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Electric Transmission: Jury Still Out on Flow-Based Pricing

Fortnightly Magazine - June 15 1997

Dominion Resources touts its "impacted" method, but opponents call it a "stalking horse" (em a scheme to avoid full review at FERC.

Is the Federal Energy Regulatory Commission prepared to accept true marginal-cost pricing for electric transmission?

With all the criticism leveled at the traditional "contract path," one would think that the FERC would consider a new approach to transmission pricing.

In fact, last year in its final Order No. 888, the Commission recognized the possible advantages of marginal cost methods, which would set prices based upon actual flows in the transmission grid:

[S]ome versions of flow-based pricing could more accurately reflect and price the actual power flows on transmission systems and thus could produce efficiency gains, better generating siting decisions, and benefits for customers and utilities alike. %n1%n

Nevertheless, the FERC still has proved to be extremely wary of marginal cost pricing for transmission. Its 1994 policy statement on transmission pricing puts the burden of proof squarely on those who would move away from traditional, embedded-cost pricing:

[U]nlike sales of generation, the Commission cannot rely on competitive market forces to discipline prices for firm transmission service. Accordingly, any transmission owner advocating a market-based transmission pricing method must demonstrate how it has alleviated these serious concerns. %n2%n

Lately, however, some have come to question the FERC's true commitment to innovative transmission pricing. %n3%n Perhaps that is why, as of early May, the Commission had yet to act on a petition proposing flow-based pricing filed last July by Dominion Resources Inc., the holding company for Virginia Power. In that petition, %n4%n Dominion Resources outlined a transmission pricing method called the "Impacted Megawatt-Mile Method" (em a method not entirely new to engineers and rate witnesses, but one that would force a significant change on the FERC and the industry in general.

In simple terms (and subject to certain exceptions) %n5%n , the IMM method would set different prices for different power movements over the grid, depending upon how any single transaction would change (impact) loads on various transmission line segments. Two seemingly identical transactions could carry different transmission prices, depending upon the day, time or the sequence in which each was requested and scheduled. In theory, the method would ensure that transmission prices maintain a direct relationship between transmission line usage and the current reproduction cost value of transmission assets deemed to have been "impacted" by the use.

As might be expected, Dominion Resources faces objections from a host of critics. Many companies have intervened, with some filing protests. The protestors include Old Dominion Electric Cooperative Inc., the Transmission Access Policy Study Group, Southeastern Federal Power Customers, %n6%n North Carolina Electric Membership Corp., Alabama Electric Cooperative Inc., Central Virginia Electric Cooperative Inc., Duquesne Light Co., and DuPont Power Marketing Inc.

The intervenors raise concerns that span regulatory, engineering and political concerns. One intervenor, Otter Tail Power Co., for example, has not protested per se, but simply wants to participate in the discussion. As a member of the Mid-Continent Area Power Pool, which has proposed its own flow-based pricing method, Otter Tail apparently wants to

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