[BETA] Fortnightly

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When we build transmission and spread the costs, we lose the market signal of the real cost of power.

As we move beyond the "whether" to the "how" of large regional transmission organizations, many critical decisions appear in defining and implementing the standard market design. One theme that recurs is the type and extent of "socialization" of costs of infrastructure investment and market operations.

Federal Energy Regulatory Commission Chairman Pat Wood recently acknowledged the debate in the context of transmission interconnection: "Frankly, I haven't made up my mind long-term on this issue of socializing (transmission-interconnection) costs...." ¹ Similar matters arise in other areas of pricing and cost allocation.

A standard argument for socializing-by spreading costs across everyone, rather than assigning costs to those who benefit-is that the cost of interconnection, or transmission expansion, or congestion management, or ancillary services, or whatever, is small compared to the total cost of electricity. In the interest of so-called simplification, in order to move forward with the broader benefits of a restructured electricity market, the proposal is to treat the cost like "peanut butter." Spread it out in small amounts, so the argument goes, and everyone would win in the long run.

It is part of the job description of regulators to reserve judgment until a decision is required. But before moving much further with electricity restructuring, it would be best to establish the principles that would guide the decisions about socialization. To do so, it is important to recognize what is implied.

Commissioner Nancy Brockway of New Hampshire captured the issue when describing the debate about building transmission to provide lower cost power in Boston. This likely would increase the price of power in New Hampshire, a market impact. And going further by expecting New Hampshire customers to accept their share of the socialized cost of the new transmission, this was not the market she was promised. Good point.

There are at least three issues bundled in this conversation. First, there is fairness. This is a familiar concern for regulators, and part of their job is deciding what is equitable or when the larger benefits overwhelm the principle of assigning costs to beneficiaries. Second, there is the dispute over the supposed magnitude of the costs. Remember, electricity restructuring was motivated in substantial measure by unhappy regulatory experience with socialized costs that turned out to be larger than expected.

As important as these two debates are, perhaps the most significant concern with socialization is in the third impact that follows as we slide down the slippery slope of further regulation. By its very nature and design, socialization of costs destroys the signaling effect of market prices. This is a part of the compromise of market principles identified by Commissioner Brockway.

When we build transmission and spread the costs, we lose the market signal of the real cost of power in Boston. Another way to socialize is to aggregate into zones rather than price according to the locational impacts of congestion. Prices then become administrative tools for collecting money, but they no longer guide the decisions