Utility Business Models

IPP and Merchant Transmission

When the markets were formed with the independent system operators (ISO), many states felt the incumbent utilities had too much market power, so they forced sale of generation (from a small amount to all depending on the market).

Once sold off to third parties, they became Independent Power Producers (IPP). IPP to a very large extent are unregulated (oh, the EPA and similar have regulations, but state regulators do not). This means that in states where there are renewable portfolio standards (RPS), the IPP may be the last running coal plants, because they are not state regulated. In many cases FERC has the ability to regulate the operations of the IPP facilities within the market, but mostly for violation of ISO and FERC regulations.

IPP make money by selling kilowatt-hours into the market, they may get tax credits for what they build or operation (Investment Tax Credits or Production Tax Credits), and in some states they may have to negotiate longer outages for upgrades.

In some ISO they get capacity payments in addition to revenue from the wholesale market. IPPs own everything from hydro-electric dams, solar and wind, to batteries, coal plants and nuclear facilities. Some even are in the business of creating Virtual Power Plants (VPP) that include demand side management resources (FERC-2222 is going to grow this piece of the market). IPP do not operate on return on invested capital (ROIC) and use cash accounting.

Merchant Transmission is another outcome of the creation of ISO. It used to be that the utilities had the right to build all transmission in their service territory, and that the utilities’ needs came first, but to lower costs of transmission, merchant transmission companies were created and allowed to participate, FERC has encouraged merchants, including allowing ITC and ATC to buy the existing transmission in Michigan. Merchants are not regulated by state commissions to any extent but are subject to ISO and FERC regulation.

Merchants do operate on a Return on Invested Capital (ROIC) and follow FERC accounting rules. FERC 1920 (transmission planning) opened the door wider to more merchants.

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Utility Business Models - Part #7