A Vision for Transmission: COMPETITION

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A Vision for Transmission COMPETITION

• Massachusetts Restructuring Roundtable
• Boston, MA
• November 16, 2001
• José A. Rotger
• Manager, Regulatory Strategy

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Is Transmission a Competitive Business?

• Historically, not treated as a business at all
• Generation and transmission planned together
• New transmission driven by generation plans
• Inter-area links for reliability ONLY, not
  economic efficiency trade must maintain
  self-sufficiency
• But, industry restructuring has changed role for
  transmission gt economic trade
• New transmission competes against new generation,
  demand-side measures, distributed generation, etc.

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Problems with Conventional Wisdom

• Undermined by new technology
• More modular, less lumpy gt changes economics
• Far less environmental/community impact gt
  affects siting
• Undermined by new regulatory structure
• Allows incentives inherent in restructured
  electricity markets to be applied to transmission
  investment
• Recognize that transmission competes with other
  solutions (G, DG, DSM) to meet customer needs
• Owners bear risks, rewards of investments gt No
  stranded cost risk

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Framework for Market-Based Transmission

• Bid-based markets
• Security-Constrained Economic Dispatch
• Locational Wholesale Prices
• Preferably nodal
• Tradeable Financial Transmission Rights
• Supporters of transmission expansions receive
  FTRs
• Term of FTRs should be as long as possible
• PJM, NYISO have this framework in place
• ISO-NE, Ontario IMO to follow

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Benefits of Market-Based Transmission

• Benefits to the environment
• More transmission gt more markets for cleaner
  energy
• Deployment of advanced technologies with much
  lower impacts
• Benefits to the community
• More underground transmission (faster permitting)
• Eminent domain not needed by market providers
• Benefits to consumers
• The right investments in the right place at the
  right time
• Protection from stranded costs
• Efficient competition among all sources of
  delivered energy will lower costs to consumers

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Current Issues in Transmission

• Does a monopoly transco serve the best interests
  of consumers?
• Transco will be a market participant because it
  will affect market outcomes
• How will merchant transmission fit in?
• How will the RTO conduct transmission planning?
• Will the transmission planning expansion
  process focus on reliability or economic needs?
• Will the incumbents control the process?
• Do we need a regional/national approach to siting?

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RTOs Market-Based Transmission What is needed?

• Defined marketable property rights
• Supporters of transmission expansions receive
  Financial Transmission Rights (FTRs) that can
  then be monetized via RTO
• Free entry by entrepreneurial transmission
  companies
• No de jure or de facto monopoly over new
  transmission
• Level competition between new entrants
  incumbents
• Equal opportunity for new entrants to compete for
  new transmission investments regulated or
  market-driven
• RTO planning function Maintain reliability
• Planning serves as backstop for market failure,
  not preempt it
• Threat of socialized investments undermines
  market alternatives
• Allow greatest competition among all alternatives

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The Alternatives

• Status quo Gridlock in grid investment
• Endless debate about net benefits of project
  who will pay
• No mechanism to address links between markets
• Monopoly transmission company (ITC)
• One transmission company
• Operates under incentive rates
• Responsible for all congestion, losses,
  reliability
• Makes unilateral investment operating decisions
  to maximize profit
• But, regulator must guess at correct incentive
  rates
• Why not let market set marginal transmission
  rates?
• Strong central planning by RTO
• Requires crystal ball, and consumers bear risk of
  imperfect planning foresight

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So, how do we get there?

• Dont fall prey to commonly held myths regarding
  transmission expansion
• Our Top 10 myths

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Top 10 Myths About Grid Expansion
No. 10 Transmission is and will remain a
natural monopoly

• Fact
• True for grid operation, but NOT for additions
  and expansions
• With LMP and tradeable property rights, G, T,
  DSM, etc. all compete to meet new energy needs
• Free rider problems, economies of scale
  arguments are being resolved by technology

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Top 10 Myths About Grid Expansion
No. 9 Free riders restrict market-based
transmission investment

• Fact
• New controllable technologies address free
  riders only users pay (HVDC, FACTS)
• FTRs discourage free riders and provide vehicle
  for investment recovery only users pay
• The combination of risk aversion (bankruptcy)
  and well-designed energy markets (with
  volatility) prevents or eliminates free riders
  (woe to the unhedged)

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Top 10 Myths About Grid Expansion
No. 8 Economies of scale (lumpiness)
restrict market-based transmission investment

• Fact
• New controllable technologies are smaller and
  more modular (HVDC, FACTS)
• Modularity preserves options
• Grid capacity can match market demand
• Generation has residual economies of scale
  (even with GTs), but few worries of market
  failures

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Top 10 Myths About Grid Expansion
No. 7 Need eminent domain and other state
police powers to site transmission

• Fact
• New cables are smaller and easier to place
  underground (HVDC Light) in existing ROWs
  (railroads, highways, pipelines, etc., just like
  fiber optic cables)
• New point source and converter devices allow
  capacity to be increased in existing substations
• Siting regulations/statutes changed to reflect
  merchant generation why not transmission?

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Top 10 Myths About Grid Expansion
No. 6 Transmission takes too long to build
need to pre-approve projects

• Fact
• New transmission technologies can approximate
  project schedule for generation (e.g. 2-3 years)
• If RTO-sponsored transmission is pre-approved,
  generators will locate at sending end of planned
  upgrades (and what is the future of distributed
  generation?)

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Top 10 Myths About Grid Expansion
No. 5 Transmission is only 5-6 of total cost
why bother?

• Fact
• Marginal cost of transmission much higher than
  average cost (10x? 20x?)
• Congestion charges visible under LMP/FTR
  frameworks N.E. Mass Boston congestion costs
  5/99-7/00 80 million
• To achieve efficiency, get prices right at the
  margin
• or generators in remote locations will push RTO
  to expand grid

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Top 10 Myths About Grid Expansion
No. 4 Why not over-build transmission the
benefits outweigh any efficiency losses

• Fact
• Must build to eliminate congestion (at any
  cost) why bother with LMPs and FTRs? Let this
  market structure work!
• Why saddle captive customers with uneconomic
  transmission investments? (think nuclear)
• Must build to mitigate market power there
  are cheaper and better ways (behavioral
  solutions)
• Must build to improve liquidity at what
  price?

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Top 10 Myths About Grid Expansion
No. 3 Only a central planning process can
efficiently reduce congestion

• Fact
• Backstop role for reliability-driven upgrades,
  but NOT for economic upgrades
• Why forfeit the competition benefits of new
  entrants?
• Central planners are destined to be wrong and
  the burden is on captive customers, NOT
  shareholders
• Central planners may be biased and may NOT be
  sufficiently independent
• Any residual central planning requires complete
  independence and a competitive solicitation
  process

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Top 10 Myths About Grid Expansion
No. 2 We need incentive rates (PBR) to build
new transmission

• Fact
• Why not rely on market-based CMS -- LMPs and
  FTRs? Let this market structure work!
• Why do we need incentive rates for the existing
  wires in order to build new ones?
• Price caps (RPI X) With LMPs FTRs in
  place, why pre-determine and lock in productivity
  improvements (X)? Why not let the market set X?

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and the Number One Myth about Grid Expansion is
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Top 10 Myths About Grid Expansion
No. 1 Market-based transmission cannot be
financed or built on basis of market rights

• Fact
• The US (and other nations) have implemented the
  market structure (LBMPs FTRs) necessary for
  market-based transmission investments
• Let the markets work!
• TEUS is actively building transmission in USA
  and Australia on a fully market basis over
  1,200 MW of in service and proposed projects (
  more to come)

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Our Solution

• Over 500 million in market-driven projects
• Australia
• Directlink 180 MW, 65 km u/g DC Operation
• Murraylink 220 MW, 180 km u/g DC Construction
• Southernlink 150 MW existing lines
  upgrade Permitting
• United States
• Cross Sound 330 MW, 40 km subsea DC Permitting
• Final permit may be issued by December gt
  operational by summer 2002
• Lake Erie Link 325-975 MW, 120 km DC Permitting
• Harbor Cable 330-990 MW u/g subsea
  Development
• Other competitors NU (CLIC), Neptune, GenPower

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Final Thoughts

• Market-based solutions are a reality
• Technology is changing the industry
• Trust, but verify
• Markets can and do work!
• But, ensure that the right structures are in
  place to allow full and fair competition

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For more information

• Our web sites
• US www.transenergieus.com
• CSC www.crosssoundcable.com
• Australia www.transenergie.com.au
• Contact information
• Jeff Donahue [phone] x105
  jeff.donahue_at_transenergieus.com
• Ray Coxe [phone] x106
  ray.coxe_at_transenergieus.com
• José Rotger [phone] x108
  jose.rotger_at_transenergieus.com