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

Fortnightly Magazine - February 15 2000

some form of marginal cost-based pricing of losses. The exception is ERCOT, which is switching from distance-based, megawatt-mile pricing to uniform postage stamp pricing.

The great divide among the ISOs lies in whether they manage transmission congestion through price-based mechanisms. This divide mirrors the history and future of the power industry's restructuring. Historically, the regulated power industry found it necessary for each major service provider to have legal rights to the physical assets that provide service. Extending this historic practice, some ISOs manage transmission congestion by curtailing customers' use of transmission facilities according to the access priority assigned to each customer. In a competitive industry, by contrast, well-functioning markets should virtually always allow market participants to obtain the commodity they want on the spur of the moment, though sometimes at a high price. The differences in how the ISOs handle congestion reflect differences in opinion about how well market mechanisms can assure real-time power system reliability.

The differences in the methods for setting transmission access charges are relatively slight. Most ISOs began with access charges that, for each customer, depended upon the costs of only the transmission owner (TO) that served the customer. All ISOs but one are moving toward access charges that, for all customers, will depend upon the costs of all TOs in the ISO-controlled grid. All of the ISOs levy access charges on loads, not generators, and these access charges depend upon either the customer's total megawatt-hour consumption, their coincident peak megawatt loads, or their megawatt load reservations.

Line Losses: Pricing Methods

and Effects on Dispatch

There are three basic approaches by which the ISOs price (or plan to price) transmission losses: marginal cost pricing, postage stamp pricing and scaled marginal cost pricing.

Marginal cost pricing charges each consumer (and generator) for the cost of the change in losses that accompanies a change in their consumption (and output). New England and PJM intend to estimate the marginal costs of the losses that attend small changes in consumption at each bus.

New York has implemented an approach by which each consumer pays the cost of the marginal losses associated with a small percentage increase in all of the loads in its zone, while each generator pays for the marginal losses associated with power produced at each bus. Because the marginal costs of losses may exceed consumers' average costs, their payments for losses may exceed the total costs of losses. When there are such excess revenues, New York returns them to all customers as a uniform per-megawatt-hour credit against its scheduling, system control and dispatch service charges.

Postage stamp pricing charges all consumers for the average cost of the whole power system's losses. "Average cost" is the total cost of losses divided by total system load (including power exports). All load, regardless of location, pays the same per-megawatt-hour price for transmission losses, though this price may be different during on-peak periods than during off-peak periods. The postage stamp approach initially is being followed by New England, PJM and implicitly California, and is about to be adopted by ERCOT.

Scaled marginal cost

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