[BETA] Fortnightly

Flow-based pricing ends

subsidies inherent in grid-wide,

postage-stamp rates.

I

n Order 888, the Federal Energy Regulatory Commission suggested 11 principles for forming an independent system operator, or ISO. In its third principle, the FERC offered this guidance on transmission pricing:

An ISO should provide open access to the transmission system and all services under its control at non-pancaked rates pursuant to a single, unbundled, grid-wide tariff that applies to all eligible users in a non-discriminatory manner. %n1%n

Several of the ISOs now under consideration across the nation face tough decisions on transmission pricing. %n2%n The most obvious literal interpretation of the FERC's third principle would be to set the price for ISO transmission by rolling embedded costs into a single, grid-wide, postage-stamp rate. Under this method, revenue requirements for bulk transmission facilities turned over to the ISO would be tallied. This aggregate ISO revenue requirement, divided by the total load (determined using the 12-month, coincident-peak method), would yield a postage-stamp rate for all transactions.

In theory, this simple approach to pricing would put power producers on equal ground in the competition to serve load. However, this proposal creates many issues for transmission owners, state and federal regulators, and transmission customers.

Several basic problems emerge under the single, grid-wide, postage-stamp rate suggested by the FERC:

• Recovering costs (the traditional "revenue requirement");

• Dealing with "rate shock" for eligible customers;

• Determining whether eligible bundled customers choosing to remain bundled take service at ISO rates;

• Compensating transmission owners equitably based on actual flows; and

• Addressing inconsistencies with the proposed capacity reservation tariff, or CRT.

Recovering Costs

Stakeholders agree that transmission owners should be able to maintain revenue requirements after turning over control of

transmission systems to an ISO. But there's a problem in that: System owners will likely see a significant reduction in what once were nonfirm revenues for point-to-point transmission between neighbor utilities. This reduction arises from the elimination of rate pancaking (em the practice of billing a separate charge for each power movement by a separate company along the hypothetical "contract path."

When utilities become part of an ISO, it becomes difficult to make transmission owners whole from a revenue perspective. Why? Because transmission revenues disappear for certain transactions. When two former control areas are combined under the ISO, these "intra-ISO" or "drive-within" transactions are now covered by network service under an access charge. To mitigate this shortfall (em potentially a substantial amount of money (em the ISO could charge a transmission rate above its aggregate revenue requirement. This strategy would fund a "reserve account," which could be used to compensate transmission owners for the shortfall.

Nevertheless, the FERC would likely frown upon transmission rates not based upon cost, as it did last November when it rejected the 10-percent "adder" for importing resources outside of the zones proposed in the recent filing for the Pennsylvania-New Jersey-Maryland Interconnection. %n3%n Under the option described above for mitigating the shortfall in cost-based transmission revenues, the contemplated reserve account would reflect an estimate in the decreased level of the nonfirm, point-to-point revenues. Again, this concept could prove