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Electric Transmission: Jury Still Out on Flow-Based Pricing

Fortnightly Magazine - June 15 1997

get an early read on how the FERC will respond. But of all the reasons for protests, the most obscure objection has risen to claim the highest profile.

In short, some of the protestors accuse Dominion Resources as acting as a "stalking horse" for the electric industry.

Dominion Resources is a holding company. It owns no transmission assets. Technically speaking, the FERC does not even have jurisdiction over Dominion Resources. %n7%n Thus, the petition asks only for a declaratory ruling that the IMM method would pass muster under the FERC's open-access and comparability policies for electric transmission. The petition does not even offer a tariff in the conventional sense. It does not give examples of actual rates, nor does the FERC have authority to force Dominion Resources to give such examples. It only presents a formula. The details would be worked out when transmission-owning utilities filed actual flow-based tariffs using some variation of an IMM method. Several protestors feel that the petition would force the FERC to rule on the IMM method without seeing a true picture of how it would affect transmission rates.

ODEC calls the petition "entirely hypothetical."

It says that Dominion Resources is seeking FERC approval for a mere theory "so that real transmission-owning utilities (em including presumably the Dominion Resources subsidiary Virginia Power (em can apply this pricing approach in real-world circumstances, without ... unwanted interference by FERC."

North Carolina EMC echoes that claim: "Dominion is unwilling to unveil the full details ... of its proposal. ... [It has] used the petition route as a vehicle for filing a rate proposal in an almost complete factual vacuum."

Yet, who can deny the logic of marginal cost pricing? As Dominion Resources explained in its petition:

[P]rices are based on actual system impacts and distance of flow. ... [T]ransmission owners [get] an economic basis for making needed system improvements (em a basis they often lack entirely under the traditional contract path approach.

Overall, the Dominion Resources proposal would appear to follow today's general consensus that marginal-cost pricing sends more accurate pricing signals than embedded-cost methods.

The Method

This small space cannot possibly do justice as a complete explanation of the impacted megawatt-mile pricing method proposed by Dominion Resources. Suffice it to say, however, that the IMM method would operate very much like the way IBM programmed its "Deep Blue" computer to plays chess against world champion Garry Kasparov. Computers would receive a proposed power transaction, weigh all conceivable consequences and then set a transmission rate accordingly.

Under the IMM method, computer software would assign a separate value for every line segment on the transmission grid, based upon voltage capacity and reproduction cost. %n8%n Computers would then analyze line loading on the transmission grid immediately before and after every single transmission transaction, depending on the category of service requested (e.g., firm or nonfirm). %n9%n Every change in line loading would be recorded, on virtually every line segment, weighted by the length (mileage) of each individual segment. The sum of these changes would reflect all total impacts on the grid imposed by