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Electric Transmission: Jury Still Out on Flow-Based Pricing

Fortnightly Magazine - June 15 1997

lies in the fact that transmission customers would find it difficult to forecast prices.

DuPont Power Marketing Inc. put it this way: "The IMM approach deprives power marketers ... of their ability to effectively compete with utilities such as Dominion Resources. The [formula] is anti-competitive in that it creates a complex transmission pricing formula which cannot be readily or easily determined or forecasted by potential competitors."

Others charge that the IMM formula would end up boosting transmission rates too high. Two

intervenors, Central Virginia Electric Co-op. Inc., and Craig-Botetourt Electric Co-op. Inc., joined their protests:

Small transmission-dependent utilities moving from bundled requirements service to unbundled transmission service ... would find that their new unbundled transmission service is much more costly than the transmission component of their bundled requirements service and the bundled transmission component of the provider's retail service.

Another key objection concerns the proposal by Dominion Resources to grandfather native load and charge incremental, impact- and distance-based pricing only for new unbundled services. According to Duquesne Light Co.:

Charging unbundled customers a distance-sensitive rate, while permitting bundled customers to continue paying postage-stamp rates ... will give customers an artificial incentive to continue purchasing power on a bundled basis from the transmitting utility (or an artificial incentive to switch suppliers).

But for that charge, Dominion Resources had a reply waiting:

Because marginal cost pricing approaches, such as IMM, are forward looking [they] cannot be readily applied to individual uses arrange for in the past ... Indeed, it would be exceedingly difficult (if not impossible) to reconstruct the circumstances that existed at the times at which existing uses were committed.

Beyond the grandfathering of native load, the most serious objections concern the choice of a distance-weighted pricing method, and the idea that prices should reflect line loadings, even though, for the great majority of hours during the year, most sections of the transmission grid are not particularly heavily loaded. Details on those points can be found in the protest filed by the Transmission Access Policy Study Group. %n10%n

TAPS argues, for instance, that distance-based pricing tends to distort rates, increasing transmission rates to customers located at the periphery of a utility's service area. It cited FERC precedent %n11%n indicating that distance-based wholesale transmission pricing is discriminatory when integrated with retail rates that contain bundled, non-distance-based transmission rates (as for native load).

Moreover, TAPS notes that the Texas Public Utility Commission (which it says has wide experience with megawatt-mile pricing for electric transmission) is now moving away from distance-based transmission pricing. %n12%n

To bolster its arguments, TAPS has peppered its arguments with analysis by Riley G. Rhorer, a professional electrical engineer and a partner in the firm of R.W. Beck. According to TAPS, Rhorer has identified a host of theoretical problems with impacted megawatt-mile pricing:

• Large-Firm Bias. Utilities with geographically diverse generation and load will benefit from internal flow cancellations.

• Small Systems Suffer. Megawatt-mile rates, liked pancaked postage-stamp rates, tend to segment markets geographically. Small systems suffer most.

• Gaming Potential. Each transaction is priced against a base of all prior transactions, making ordering significant,