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Pricing the Grid: Comparing Transmission Rates of the U.S. ISOs

Fortnightly Magazine - February 15 2000

How does each region manage congestion, allocate losses and dispatch resources? Which players gain the most from each approach?

The United States now has six independent system operators, five approved by the Federal Energy Regulatory Commission and one approved by the Public Utility Commission of Texas. These ISOs present an astonishing array of similar and conflicting rules and philosophies by which transmission services are defined and priced.

This article aims to explain some of the key similarities and differences among the ISOs' transmission pricing schemes. In particular, we ask several questions:

* Pricing for Transmission Losses. How does each ISO assure that market participants pay for the power that is lost in transmission?

* Managing and Pricing Congestion. How does each ISO assure that flows over transmission facilities do not exceed the physical capacities of those facilities?

* Setting Access Charges. How does each ISO market allow transmission owners a fair chance of recovering their capital and operating costs?

* Winners and Losers. Which market participants are the relative winners and losers with respect to the ISOs' different transmission access and pricing schemes?

In the interest of brevity, we focus primarily on the real-time management and pricing of transmission services rather than on the pricing of transmission rights. We do, however, explain some of the ways in which transmission rights markets interact with real-time electricity markets.

Overview: Regions and Markets

Table 1 presents some key statistics of the six approved ISOs. All are large entities. They cover California (the California ISO), Texas (the Electric Reliability Council of Texas), a big portion of the Midwest (the Midwest Independent Transmission System Operator) and the whole Northeast (ISO New England, the New York ISO and the PJM Interconnection). [Note: Tables/graphics not included. See print copy]

The pricing methods of the ISOs are in transition. Major changes have been proposed or are in progress in the Electric Reliability Council of Texas (ERCOT), the Midwest ISO (MISO) and ISO New England, and lesser changes are occurring in the other ISOs. Table 2 summarizes key features of the ISO tariffs, dividing these features into those related to losses and congestion ("usage") and those related to overall cost recovery ("access"). Arrows (') indicate instances in which the market designers apparently intend to switch to a specific new pricing method.

Table 2 indicates no uniformity among the ISOs in the geographic scope of charges for losses and congestion management. California has zonal pricing, under which a generally uniform energy price is received or paid by all generators and consumers located within each of three geographic zones. ERCOT and New England have postage stamp pricing, under which a generally uniform energy price is received or paid by all generators and consumers throughout the ISO. MISO differentiates its loss charges by transaction. New York (and prospectively New England) has nodal pricing for generators - that is, the price can be different at every generator bus (node) - and zonal pricing for consumers. PJM has nodal pricing for everybody.

Table 2 also shows that five of the ISOs have, or are moving toward,