[BETA] Fortnightly

More than a decade ago, working at the energy laboratory at the Massachusetts Institute of Technology, the late Fred Schweppe devised a novel scheme for pricing electric transmission. His solution? Do nothing. Simply ignore transmission. Or, for those of you old enough to remember what utilities used to say about open access, "Just say node."

What Schweppe discovered, as told by Sally Hunt and Graham Shuttleworth in their recent book, Competition and Choice in Electric (John Wiley & Sons, Ltd., 1996), was that any attempt at transmission pricing is largely "redundant." The costs don't matter (except, perhaps, for line losses in a condition of zero constraints.) Instead, you simply estimate the price of generation at each and every busbar, or "node," in the grid. All else equal (no undue "market power"), the difference in energy prices at nodes A and B should give you the true price of transmission from those two points.

Schweppe eventually refined his ideas in the landmarks study, Spot Pricing of Electricity (Kluwer Academic Publishers, 1988), with co-authors Michael C. Caramanis, Robert E. Bohn, and Richard D. Tabors. That work forms much of the basis for today's "poolco" proposals. Today, a decade after the idea was born, the FERC is at last taking arguments on locational pricing for electric transmission.

A Slush Fund?

The case at the FERC involves the Pennsylvania-New Jersey-Maryland Interconnection. PJM member companies have filed an interconnection agreement, a tariff and a transmission owner's agreement governing wholesale trades in the new PJM power pool (see FERC Docket Nos. OA97-261-000 and ER97-1082-000).

At issues is PJM's "Locational Marginal Pricing" model, proposed by the so-called "supporting companies" (seven members of PJM). The LMP plan is championed by Professor William Hogan of the Harvard Electricity Policy Group, who claims it's the best way to "get the price right." As I understand the LMP idea, PJM would collect transmission charges based on nodal energy prices and then rebate those costs among buyers and sellers, reflecting ownership and market value of Firm Transmission Rights. PJM would award FTRs only to owners of generation dedicated to firm or network transmission service. FTRs would function as a price hedge--a financial right to move power from one node to another. Settlement would occur after the fact, when the pool tallies power transactions and distributes rebates. But all FTRs are not equal. Some long-distance FTRs crossing transmission constraints could prove quite valuable, earning a high rebate. On the other hand, an FTR for a generating plant serving only local load might carry no value at all.

Hogan sees no discrimination in the rebate process: "Congestion rebates are set up so that no one will be any worse off than if they had to serve their own load entirely with their own resources."

Nevertheless, many oppose PJM's LMP plan. Notable opponents include PECO Energy and the Coalition for a Competitive Electric Market, which includes a group of power marketers. PECO reportedly argues for a single-system access charge (a postage-stamp rate) with a uniform uplift fee to recover redispatch costs. CCEM advocates zonal pricing--a variant of