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Incremental-Cost Pricing: What Efficiency Requires

Fortnightly Magazine - January 1 1996

change in overall price levels. This balancing reflects the fact that much of the system is not heavily loaded.

Second, Impacted Megawatt-Mile pricing does not require forecasts or speculation about future uses of the system. Prices are based solely on knowable facts about current system use and current line duplication costs.

Third, since Impacted Megawatt-Mile pricing produces the lowest prices consistent with economic efficiency and applies them without discrimination to all competitive users, the prices set under this

system can be approved by the Federal Energy Regulatory Commission (FERC) as just and reasonable, even though they will not produce revenues that match a traditional embedded-cost revenue requirement in any particular year. The time has come to abandon traditional thinking and recognize that if transmission prices are set properly, the revenue they provide is the revenue requirement for regulatory purposes. Adjusting prices based on incremental costs to match each year's embedded-cost revenue requirement would unnecessarily undermine the pricing system's incentives for efficiency.

Over time, Impacted Megawatt-Mile pricing should allow owners making average decisions on capacity additions to recover their investment costs for both existing and new capacity, including their allowed return on capital. Owners wise enough or lucky enough to build lines that experience high usage growth should realize above average returns.

Let's remember that if the transmission system is viewed in terms of actual flows, rather than contract paths, a number of different investments can relieve heavy loadings on a particular line or lines. Impacted Megawatt-Mile pricing provides market-like incentives rather than central planning to encourage the best choices of new lines.

In sum, Impacted Megawatt-Mile Pricing provides a practical way to reflect incremental costs.

In that way, it will help achieve

increased efficiency that marks

the true objective of electric

restructuring. t

Alfred F. Mistr, Jr. is director of planning analysis for Dominion Resources, Inc., chairman of the Interconnection Dynamics Working Group of the North American Reliability Council, and a charter member of the General Agreement on Parallel Paths Committee. A licensed professional engineer in the State of Virginia, Mr. Mistr holds a BS in electrical engineering from Virginia Polytechnic Institute.

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