F. Lack of Investment in New Transmission Facilities

As discussed earlier, unlike with generation facilities, there has been little recent construction of transmission facilities in the Midwest. The reasons for this are a combination of regulatory siting requirements, particularly zoning, and the regulatory uncertainty of obtaining a return on the investment because of the evolution of RTOs and the possibility (or reality) of rate freezes in state retail access programs. Staff did not find evidence that the lack of investment in new transmission facilities currently affects the efficiency of the Midwest market. However, if the trend continues, the lack of new transmission facilities could affect the market as load and demand increases, particularly during a hot summer.

A number of market participants and state agency personnel told Staff that zoning requirements in general and resident opposition in particular act as a deterrent for utilities to initiate transmission construction projects. In addition, several market participants that provided information to Staff attribute the lack of construction of transmission facilities to the regulatory uncertainty perceived by the existing stakeholders. While the transmission system is currently owned by vertically integrated IOUs, it is unclear who will own or operate the system in the future after the evolution of RTOs. As discussed above, transmission siting can be a lengthy and costly endeavor. Since it is unclear who will eventually own, operate and value the transmission assets, the financial return on any investment is uncertain. Some market participants believe that the rate freezes and reductions that are being imposed as part of state retail access programs will act as a further hindrance to investment in transmission because they are uncertain as to whether they will be able to recover the costs of the facilities and make an acceptable rate of return.

G. System Reactive Capability

The transfer of large amounts of energy over long distances across interfaces requires sufficient reactive power support. Reactive power (MVAr), in effect, provides voltage support across the lines where real power (MW) is transferred. Unlike real power, the reactive component of power cannot be transmitted over long distances and must be provided locally. Most reactive power is supplied by generators, synchronous condensers and shunt capacitors.

Vertically integrated utilities perform this task for their own transmission systems. On the other hand, independent generators have little direct incentive to provide reactive power as no system is in place to compensate them. Once RTOs are in place, it is likely that some contractual agreement will be created to obtain the necessary reactive support. Without adequate reactive support, parts of the system can be susceptible to the threat of voltage collapse. This is especially a concern on days of peak demand on a hot summer's day.