6.6. ERMUSR 01-11-2005 - Laserfiche WebLink

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CAPX 2020 INTERIM REPORT DECEMBER 2004 Some concerns with the current cost recovery process exist. They include: Required investments not large enough to drive a general rate proceeding; cost recovery can lag investment. Transmission investments account for approximately 7 percent of total utility costs, so by themselves they do not justify the time and expense of a general rate case proceeding. However, planning, certification and routing proceedings -and ultimately construction and operation of new transmission projects -can require significant investments prior to cost recovery. Until a general rate case is filed, the costs of incremental transmission investments are incurred by the utility but not recovered in rates. This "regulatory lag" provides a disincentive for significant transmission investment. Cost recovery at authorized returns may not be sufficient to encourage large-scale undertakings with attendant risks ofnon-certification of facilities or lengthy, contentious proceedings. The Federal Energy Regulatory Commission (FERC) considers returns to appropriately compensate for investments in transmission, recognizing the nature of these investments. In contrast, state regulation uses a single rate of return to compensate for all electric utility investments -generation, transmission, distribution, customer service and other costs. A single return may not appropriately compensate for the risks associated with large-scale transmission investments, given their unique nature. Current recovery mechanisms do not encourage appropriate decisions between generation and transmission investments. To some extent, additional generation and transmission are substitutes for each other. In some cases, transmission investments may allow for acquisition of distant resources that can more cost effectively meet customer needs, provide a robust grid, or otherwise strengthen access to markets that help with effective functioning of the wholesale energy markets. Current regulatory and cost recovery mechanisms, however, can favor investment in generation as opposed to transmission, as costs are more likely to be promptly recovered for generation investments. NEED CERTIFICATION The criteria for determining whether a proposed transmission facility qualifies for a certificate of need address a variety of issues. These criteria were established by statute in the 1970s, prior to the recent changes in the use and oversight of the transmission grid and do not specify any particular weighting. These criteria should be reviewed in light of today's environment, as reliability, access to markets and the robust functioning of a wholesale market may be appropriate additional criteria to consider. Such a review should consider whether to add regional considerations to the state's decision-making, as some transmission investments may not be required to specifically serve Minnesota load but rather are needed to address regional reliability issues. Further, it may be appropriate to consider assigning weights to the various criteria to ensure that reliability has priority consideration. 20