In thinking about transmission pricing for a competitive electric industry, we should remember that the fundamental objective of competition is to increase economic efficiency. Improved economic...
A West Coast View: The Case for Flow-Based Access Fees
collect expenses, depreciation and the regulated return on investment. Fixed costs related to transmission were treated historically as common costs (em costs not susceptible to attribution to an individual service. %n5%n
Today, however, the transmission grid is no longer just a black-box conduit for power supply to end users. Instead, the transmission grid is a complex transportation system for electrical power for end users that also provides the competitive generation market with access to various load centers. With its unbundling Order 888, the Federal Energy Regulatory Commission has identified transmission pricing as susceptible to manipulation by transmission-owning utilities to favor their own generation. To realize its goal of creating a fully competitive market in electric generation, the FERC has recognized the need to separate transmission-related costs from generation costs. Access, then, is no longer a common cost.
In both a financial and physical sense, the existing transmission system is now linking two sets of transmission users: end users and producers. It is important to see how these two sets of customers use the system. If transmission provides functionally different services, then each set of customers should be charged based upon their different usage. The problem now evolves into one of defining the "bright line" separating categories of transmission customers on a cost-causation basis.
With few exceptions, however, electric power transmission does not occur over discrete paths but rather diffuses throughout the network. For example, Figure 1 shows the incremental flow distribution in California for a 100-MW injection of power at Mohave in Nevada, supplying a 100-MW increase in WEPEX's wholesale load in California. Most of the 100-MW injection is transmitted directly to the load via California's utility interconnections, but 23 MW is transmitted to the load via loop flow north, south and east through the remainder of the interconnections to the WSCC system.
Looking at the historical development of power systems in the U.S., one finds that local utility power systems developed as independent entities with their own generators feeding their own load over their own lines. It was not until the late 1950s that the utilities in the WSCC developed interconnections involving long, extra-high-voltage lines. These connections offered many advantages, including continuity of service, reserve sharing and economy interchanges. The hypothesis appears obvious: higher-voltage lines serve a regional function (interconnection); lower-voltage lines serve load, a local function.
The principle of cost causation suggests that end users pay local transmission costs and producers pay regional costs. What's left is identifying those lines having local or regional functions.
Two-Tiered Pricing: The Local/Regional Split
This local-regional split between transmission facilities helps resolve the question of who should pay what fees to gain access to the grid.
For power producers, who use the regional grid at high voltage levels, a measure of usage based on MW-miles offers a consistent method to allocate revenue requirements and access fees. A simple allocator for regional revenue requirements can be constructed by using the ratio of a generator's regional MW-miles relative to total system regional MW-miles. In this way, each generator can be assigned a lump-sum regional access fee.