[BETA] Fortnightly

By its Notice of Proposed Rulemaking on wholesale electric competition, commonly called the "Mega-NOPR" (or "Giga-NOPR"), the Federal Energy Regulatory Commission (FERC) has announced big plans for electric transmission.

The FERC would require "functional" unbundling of transmission from generation. The Mega-NOPR requires utilities that own transmission to file tariffs for point-to-point and network transmission services, based on guidelines in pro forma tariffs published by the FERC. To tie it all together, the FERC would mandate a system of real-time information networks. These so-called "RINs" would disclose prices and terms of access to the transmission system to any third party in the market to buy or sell generated power.

When all is said and done, electric transmission will become a business all to itself. But it remains far from clear how this nascent industry will price its services. Can utilities offer electric transmission as any other commodity or transportation business, with marginal-cost pricing, or does transmission exhibit special attributes that mandate traditional, regulated embedded-cost pricing?

Economists generally tout marginal-cost pricing as the key to economic efficiency. But the FERC historically has priced electric transmission according to embedded-cost principles and a fiction known as the "contract path." Regulators assume that electrons move along a direct path connecting the two (or more) contracting parties. Under contract path, postage-stamp pricing, each transmission-owning utility along the contract path exacts a toll for the use of its facilities. Nevertheless, we all know (as does the FERC) that electrons obey the laws of physics, not of regulators. Electrons move across the grid with no heed to the contract path. A transmission transaction flows across the network, not along a discrete path.

Computer analysis now allows models that can predict with certainty how a given transaction will flow across the grid. This capability enables "flow-based" pricing (em the antithesis of the contract path. But each transaction affects every other transaction, simultaneously creating or relieving constraints throughout the grid. In theory, a flow-based pricing method could reflect either embedded or marginal costs. One idea, a marginal cost flow-based method, would reflect the impact imposed on the transmission system by each service or transaction.

In its first technical conference on RINs, held in July 1995, the FERC explored the telecommunications framework needed to achieve transmission access. It defined two problems that it called the "How" and the "What." The first problem involves telecommunications and software. The second question asks what categories of pricing and other information to disclose. At one point, a member of the audience asked FERC chair Elizabeth Moler, in effect, "How can we figure out the 'What' if we don't know how in advance the FERC's pricing method and, by the way, why is the FERC holding on to the contract-path fiction?"

Chair Moler replied that the FERC did not necessarily believe in the contract path. But she added that, as an administrative agency, the FERC could only act upon formal proposals set before it. t

Bruce W. Radford is editor of

PUBLIC UTILITIES FORTNIGHTLY.

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