Illinois energy attorney Paul Neilan outlined the merchant transmission "benefits" scam in recent comments to the Illinois Power Agency. Back in January the IPA published its draft 2024 Policy Study and invited comments.
In his comments, Neilan pointed out how IPA's idea of the finances of merchant transmission is wrong. Government ideas about merchant transmission are almost always wrong. Nobody seems to understand how it works, so they make things up and pretend they understand. Because governments don't understand how merchant transmission works and how it differs from regionally planned and cost allocated transmission needed for reliability, merchant transmission developers often have a field day making up need and benefits for their projects to make ignorant regulators believe they somehow provide "public benefit" that will enable eminent domain authority for private profit.
First Neilan takes issue with IPA's claim that merchant transmission makes money through power price arbitrage:
In his comments, Neilan pointed out how IPA's idea of the finances of merchant transmission is wrong. Government ideas about merchant transmission are almost always wrong. Nobody seems to understand how it works, so they make things up and pretend they understand. Because governments don't understand how merchant transmission works and how it differs from regionally planned and cost allocated transmission needed for reliability, merchant transmission developers often have a field day making up need and benefits for their projects to make ignorant regulators believe they somehow provide "public benefit" that will enable eminent domain authority for private profit.
First Neilan takes issue with IPA's claim that merchant transmission makes money through power price arbitrage:
These descriptions misstate the revenue model of a merchant transmission service provider, and the Agency's Figure 7-3 is misleading because it creates the impression that the merchant transmission service provider is obtaining commodity electricity supply at a low price and then selling that commodity electricity supply at a higher price in a different area (i.e., price arbitrage) in order to recover its costs.
A merchant transmission service provider sells transmission service, not commodity electricity supply.
| comments_on_illinois_power_agency_2024_policy_statementdraft_final.pdf |
This is something a vast majority of landowners impacted by Grain Belt Express know well. Why doesn't IPA know this? GBE doesn't own power generators, and it doesn't sell power. It only sells transmission. Sellers and buyers on either end are not supposed to be affiliated with the transmission line. Therefore, if there was any money to be had buying low at Point A and selling high at Point B, it would not be GBE realizing the income and using it to pay for construction and operation of its transmission line.
Neilan points out that the price difference between seller and buyer must be more than the cost of GBE. This is the reason GBE doesn't yet have enough customers to finance and build its project. The price differential between seller and buyer is so small that it doesn't allow the addition of the bloated $7B GBE project and still allow an arbitrage profit. He attaches a portion of a transcript from the ICC hearing that demonstrates how GBE witnesses dodge and weave when asked questions they would rather not answer because a truthful answer isn't helpful.
Merchant transmission claims of electricity cost reductions are magic math.
Neilan points out that the price difference between seller and buyer must be more than the cost of GBE. This is the reason GBE doesn't yet have enough customers to finance and build its project. The price differential between seller and buyer is so small that it doesn't allow the addition of the bloated $7B GBE project and still allow an arbitrage profit. He attaches a portion of a transcript from the ICC hearing that demonstrates how GBE witnesses dodge and weave when asked questions they would rather not answer because a truthful answer isn't helpful.
Merchant transmission claims of electricity cost reductions are magic math.
Though merchant transmission developers may claim that their projects will reduce electricity costs for consumers, as the example above shows, any decrease in the electricity price at the point of delivery necessarily reduces the price arbitrage opportunity and is, therefore, contrary to the merchant transmission developer’s economic self-interest as a profit-maximizing enterprise."
In other words, if GBE really reduced power prices for consumers that are not served by its project ("public benefit") it would actually be shooting itself in the foot because it is closing the arbitrage gap between seller and buyer that allows for the price of using GBE to be added in and still allow the seller to make a profit. GBE wants the seller to sell at a low price, and the buyer to buy at a high price, the higher the better. A high price would allow the low price of generation plus the cost of GBE to remain lower than the buy price at the other end of the line. Lower the buy price, and suddenly GBE is not economical. Knowing this... how many times has GBE lied to regulators, the media, and the people?
The magic math GBE used at the ICC to create $6.6B of savings for electric consumers is a story unto itself. You should read Neilan's explanation of GBE's non-existent carbon tax and failure to adjust the time value of money. Geeky topic, easy explanation.
Perhaps IPA's biggest flaw is its presumption that eminent domain is appropriate for merchant transmission projects:
The magic math GBE used at the ICC to create $6.6B of savings for electric consumers is a story unto itself. You should read Neilan's explanation of GBE's non-existent carbon tax and failure to adjust the time value of money. Geeky topic, easy explanation.
Perhaps IPA's biggest flaw is its presumption that eminent domain is appropriate for merchant transmission projects:
In its discussion of “Land Ownership,” which the Study presents as a mere obstacle to merchant transmission development, the Agency states:
"In cases where the public utility commission or transmission siting authority approves a transmission line, the state has the authority to use the land for public use and pay the landowner compensation."
(Study, pg. 159). Here, the Agency accepts without question the proposition that a merchant transmission project is a “public use” of the private property of Illinois landowners. This acceptance ignores the nature of merchant transmission as an entirely profit-driven enterprise. In 22-0499, the only party alleging that GBX’s merchant transmission project is needed to relieve grid congestion, enhance reliability, or provide adequate service was GBX itself. Such self- serving assertions may be entirely discounted.
That strikes at one of my biggest pet peeves about merchant transmission -- considering it a public use. In order to be a public use, it must provide public benefit. A merchant transmission project only provides benefit to its signed customers (assuming they actually found some benefit from using the line). There is no public benefit. Merchant transmission companies (and their enabling state utility commissioners) attempt to *create* a public benefit with claims of lower power prices for everyone. Missouri even went so far as to claim that because GBE signed a contract to sell its private service to a municipal power agency, that somehow transferred the public benefit provided by the power agency to GBE and allowed GBE to wield the power of eminent domain. It's a ridiculous interpretation of the law. Merchant transmission owners sell transmission service to willing buyers at the highest price it can negotiate. Merchant projects are not necessary for reliability, economics, or public policy. They are simply a private profit scheme laid on top of our current electric transmission system. They should have to negotiate easements in the same kind of market where they negotiate their contracts with companies who purchase their capacity -- a free market with a willing buyer and a willing seller. Merchant transmission should never be granted eminent domain authority. We need to fix that.
Hopefully Neilan can straighten out the IPA's screwy thinking. It's a vital first step!
Hopefully Neilan can straighten out the IPA's screwy thinking. It's a vital first step!
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