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FERC should consider a two-part tariff to boost transmission investment.
Fortnightly Magazine - October 1 2003

price hikes to pay for the investments.

We propose a more realistic goal: The amount of loss and inconvenience from cascading failures should be no greater, averaged over a decade or so, than the loss and inconvenience due to natural hazards such as ice storms.

Standard reliability indexes such as SAIFI (the system average interruption frequency index, or number of outages per year per customer) show that the U.S. system is half as reliable as that in Britain. 5

There is no mystery as to how we could make our system more reliable: Add more generation, and transmission and distribution lines to supply the load if a unit fails, as well as adding ancillary services at critical points and implementing modern automated controls.

Despite the demonstration that these measures can increase reliability, the United States has opted for lower-priced, less reliable power. Does it make sense to spend more to prevent an outage due to cascading failures than an outage due to storms?

FERC and state regulators must address the implications for the grid in light of the deregulation of generation. Peak load congestion should be managed by levying a charge when the grid is congested; locational marginal pricing (LMP) is currently in use in some areas and is adequate for signaling users to curtail transmission during congestion.

Some analysts have hoped that an LMP congestion charge would provide both the information and incentives to guide transmission investment. Unfortunately, LMP provides precisely the wrong incentives to investors. The owner of the transmission line that was paid through only LMP would never desire to expand capacity. Any capacity expansion would reduce the LMP so that the owner would receive less revenue.

Furthermore, LMP does not give a good signal as to how much money should be invested in new capacity, or even where the capacity is most needed. Experience has shown that the line with the highest LMP may not be the tightest constraint in the transmission network. Very small changes in load or generation lead to large variations in LMP.

The funding to maintain the current transmission grid and encourage new transmission lines should come from a charge based on the number of megawatt-hour-miles (MW-hm) of transmission to get electricity from generator to customer. The transmission owners must be able to earn a rate of return that makes their investment attractive, given the uncertainty of the investment.

Locational marginal pricing (LMP) charges should be used to optimize flows in the existing system, since they provide the proper incentives to customers and generators not to ship power over already-congested lines. However, the LMP charges should not be paid to current owners or new investors; locational marginal prices should not guide investment, because they do not always give incentives to invest in the proper locations.

Locating new lines or expanding the capacity of existing lines requires an analysis of current and expected future locations of generators and customers. Each part of the transmission grid interacts closely with each other part, so a systems analysis and decision, as well as incorporation of stakeholder concerns, is