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

Fortnightly Magazine - February 15 2000

management during the next year or so.

A key feature of all the priority schemes is that there is little or no relationship between a customer's access priority and the value a customer derives from transmission service. Because of the small role of price in assigning priorities, the market participants with the firmest service, in many hours, may have lower-valued transactions than market participants with less-firm service. Furthermore, market participants often lack convenient means for trading transmission priorities. The result is that high-valued transactions can be curtailed while low-valued transactions continue.

MISO provides an example of the ways that non-price congestion management schemes are accompanied by restrictions on secondary trades in transmission rights. MISO has two particularly important restrictions that by no means are unique to MISO.

First, there are ceilings on the prices at which transmission rights can be traded. A purpose of these ceilings is to control market power, so MISO intends to eliminate the ceilings for the sellers of those rights who demonstrably lack market power. Until they are eliminated, however, the ceilings will inhibit transmission rights trades for precisely those hours when transmission is most valuable and most congested.

Second, MISO requires that the physical feasibility of serving the designated resources and loads of the transmission rights buyer be roughly the same as that of serving the resources and loads of the transmission rights seller. This seemingly reasonable restriction means that, in MISO, transmission rights are non-homogeneous commodities that must be traded on a case-by-case basis. Indeed, MISO can require that individual trades be preceded by system impact studies. Note that, by contrast, the ISOs with price-based congestion management have turned transmission rights into a homogeneous commodity that is freely traded every hour.

Transmission Access: Price vs. Value

For all the ISO markets, transmission access pricing boils down to dividing some measure of transmission system costs by some measure of transmission system use. The differences among the access charges reflect variations in how the different markets define costs and use.

With respect to costs, ERCOT, MISO and New England have access charges that basically cover transmission revenue requirements. California, New York and PJM design their access charges to recover only that portion of transmission revenue requirements that are not recovered through congestion charges. To foster retail rate stability during a transition period, all ISO markets except ERCOT initially have set different access charges for the customers of each transmission owner. However, all ISO markets (except New York) plan to move toward system-wide access charges based upon system-wide costs.

With respect to use, all the ISO markets measure transmission use according to loads (including exports), but they use different measures of load. California and New York base access charges on the customer's megawatt-hour consumption. ERCOT charges customers taking firm service according to their coincident peak loads in the summer months, and requires customers to purchase firm service to assure that aggregate transmission revenues will be sufficient to cover transmission costs. In MISO and New England, access charges for network service depend upon the customer's hourly energy load at the

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