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Embedded Cost Pricing: What Fairness Demands
As the generation side of the electric industry becomes increasingly deregulated and transmission migrates toward common carrier status, an easily administered and fairly applied pricing system must be developed. The concepts of "postage stamp" tariffs and "contract paths" lose all logical viability. They possess no totally encompassing tie between the provider of the service and the revenues for that service. Instead, distance-based methods provide that link and will likely emerge as the surviving pricing concepts, since they most closely combine the physics of electricity flow and the precepts of a market economy.
Several approaches have been advanced for distanced-based (often called megawatt-mile, or "Mw-mile") pricing to ensure economically correct transmission user fees in a more open electric energy marketplace. The embedded-cost pricing method calls for uniform rates to be paid by all who actually use the
transmission system and receive similar services.
A Uniform Rate
First we need some definitions and assumptions. The unit used to measure the service provided would be the Mw-mile; i.e., one megawatt of electric power transported over one mile of distance, or one megavolt-ampere of transformation capacity used for a given period of time. Any interval could serve as the time period (em an hour, a day, a month, or a year (em with the rate adjusted accordingly.
Where the power actually flows (em and, thus, which transmission elements are used to support a transaction (em is directed by the physics of the universe, not by
the words of a contract. The embedded-cost approach rests on the premise that in the interconnected system, some electrical energy from every generating source flows on every transmission element to reach its intended load. This fact is common knowledge to the power system engineering community. The mathematical formulation of the governing physical laws is embodied in superposition theory and Kirchhoff's laws.
Certain outdated pricing concepts make the price independent of the amount of service rendered and independent of the provider of the service. Under these concepts, such as the "postage stamp" or "contract path" rate, many transmission owners would provide the service, but only one or a few would receive the compensation. These approaches contain so many inequities that I do not think they can survive for long.
Distance-based, Mw-mile methods also exhibit several variations in approach. Mr. Mistr, for example, will argue for an approach that prices the transmission service based on the scarcity of the transmission resource used and the amount of transmission capacity actually used. By contrast, I support a uniform rate, based on embedded costs and the Mw-mile method. This second approach
assumes that all who use the transmission system would pay the same amount per Mw-mile of service. Also, all providers of the transmission service are compensated based on the scope of service they actually provide.
In the post-Mega-NOPR environment, with its comparability provisions, the transmission segment of the electric industry will look very different than it does today. I take it for a fact that increased competition will lead us toward an actual or virtual disaggregation of the industry. This fact implies a