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Commission Watch

The case for participant-funded transmission.
Fortnightly Magazine - January 1 2003

own terms in the "wrong" areas, to take advantage of locational price differentials for the energy commodity. With rolled-in pricing, says Edelston, generators avoid coming to terms with the locational price disadvantage inherent in building generation far from load and forcing costly grid upgrades. That problem is simply socialized, at no added cost to the merchants.

The Technology Misfit

In the course of the debate at FERC over the SMD, perhaps the most telling argument against traditional, rolled-in transmission pricing, and in favor of a privately funded grid, has come, ironically, from the commission itself.

The argument centers around the new generation technologies-fuel cells, photovoltaics, and all manner of distributed generation alternatives. What happens if RTOs impose top-down planning, socialized costs and rolled-in rates on a new "generation" of utilities that instead dare to cast their lot with distributed generation (DG) technology, in an effort to avoid paying for costly grid upgrades? Will traditional rate-making force them to pay anyway?

In one conversation, FERC staffer Dick O'Neill, from the commission's Office of Markets, Tariffs and Rates, cross-examined TRANSLink CEO Audrey Zibelman, asking her how a small municipal utility would fare if it chose a high-tech DG strategy.

Zibelman had no ready answer for FERC, other than to concede that the small muni might have no option to escape paying higher grid charges, except perhaps to just "cut the wires." O'Neill countered that traditional rate policy for transmission would end up discriminating against innovative generation. (see Sidebar)

The issue, again, boils down to a simple truth. Generation and transmission are interchangeable-so much so that a policy applied to one (merchant competition for generation) must be repeated for the other to avoid arbitrage and market distortions.

In the end, the decision may come down to FERC Commissioner William Massey, now one of only three voting commissioners. If so, it appears that proponents of participant funding can count on him as a member of their camp.

"When I look at this issue," says Massey, "I look at it in the context of what I consider to be the centerpiece of standard market design, which is locational marginal pricing.

"It seems to me that all the working parts of the SMD ought to fit together in some cohesive way. And if the centerpiece is LMP, it seems to me that some sort of participant funding is more consistent with that."

FERC Economist Dick O'Neill debates TRANSLink CEO Audrey Zibelman on the merits of regulated pricing for transmission in an age of competitive generation.

NOV. 6, 2002

O'NEILL: Can I ask a question? I mean, suppose I'm a large muni [municipal utility] and I've dediced that I want to go Green. And so I make a huge investment in distributed generation and photovoltaics … and somebody says, we're going to build some transmission for your benefit, and I say, you known, I don't need it. I've put local generation in.

ZIBELMAN: Well, the question is, if you're that muni, have you just dropped of the regional tariff?

O'NEILL: No, but I want to be on