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Public Power & RTOs: How To Avoid Making Swiss Cheese

Several issues need to be addressed before municipals and co-ops participate significantly in regional transmission organizations.
Fortnightly Magazine - August 2002

Pricing vs. State Mandated Universal Rates

A further problem for small utilities of any sort can result from the unintended consequences of the commission's favored locational marginal pricing (LMP) methodology for managing transmission congestion. FERC favors LMP largely because it conveys a price signal regarding the cost of generation in particular locations, so that customers in high congestion areas pay more for transmission, and generators who site plants inside constraints receive higher payments. As FERC noted in its working paper: 6

Market design flaws are visible in every regional electric market today under the existing tariff. These flaws are allowing operational problems such as the "socialization" or "uplift" of congestion management prices across all customers in a region, which obscures the potential for price signals to indicate where new generation, demand response, or transmission is needed.

However, most state retail rates are "universal;" all customers located in the same IOU's service territory face the same rates, with class variations for customers' character, size, voltage, and load shape, but not location. Consequently, IOUs socialize the locational transmission costs by spreading them evenly across their entire service territories, blunting the demand-side price signals that LMP is intended to provide.

More seriously for municipal and cooperative entities, the conflict between LMP and state-mandated universal rates causes LMP to have a disproportionate negative impact on small entities. For example, picture twin cities located in a transmission-constrained load pocket. City A is served by the local IOU, as are many areas outside the load pocket. The residents of city B take service from a municipal utility located entirely within the load pocket. Under the state universal rate policy, the increased congestion costs incurred by A's customers are spread to all of the IOU's rate base, in congested and non-congested areas alike. While everyone will pay a slightly higher rate, A's citizens will not see a large increase. In contrast, B's inhabitants have no choice but to absorb the entire increase due to congestion costs. Even if the municipality is subject to state regulation, as a local entity it has no other customers with whom to share the costs. B's customers thus see a comparatively large increase. Small utilities in congested areas have little incentive to participate in RTOs if the congestion management systems will disadvantage them this way.

FERC has an obligation to recognize the multi-jurisdictional context in which its policies play out and ensure that they work, without causing undue discrimination in those contexts. Notwithstanding the academic case for LMP, it makes little sense to impose LMP if its goals will not be achieved because state policies pull in the opposite direction. The commission will have to examine the true impacts of its policies in the jurisdictions where they will be applied, to make certain that hidden disadvantages do not undermine RTO participation.

Municipals & RTOs: How to Divvy Up Operational and Planning Issues?

Governmental utilities who are considering placing their transmission facilities under RTO ownership or control also face the fact that transmission is difficult to extract from municipal utilities' other functions. Functional disaggregation has