A spate of newly announced deals, including Allegheny Energy’s proposed $9.27 billion acquisition of FirstEnergy, plus PPL’s takeover of E.ON US for $6.73 billion, has left the utility industry...
The Myth of the Transmission Deficit
do not cause a reliability problem. 1
When TLRs of level 5 and above are examined, there are few calls for relief. For example, in 2001 there were only 28 calls in this group, 27 in 2002, and 34 so far in 2003. 2 It should be understood that these TLRs affect a minuscule percentage of all lines, curtail a minuscule percentage of transactions, and occur a minuscule percentage of the time. In addition, the bulk of the level 5 and above TLRs occurred on the systems of just two reliability coordinators, the Midwest Independent System Operator and the Southwest Power Pool. These insignificant events do not imply a need for an enormous increase in transmission lines across the entire country.
Hirst also points to transmission congestion costs as a symptom of an ailing transmission system, citing a study that reports congestion costs in 2000 to be $800 million in PJM, the New England Independent System Operator, the New York Independent System Operator, and the California Independent System Operator. EEI also claims there is "tremendous congestion" throughout the country.
These claims reflect a fundamental misapprehension of the import of congestion. Congestion occurs whenever lower cost energy does not reach all potential load-thus creating a price differential between area A, the exporting area, and area B, the importing area. There is, in that sense, tremendous congestion all across the country as price differentials abound. Some of that congestion is caused by physical constraints of the system, but some is not physical at all (arising from non-integrated and inefficient dispatch of electricity, pancaked transmission rates, etc.).
Congestion costs do not equate to reliability problems. Assume there is coal-fired generation in area A that from time to time exceeds demand in area A, but where the excess cannot reach area B due to a transmission constraint. Assume also that area B has plenty of oil-fired generation (no reliability problem). This is an example of congestion cost-a simple price differential between areas A and B-but no reliability problem. 3
Only regional transmission organizations (RTOs) report congestion costs as such, which gives rise to the common misconception that creating an RTO creates congestion. Of course, creating an RTO that reports congestion costs does not create congestion but only makes known what was not known before and assigns the additional (marginal) cost to those areas that require the higher-cost energy. 4 This identification of congestion costs allows for efficient responses. The response can be to do nothing (if the solution is more costly than the congestion), to build more transmission, to build more generation, or to reduce demand.
With this background, we can see that neither TLRs nor congestion costs support a conclusion that there is too little transmission capacity. The relevant TLRs are simply too rare in occurrence and limited in scope to translate into a generic need for more transmission. The reported congestion costs are only price signals that enable efficient responses.
- It can be contended that increased non-firm TLRs simply reflect more aggressive sale of available transmission capacity, and thus greater use of the