Just who benefits from FERC’s NOPR? Anyone?

In a recent post, I discussed FERC’s new Notice of Proposed Rulemaking (NOPR) on “cybersecurity incentives” for electric utilities. I pointed out that, while the benefits to utilities will be substantial, they will – as far as I could see at the time – go entirely to about 35 organizations of investor-owned utilities (IOUs). Although, to be fair, those 35 organizations account for at least 75% of total load served in the US. The thousands of cooperative and municipal utilities would be left out altogether.

However, I realized the next day, in the course of emailing with Kevin Perry, that I was wrong about both the number of organizations that will benefit (I was too low on that), and the total amount of benefits (which is likely to be much lower than I was thinking, although I didn’t try to estimate the amount when I wrote the first post, and I certainly won’t try to estimate it now).

Essentially, the NOPR states that FERC will provide utilities (BTW, IPPs are completely out of the picture on this, since except in very few cases their rates aren’t regulated by anything but the market) with rate relief – meaning they can charge their customers more - to allow them to increase the amount they spend on BES cybersecurity, as long as they spend it in particular ways.  I assumed FERC was talking about the rates the utilities charge electric power users – i.e. everyday schmoes like you and me (well me, anyway. I know you’re perfect).

I was quite aware that FERC has no direct jurisdiction over those rates. Those rates are set by the state Public Utility Commissions (PUCs, as if I weren’t already over my quota for acronyms in this post. I might get fined), but only for IOUs, which is why the coops and munis were left out in the cold. But I assumed that FERC’s guidance would be followed by the PUCs, so they would automatically let the utilities include in their rate base whatever FERC said they could include.

However, when Kevin and I had our email conversation, we realized that what FERC must be talking about is the rates they do have direct authority over: rates for power transmission, meaning the rates that Transmission Owners (the organizations that own transmission lines, substations and control centers) charge their customers; they are called TO’s in the industry.

FERC has jurisdiction over interstate transmission of power, but Kevin pointed out to me that there are lots of transmission lines that are entirely within one state. After all, there are few long lines that cross multiple state boundaries, so power that’s flowing from say Louisiana to Indiana will pass over a number of different TO’s lines. FERC is proposing to let TOs charge their customers a little more, to fund additional cybersecurity expenditures (by the TOs themselves, of course). 

So who are these TOs that are going to reap the benefits of FERC’s proposal? I haven’t studied any of this, but from what I know, they fall roughly into three categories:

1.      Transmission-only companies, of which there are…get ready…a total of two: ATC and ITC (I want to thank Lew Folkerth for reminding me of these. Lew, by the way, is Kevin’s evil twin. Or Kevin’s Lew’s evil twin, I’m never sure. It depends on who’s speaking). They’re both privately owned by utility groups.

2.      Transmission arms of large utilities, primarily IOUs, but including at least a few large coops and munis.

3.      Transmission arms of smaller utilities, consisting almost entirely of coops and munis.

Since this post is all about money (that makes two in a row), the two questions now are

1.      Is the total amount of monetary benefit from FERC’s proposal likely to be larger or smaller than what it would be if I’d been correct when I said in my last post that the benefit was based on sales of power to end users?

2.      How will it be distributed among the three groups above?

To answer 1, I’d say the aggregate monetary benefit must be much less than I originally thought, since undoubtedly the total amount spent on power transmission in the US must be much smaller than what’s spent by end users (households, commercial and industrial) on power. Of course, if someone knows better and wants to enlighten me on this, I’d love to hear from you.

Regarding question 2, it seems almost axiomatic that most of the benefits of FERC’s proposal will flow to the first two groups. But keep in mind that, when it comes to the second and third groups (i.e. utilities), their total transmission revenues must be a small fraction of their distribution revenues – since transmission is a sideline but distribution is their raison d’etre of almost any electric utility. Except for ATC and ITC, I don’t think there will be any kind of huge increase in cybersecurity expenditures by TO’s this year, or at least much more than they were already planning (which was undoubtedly a lot).

So what’s my verdict on FERC’s proposal, from the fiscal side (I still haven’t discussed it from the cybersecurity side. I’ll get to that soon)? I certainly think it’s better than nothing. But it’s not the answer to the long-term problem: The need for cybersecurity spending for the grid will continue to grow much faster than utility revenues. FERC is doing what it can, but ultimately the solution has to lie in Congress and the White House.

Any opinions expressed in this blog post are strictly mine and are not necessarily shared by any of the clients of Tom Alrich LLC. If you would like to comment on what you have read here, I would love to hear from you. Please email me at tom@tomalrich.com.