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Electric Transmission: Jury Still Out on Flow-Based Pricing

Fortnightly Magazine - June 15 1997

the transaction. When multiplied by a dollar figure, the formula would convert these changes into a hypothetical cost representing the value of usage imposed on the line by the transaction. In theory, this cost value would offer some measure of the restraints (if any) imposed by the transaction (em and the extent to which the transaction might preclude other power movements.

Some changes on some line segments could actually reflect a drop in thermal load (em sometimes in the prevailing direction of the transmission movement, or sometimes in the opposite (counterflow) direction. These negative changes in fact might relieve constraints to such an extent as to make other transactions possible (or less costly) that otherwise would be precluded by a lack of transmission capacity. Thus, the IMM method provides for various reciprocal rate credits (including a credit for not using the full amount of a scheduled firm reservation) to reflect these positive effects on line constraints (see sidebar).

All in all, the formula would set a complex rate for firm transmission service that would feature eight separate rate components:

1) capacity reservation charge (fixed charge);

2) reactive power charge (fixed);

3) replacement of line losses (fixed charge for capacity cost of generation);

4) counterflow credit;

5) credit for third-party use of customer's unused capacity reservation;

6) credit for third-party use of facilities or additions paid for by the customer;

7) line-loss charge (variable charge); and

8) an administrative charge.

The formula would also provide a mechanism for mitigating constraints, allowing a potential customer to seek bids from those who might be able to remove a given constraint. Such bids would be capped at the cost of removing the constraints, plus a 10-percent premium.

Another important factor, not to be overlooked, concerns native load. The IMM method proposed by Dominion Resources would apply only to incremental transmission services. It would not cover native wholesale or retail load. As might be expected, that grandfather exemption has raised a firestorm of objections. (Dominion Resources called it "a barrage of complaints.") Even Duquesne Light Co., itself a franchised utility with its own native load, charged that by limiting the incremental pricing formula non-native transmission arrangements, it would distort attempts by the FERC to introduce open access in transmission and competition in the generating sector.

Nevertheless, Dominion Resources believes that its IMM method will prove particularly well-suited to a competitive generation market where participants rely heavily on the transmission grid. It suggests that IMM (incremental) pricing will encourage enhancement or new construction of transmission facilities where warranted by market conditions:

Traditional pricing is likely to leave retail ratepayers or shareholders 'holding the bag' for transmission investments made to meet the requirements of third-party transactions. ...

This problem is exacerbated by the lumpiness of transmission investments. ...

Impacted megawatt-mile pricing addresses [this problem] by basing prices for all new service on incremental costs.

If only it were that simple. As matters stand, the intervenors have identified quite a long list of objections to the Dominion Resources pricing proposal.

Objections

A major objection to the proposed IMM pricing formula