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
are not associated with non-local generators. Incorrect locational pricing signals are given for the location of new generation facilities. In this PX-only case, end users are not contractually linked to suppliers and all contribute to the recovery of transmission revenue requirements on the same average $/kWh basis.
PX with CFDs. Next, assume an end user enters into a contract for differences with a non-local generator. If the end user pays the same single access fee regardless of where the power is generated, then a generator would benefit from being non-local (lower wages, taxes and business costs, inexpensive fuel and less-stringent regulation). The non-local generator is given a competitive advantage and can under-cut the local generator's price. The CFD financially links the non-local supplier to the load. This supplier avoids paying its share of the full cost of delivery in the access fee charge.
PX with direct access. In a world with direct physical access, the subsidy becomes even clearer. Assume two functional transmission networks, local and regional. Assume transmission revenue requirements of $100 million (em $20 million related to regional transmission and $80 million related to local transmission. Forecasted sales total 25 billion kWh (em 10 billion kWh related to non-local generation and 15 billion kWh related to local generation. Assume the entire load is local. A single access fee paid only by end users would be 4 mills ($100 million/25 billion kWh). The two-component access fees would be 2 mills ($20 million/ 10 billion kWh) for non-local access and 3.2 mills ($80 million/ 25 billion kWh) for local access. The single access fee forces customers using local generation to subsidize customers using non-local generation by 1.2 mills (2.0 + 3.2 - 4.0). As the link between end user and generator strengthens, the subsidy related to a single access fee becomes clearer.
In the short run, our proposal to charge generators with distance- and flow-based regional access fees will not influence current operational decisions. The regional access fees are assigned to the generators as a lump-sum payment, irrespective of current output.
Similarly, the regional access charge should not influence the PX bid price in the short run, but could help level the field between local and non-local generation.
In Southern California, most local generation is either gas-fired or nuclear. With gas-fired generation dispatched as the marginal resource during peak and shoulder periods, gas-fired resources set the MCP in the PX. Once the decision to pay the regional access fee is made, the fee is no different from any other fixed cost. If local gas-fired generators try to pass on the cost of the regional access fee in their PX bid price, they may not be dispatched. The incentive remains for the local generators to bid their marginal cost of generation.
Since non-local generation consists mainly of lower marginal-cost resources like coal, hydro and nuclear, it does not set the PX price. These resources are infra-marginal. Thus, if they are paid the PX MCP, they receive a contribution to their fixed costs. The regional access fee paid by the non-local generators