grid.

First, as merchant generation materialized, FERC agreed that the cost of all facilities needed to connect these new units to the network should be treated as sole-use facilities and be directly assigned to the generator, rather than included as part of the network and paid for by all customers. It was at this time that the commission issued Tennessee Power Company.³⁷ Here, the commission clarified that interconnection is a component of transmission service that must be offered under the terms of the pro forma tariff, even if the interconnection component of transmission service is requested in advance of the delivery component of transmission service.

Next, in Southern Company Services Inc.,³⁸ the company proposed to continue treating the cost of interconnection facilities for its generators as part of its open-access transmission rate. This case presented FERC with the issue of whether all interconnection facilities (both merchant and utility) should be treated on a consistent basis. Recognizing the need to address this issue on a generic basis, the commission made Southern subject to the outcome of the rulemaking in Docket No. RM02-000, Standardization of Generator Interconnection Agreements and Procedures (Order Nos. 2003 and 2003-A).

In that rulemaking proceeding, a number of commenters expressed their views regarding the commission's proposal to require that all transmission providers remove from their transmission rate the costs of facilities used to interconnect their own generating plants, and to treat them as directly assigned generation-related costs. To resolve this issue, FERC explained its new policy in Order 2003 par.743, as follows:

The Commission believes that, to ensure fully comparable treatment of all Generating Facilities, transmission rates should not include the costs of Interconnection Facilities. As stated in the NOPR, this policy is consistent with the Commission's current treatment of generation step-up transformers, appropriately assigns the costs of Interconnection Facilities to the generation customers using them, and ensures that the Transmission Provider's own Generating Facilities and those of its competitors are treated comparably.

Rather than requiring the removal of all costs of interconnection facilities, the commission imposed a more limited requirement. Transmission providers were required to remove from transmission rates only the costs of interconnection facilities constructed after March 15, 2000, the date on which Tennessee was issued. The commission reasoned that Tennessee placed "Transmission Providers" on notice that the costs of interconnection facilities cannot be recovered in rates for transmission service.

Once again, the commission's reasoning was to put all generators on equal or comparable footing by assigning the related transmission costs to the customers that use the particular generator. The native load customers that use the utility's generators also pay the cost of the facilities that interconnect the unit to the grid. Similarly, merchant generators must recover their interconnection costs from customers that they serve. I believe that the commission has fairly apportioned the transmission costs to the customers that use and consequently benefit from the discrete components of the transmission system.

Most recently, the commission issued Order No. 2003 and a clarification in Order No. 2003-A that involves the most important "hot button" issue of all, and which ties back to the incremental pricing policy in Public Service Company of Colorado discussed above. Following the issuance of Order No. 2003, many interested parties questioned how the commission would implement its pricing policy and what effect this would have on native load customers. Some read the order as mandating rolled-in pricing in all situations, which could raise rates to existing customers and subsidize the unregulated merchant generators. Some parties claimed that such a strict ratemaking policy would violate the commission's "higher of" pricing policy (charging the higher of an incremental or rolled-in rate).

Specifically, Order No. 2003-A addressed these concerns in the section titled, "Fairness of Order No. 2003 Pricing Policy: Applicability of the Commission's 'Higher of' Ratemaking Policy." In that section FERC stated, among other things, the following:

In Order No. 2003, the Commission did not intend to abandon any of the fundamental principles that have long guided our transmission pricing policy. [f.n. omitted] In particular, the Commission had no intention to adopt a policy that is inconsistent with its "higher-of" pricing standard for non-independent transmission providers. Thus, we clarify that under our interconnection pricing policy, the Transmission Provider continues to have the option to charge a transmission rate that is the higher of the incremental cost rate for network upgrades required to interconnect its generating facility or an embedded cost rate for the entire transmission system (including the cost of the Network Upgrade).

Where rolling-in the costs of network upgrades incurred for an interconnection would have the effect of raising the average embedded cost rate paid by existing customers, the Transmission Provider may elect to charge an incremental cost rate to the interconnection customer and thereby fully insulate existing customers from the costs of any necessary system upgrades.

As decisions regarding upgrades to the electrical grid are made, we can learn-and save ourselves from more than just a few errors-if we take a page from the commission's actions with regard to the natural gas grid and pursue a more economically responsible approach to paying for upgrades to the electric grid.

Given the precedent of the competitive evolution of the natural gas pipeline industry, efforts to achieve regulatory consistency, certainty, predictability, and comparability cannot and should not be underestimated or undervalued in our quest for the competitive electricity marketplace. In the end, the cost of delivery of the commodity must be allocated based on principles of equity, principles that foster and solidify the true value of generation and transmission solutions. This approach can enhance the journey to competitive markets in the electricity industry.

Endnotes

1. Reference: Colorado Interstate Gas Co., 19 F.P.C. 1012, 1021 (1958); United States Pipe Line Co., 14 F.P.C. 353, 391-400 (1955); Colorado Interstate Gas Co., 11 F.P.C. 324, 353-54 (1952); Trunkline Gas Supply Co., 8 F.P.C. 250, 258 (1949); cf. Louisiana P.S.C. v. United Gas Pipe Line Co., 3 F.P.C. 402, 404-405 (1943); City of Cleveland v. Hope Natural Gas Co., 3 F.P.C. 150, 190 (1942).
2. Battle Creek Gas Co. v. FPC, 281 F.2d at 42 (1960).
3. At 46.
4. At 47.
5. At 46 (Citing Trunkline Gas Supply Co., 8 F.P.C. 250, 260 (1949)).
6. At 46.
7. At 46.
8. At 47.
9. Algonquin Gas Transmission Co. v. FERC, 948 F. 2d 1035 (D.C. Cir. 1991).
10. Algonquin Gas Transmission Co. ,47 FERC 61,048, at 61,154 (1989).
11. 948 F.2d at 1312.
12. Id.
13. At 1312.
14. At 1313.
15. Great Lakes Gas Transmission L.P., 57 FERC 61,140, at 61,512 (1991) (Opinion No. 367), reh'g denied 62 FERC 61,101 at 61,713 (1993)(Opinion No. 367-A); Great Lakes Gas Transmission L.P., 57 FERC 61,141, 61,534 (1991)(Opinion No. 368), reh'g denied, 62 FERC 61,102, 61,731 (1993) (Opinion No. 368-A).
16. 57 FERC at 61,521.
17. 57 FERC at 61,521.
18. TransCanada Pipelines Ltd. v. FERC, 24 F.3d 305 (D.C. Cir. 1994).
19. 24 F.3d at 308.
20. Id.
21. At 311.
22. (Docket No. PL94-4-000).
23. Mimeo at p. 4.
24. Mimeo at 7.
25. Mimeo at 7.
26. Mimeo at 4.
27. Mimeo at 9.
28. Mimeo at 2.
29. Mimeo at 10.
30. Mimeo at 13.
31. Mimeo at 17.
32. Mimeo at 18.
33. Mimeo 20.
34. Mimeo at 28.
35. (59 FERC 61,311 (1992); reh'g denied, 62 FERC 61,013 at 61,061 (1993).
36. 85 FERC 61,274 (1998).
37. 90 FERC 61,238 (2000).
38. 98 FERC 61,328 (year).

Curt Hébert Jr. is executive vice president, external affairs, for Entergy Corp., and former chairman of both the Federal Energy Regulatory Commission and the Mississippi Public Service Commission.

A Survey of Prior Policy

Key Decisions on Rolled-in vs. Incremental Pricing for Network Expansion

Gas Pipelines

1960 Admitting Problems. Federal appeals court upholds "roll-in" of gas pipeline expansion costs to all ratepayers but admits disadvantage to incumbent customers of expanding pipelines. Battle Creek Gas Co. v. FPC, 281 F.2d 42.

1991 Demanding Proof. Appeals court tells FERC to justify rolled-in pricing with clear and substantial evidence that pipeline expansion provides system-wide benefits to customers. Algonquin Gas Trans. Co. v. FERC, 948 F.2d 1035.

1991 Tougher Standard. FERC says pipelines must now justify rolled-in rates by proving that system-wide benefits are "commensurate" with increase in rates. Great Lakes Gas Trans., Opinion 367, 57 FERC 61,140.

1995 Numerical Test. FERC warns of rate shock, sets rebuttable presumption for roll-in if rate increase is 5 percent or less. If greater, then pipeline must prove benefits are proportionate to rate impact. Policy Statement, FERC Docket No. PL94-4.

1999 Reversing Course. FERC reverses course and ends prior presumption, saying rolled-in pricing sends "wrong signal." Instead, will ask if project can proceed without subsidies, and will examine benefits and balance interests. Policy Statement.

Electric Transmission

1993 "OR" Pricing. Utilities building new lines may choose and bill ratepayers the higher of average-cost (rolled-in) OR incremental cost pricing, but may not combine the two ("AND" pricing is barred). Pub. Serv. Co. of Colo., 59 FERC 61,311.

1998 Functional Test. FERC says generation "step-up" transformers no longer treated as transmission plant. Ky. Utils. Co., 85 FERC 61,274.

2000 Merchant Gen Additions. FERC rules that interconnecting power plants to the grid qualifies as a transmission service. Costs of grid expansion to accommodate interconnection are billed to load, but gens can get credit against future transmission. Tennessee Power Co., 90 FERC 61,238.

2003 Ratepayer Protection. FERC reiterates that transmission providers may charge higher of rolled-in or incremental cost in grid rates to cover expense of network upgrades to accommodate gen interconnection, thereby insulating incumbent ratepayers. 98 FERC 61,328. -Bruce W. Radford

The Entergy Proposal

An independent overview.

By Bruce W. Radford

MEETING IN NEW ORLEANS. On July 29 and 30, representatives of Entergy Services Inc. were to appear in New Orleans, at the offices of the New Orleans City Council, to participate in a technical conference conducted by the Federal Energy Regulatory Commission (FERC).

At the conference, Entergy officials were to meet with state regulators and market players to discuss the details of a new plan that Entergy presented to FERC several months ago. In that discussion, regulators would have occasion to debate Entergy on some of the issues that Curt Hébert raises in his article on page 40.

PLAN OVERVIEW. As proposed, Entergy's plan would set up a new regime to govern access to the company's transmission system. The plan also would establish a new pricing system to recover costs incurred to upgrade or expand Entergy's transmission network-not only to accommodate new power plants, but also to serve load growth and satisfy requests by load-serving entities (LSEs) for point-to-point and network service rights. (See FERC Docket No. ER04-699, filed April 1, 2004.)

To some degree, the plan represents a logical continuation of earlier proposals by Entergy to set up "generator operating limits" (GOLs) and rules governing available flowgate capacity (AFC) to serve as benchmarks to aid in managing interconnection rights for merchant generators. (Entergy, after all, has seen greater development of merchant plant projects within its service territory than virtually any other utility in the United States).

Also, those earlier plans would establish a solicitation or auction process (weekly procurement process, or WPP) for purchasing energy from merchant plants. The WPP plan to some degree would echo the regional spot markets operated by regional grid operators in the Northeast United States. (See Fortnightly's Spark, Jan. 2004; FERC Docket Nos. ER02-2014, EL02-132, ER02-1372.)

GRID MANAGEMENT. The new plan continues where the prior proposals left off. In one notable development, Entergy now says that it will broaden the WPP solicitation to allow third-party LSEs to participate as buyers-not just Entergy. But the new plan also breaks ground in several key areas.

For example, the plan creates a new entity, the Independent Coordinator of Transmission (ICT). The ICT would function somewhat like a regional independent system operator (ISO) or regional transmission organization (RTO), except that it would oversee the grid of a single transmission owner (Entergy).

PRICING FOR UPGRADES & EXPANSION. The plan also would appear to increase the likelihood of incremental pricing (versus rolled-in pricing) for many grid upgrades and expansion projects. In fact, it would go one better and impose participant funding for some project categories-i.e., the party requesting the expansion would be the one required to pay for it-exactly as advocated here in the main text.

The plan submitted by Entergy contains "Attachment T," presenting the outlines of the pricing plan, plus a 14-page affidavit by consultant Michael M. Schnitzer (Northbridge Group). In his affidavit, Schnitzer lays out the rationale for the pricing plan and presents several informative and useful mathematical examples to show why Entergy believes that its plan will promote sensible and cost-efficient investment in transmission.

PLAN OPPONENTS. Pending the conference in New Orleans at the end of July, some parties already had gone on record to oppose various aspects of the plan.

In March, for example, ahead of the formal Entergy proposal, the Arkansas Public Service Commission had opened an investigation of the possibility that Entergy might choose to create an ISO-like structure on a single-company basis, instead of participating in a recognized RTO, such as the Southwest Power Pool. The PSC had asked for a delay to give time to federal and state regulators to review the idea-hence the conference in New Orleans. (See Ark.P.S.C,. Docket No. 04-050, Order No. 1, March 17, 2004.)

More recently, the Southeast Electricity Consumers Association (SECA), represented by attorney Robert Weishaar (McNees Wallace & Nurrick), opposed the idea of a single-utility ISO design, describing the "independence" of such structures as "Potemkin-like." In this case, for example, SECA says that Entergy would retain authority to approve any annual capital or expense budget drafted by the ICT. Thus, SECA predicts that FERC approval of the Entergy plan would launch other transmission owners on a "race to the bottom," to devise similar, single-company ISO plans that lack true independence.

On the question of grid expansion costs, SECA objects to Entergy's proposal to apply its pricing scheme retroactively to existing interconnected generation. It also opposes Entergy's plan to create point-to-point credit allowances for merchant gens interconnected with network rights, arguing that the PTP credits will encourage generators to wheel their power out of Entergy's system, because the credits won't be available for network service provided to local load.

However, SECA's opposition to participant funding relies largely on its supposition that the Entergy ICT won't qualify as truly independent. (See Protest of SE Elec. Consumers Asso., FERC Docket No. ER04-699, filed June 14, 2004.)

Bruce W. Radford is editor-in-chief of Public Utilities Fortnightly magazine. Contact him at radford@pur.com

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