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Transmission Tariffs: Still Pro Forma? Locational Pricing and the Federal Power Act

Fortnightly Magazine - May 1 1996

that operates as a single control area with free-flowing ties among its members. The pool supports an energy market that uses a cost-based economic dispatch queue administered by the pool's control area operator (em PJM Interconnects Associates (em subject to the right of each individual company to self-schedule its owned (or contracted-for) generation to its own load. The PJM companies propose to modify their current pool structure (em including a shift to price-based dispatch and creation of an ISO (em to satisfy the objectives of the open-access NOPR.

The PJM companies say they will provide wholesale transmission services under poolwide transmission tariffs that offer comparable service to all market participants. Under these tariffs, load-serving entities (LSEs) within the PJM area will share the cost of the transmission system and thereby purchase equivalent network transmission service. Each LSE will use this network transmission service to bring energy from any source in the pool to its loads, on a firm basis.

The ISO will operate an hourly energy market with prices based on bids submitted by generators and their agents. Every generator will be required to quote a bid price in order to be economically dispatched by the pool. "Self-scheduled" resources will be required to declare a "floor" price. If the pool locational price falls below the floor, the owner must reduce the unit's output. The generator may declare a negative floor price, however, such that if the clearing price at a unit's location falls below zero, the owner would pay the pool to remain on line.

In the absence of transmission constraints, the hourly price for all energy bought and sold in the pool energy market will reflect the highest bid price for generators required to serve that level of load. When the system is constrained,6 the market-clearing price will reflect the incremental cost of serving load at different load and generation locations using the least-cost, security-constrained dispatch. The ISO will use this locational pricing method to collect congestion charges from the LSEs that incur them. These charges will be credited after the fact to the LSE and other purchasers of firm transmission service. Nonfirm transmission users will not receive credit from congestion charges.

Each LSE will be allocated firm capacity (de facto TCCs). If any firm capacity remains, the ISO will solicit annual requests for firm service on the bulk transmission system. If the ISO determines that sufficient capacity exists to provide the requested firm service, it will arrange the contracts between the appropriate parties.

PJM would employ an average interchange price (AIP) as a

surrogate for the unconstrained market-clearing price, defined as the weighted-average locational price of spot-market energy interchange sales and purchases. Prices at the source and load locations would be compared against the AIP. If the price at the source location exceeds the AIP, the differential creates a congestion charge credit to LSEs in the load location. Similarly, if the AIP exceeds the source-location price, LSEs at that location would receive the differential as a congestion credit. Revenues collected from parties involved in bilateral point-to-point trading would fund the