Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Gen Interconnection: Comparability or Common Sense?

Why power plants should pay for grid upgrades.
Fortnightly Magazine - September 15 2002

upgrades and expansions.

Historically, these costs have been socialized (rolled into the embedded cost of transmission) and collected from ratepayers. If this policy continues, the RTO (regional transmission organization) will require payment for network upgrades and bill the cost through transmission rates. In essence, generators will be able to make consumers pay for costs that flow from siting choices. Over time, as congestion increases, generators expect that the RTO or the existing transmission owners (TOs) will expand the transmission system and eliminate the congestion-again, at ratepayers' expense.

Is this the result that FERC wants?

Certainly, the time has come for a thoughtful, coordinated, efficient, and fully participatory siting process. We need to know who pays for the transmission grid beyond the point of interconnection:

  • Who pays to maintain system reliability?
  • Who pays to add capacity to the grid to accommodate the full output of the new plant?

FERC, in creating RTOs, must recognize that generation siting is an integral element to ensuring efficient electric transmission planning and investment. At a minimum, FERC interconnection policy should mesh well with its vision for a standard market design (SMD) for wholesale power transactions. 4

SMD supports transmission congestion management based on locational marginal pricing (LMP) and each node is associated with full marginal transmission losses. These elements of SMD provide market participants with the short-run marginal cost price signals of using the transmission system. They provide market participants with the operational costs associated with different locations on the grid.

The Current Policy

Much of the FERC Notice of Proposed Rulemaking on Interconnection Policy (NOPR) is geared to ensure comparability between merchant generation and generation owned by transmission owners. This feature reflects FERC's desire to prevent alleged interconnections abuse, where vertically integrated utilities charge higher interconnection costs for merchant generation than they charge themselves.

If one were to accept FERC's premise-that comparability is the paramount concern-then, yes, one might indeed favor FERC's current interconnection policy. But other factors also warrant consideration.

Under its current policy, FERC requires the generator to pay all interconnection costs up front, but then it is given a credit on its Open Access Transmission Tariff (OATT). In essence, the generator is fully reimbursed for all upgrades except for the generation tie, i.e., the facilities required to connect the generator to the grid. Comparability, when TOs also own generation and are not in a RTO, is ensured by simply removing reliability and deliverability network facilities' costs from the interconnection mix by having the TO and ratepayers ultimately pay for all network upgrades.

However, as discussed above, this solution is an inefficient policy in the new paradigm of RTOs and LMP. If interconnection costs associated with network facilities are socialized (rolled into the existing rate base), the locational signal is limited to only the costs of facilities used to tie into the network. This policy will lead to inefficient siting decisions.

Instead, by directly assigning network upgrade costs to the generator, the RTO can send the appropriate long-run marginal cost locational signal to the generator.

To see what that would mean, recall our example