Comments of Stephen Ward, Maine Public Advocate October 28, 2004 Restructuring Roundtable: “Should it be Commonplace to Pay in Common for Local Upgrades?” Comments of Stephen Ward, Maine Public Advocate October 28, 2004

1. The title for this panel points to one clear distinction between transmission projects: above ground/overhead and underground/ buried - significant cost differential between the two. 2. I do think it is critical to differentiate [as the current planning procedures and tariff do] between cost recovery for “plain vanilla” transmission projects and for “gold plated” underground projects. 3. I’ve yet to meet anyone who staunchly advocates gold plating when they themselves have to pay for it … but there is considerable interest in designating projects as reliability-related if in fact they have gold-plated components.

4. The obvious concern is that unnecessary project costs are spread region-wide to customers who derive no benefit from the gold plating. The additional wrinkle in the case of SW Connecticut is that customers in a state with the highest per-capita income in the U.S. (36% above the national average) can export T-related costs to customers elsewhere in NE who have lower per-capita income (in Maine, 9% below the national average). 5. This possibility reminds those of us with long memories about the debates within NEPOOL in the late 1980’s over whether to increase pool-wide reserve requirements to account for outages at 1150 MW nuclear units. Because Connecticut had 3 nuclear units and was bringing a 4th on line at the time, the new higher requirements imposed significant costs in parts of the region where load growth was not nearly so rapid as in Connecticut but where energy efficiency programs were higher on the regulatory agenda than in Connecticut.

6. The problem with a regional allocation of $1 billion for new transmission in SW Connecticut is a different problem from the 22% revenue requirement proposals in the 1980’s but it does recall the politics of that debate in the region. 7. The rationale for socializing T-upgrade costs across the region boils down to the contention: sooner or later, everyone’s project will get socialized; it’s just a matter of time. I disagree, I think rural states are much less likely to benefit because infrastructure upgrades occur more frequently in high-density areas. There is a question of fairness here due to the differing rates for upgrading. 8. As a party requesting FERC reconsideration of the current tariff, along with the Maine and Rhode Island PUCs, I think we should adopt the principle that cost causers should pay for T upgrades, without 100% region-wide socialization.

9. In fact, FERC has approved a “cost causer pays” methodology for energy prices. New England has adopted a LMP regime that seeks to elicit market responses in given sub-regions by conveying accurate price signals within those sub-regions. 10. Socializing all RTEP project costs essentially sends a contradictory message: transmission projects (unlike generation or demand response) will be treated as valuable irrespective of the sub-region in which they are located. 11. The result is that price signals that could stimulate cost-effective alternatives to a transmission upgrade are muffled – if not silenced altogether – if those costs are fully socalized.

12. The current rules also are hard to implement 12. The current rules also are hard to implement. How do you distinguish real-world economic or “gold-plated” investments from purely reliability-based ones. Not easy to do, except in the most egregious cases. In my view, virtually all underground T (except for submarine cable projects) should not qualify as economic or reliability-based, at least outside of urban centers. 13. The current definition of a reliability upgrade is so broad as to encompass just about every project identified in the RTEP process. The result will be socializing costs for projects that simply are not economically justified. In particular, if one state’s regulators assume a project’s costs will be socialized, they may be much more apt to approve uneconomic project components in that project.

14. The upshot is that we need to be very cautious about adopting a blanket assumption that all customers in the region will benefit from all RTEP projects. Some will, considerably. Some may not, at all. 15. Along with Rhode Island and Maine Regulators, we have requested reconsideration of FERC’s December 18, 2003 order approving transmission cost allocation amendments adopted by NEPOOL. Instead we have proposed a 75%/25% allocation of costs for reliability upgrades. That approach, we believe, will forestall the development of uneconomic projects and will better protect the most distant customers who derive the smallest identifiable benefit in subsidizing those most directly benefited.

I’m happy to respond to questions.