Smitherman Cites Cost Concerns on SPP Transmission

PUCT Chairman Barry Smitherman has proposed that the Commission open a project to receive comments from interested parties on how the Commission or Southwest Power Pool rules should address several concerns regarding transmission expansion projects in order to limit the burden on Texas ratepayers.

"The main concerns I have with the proposed transmission projects in SPP are: 1) the examples of cost overruns that we are currently seeing with the Priority Projects and the need to contain costs for these and future projects, and 2) the assignment, or 'novation,' of projects from incumbent utilities to third-party entities," Smitherman said.

In a memo in advance of today's PUCT open meeting (37830), Smitherman noted that the cost estimate for the "Priority Projects" approved earlier this year has increased from $1.145 billion to $1.416 billion, an increase of $271 million, before final route selection and construction on the projects have even started.

Furthermore, Smitherman reported that the January 2011 Regional State Committee and SPP board meetings are expected to address SPP's recently approved Integrated Transmission Planning Year 20 Assessment (ITP20). The current proposals for ITP20 projects are estimated to cost between $1.7 billion and $7.3 billion, with the SPP Staff recommending a $2.4 billion proposal at the October 25, 2010 Regional State Committee meeting.

"SPP appears to lack a rigorous mechanism for containing costs of transmission projects. While SPP selects which projects will be constructed, the procedure for determining wholesale cost recovery is done at the FERC. After a project is selected and assigned to a company for construction, there is little authority or ability by SPP to address increased costs," Smitherman noted.

"The Commission should evaluate what ability it or SPP has to hold costs down after the initial estimates are made to select projects," Smitherman said.

Under SPP rules, an incumbent utility is assigned to build a transmission project if the project is within its service territory. However, SPP rules also allow the utility to assign, or novate, the project to a third-party if it so chooses.

"The concern here is that there no meaningful evaluation or oversight of the cost structure that the third party may employ, including ROEs and other capital and O&M costs, and the fact that these costs appear to always be higher than those of the utility assigning the project. While the FERC does have the final authority to approve the assignment, this review also does not seem to have a robust evaluation of whether the assignment would be more cost effective," Smitherman said.