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Perspective

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

needed.

In most places, transmission will remain a regulated monopoly, but the regulators or the monopoly should have systems analysis ability, incentives to invest, and incentives to incorporate stakeholder concerns.

How To Boost Investment

To provide investment incentives, we propose that the regional transmission organization (RTO) calculate the number of megawatt-hour-miles produced by the transmission system. For example, if a customer purchased 10 megawatt-hours from a generator that is 125 miles away, that would be recorded as 1,250 MW-hm. Suppose that over a year the transmission system of an RTO supplied 32 billion MW-hm of transmission. Suppose further that cost of maintenance and repair on the lines was $200 million and that investors had to be paid $1.4 billion in interest and depreciation. Dividing the $1.6 billion in expenses by the 32 billion MW-hm, the charge would be 5 cents per MW-hm. If the average generator were 200 miles from the customer, the transmission charge would be $10 per MWh. An average charge of this nature is the economically favored solution when the marginal cost of additional service is low.

The revenue paid to transmission owners should come from this megawatt-hour-miles charge and the LMP. The entire LMP should go to this fund, unless the grid is so congested that the LMP exceeds the revenue owners should receive. If there were an excess, the funds could be used for research and development or to pay down the debt of the transmission owners. Generally, the LMP will be less than the required revenue. In that case, the additional revenue will be collected from a megawatt-hour-mile charge.

For example, suppose in the example above the LMP resulted in total revenue of $800 million. If so, the 32 billion MW-hm would have to raise $800 million, and so the charge would be $0.025 per MW-hm or $5 per MWh for a 200- mile separation between generator and customer.

Customers that bought power off-peak or in areas with a zero LMP would pay little for transmission, while customers located in congested areas would have to pay a great deal for transmission at peak demand times. The locational marginal price does not provide any investment signal, since the revenue paid to the RTO does not change.

If the RTO invested in new transmission lines that allowed more power to flow, the megawatt-hour-mile charge would allow them to get an adequate return on their investment. If the RTO, not the individual investor, determines when transmission lines should be built and which lines should be expanded, the RTO, rather than the investor, should bear the risk of bad decisions. Investors are taking little risk and should receive a return on their investment that reflects the risk level.

This two-part tariff would encourage customers and generators to locate in places with low LMP, and it would give investors in new transmission lines the incentive to build needed capacity.

Recommendation

FERC should implement this two-part tariff composed of LMP and a transmission charge to get needed investment in the transmission network, then set a rate of return that would attract sufficient