Commission Watch

Solving the dilemma.

The rationale from the Federal Energy Regulatory Commission (FERC) for eliminating through-and-out (T&O) rates while simultaneously imposing a Seams Elimination Charge/Cost Adjustment/Assignment (SECA) is an acknowledgement that FERC is conflicted on a fundamental economic principle: regional transmission organization (RTO) loads use the transmission systems of exporting RTOs; therefore, it is correct for importing customers to compensate exporting RTOs for the use of their transmission systems. It is unfair for importing loads to get "free" transmission service from neighboring exporting RTOs. At the same time, FERC is convinced that T&O rates have a negative impact on electricity markets. As a result, FERC wants to eliminate direct T&O charges while at the same time compensating exporting transmissions systems through inefficient uplift charges.

This view was first expressed by FERC in its Notice of Proposed Rulemaking (NOPR) in 2002. ¹ FERC proposed eliminating T&O charges, instead charging all customers in an importing region for the exporting region's embedded transmission costs associated with imports. This would be done on an after-the-fact basis based upon the amount of power the region imported. But customers-not regions-import power.

To illustrate, suppose a customer in an RTO has purchased power to save $1.00/MWh in power costs. The exporting region's transmission provider would be paid its embedded transmission cost (say $2.00 per MWh) by all customers in the importing RTO. The cost of one customer's import decision ($2/MWh) would be socialized and disconnected from the purchase decision that caused that cost. How is that economically efficient?

The SECA mechanism is similarly inefficient. It will mean that customers who have historically imported power will continue to bear the cost of past T&O charges during the transition period, whether or not they import power during the transition period.

Is this just and reasonable? Administrative surrogates for direct charges are not consistent with the principles of efficient pricing.

Fortunately, the SECA is transitional. The two-year transition period "is sufficient time for the parties to establish a permanent rate design that efficiently prices transactions for inter-RTO pricing in the PJM/MISO footprint.", ² FERC's action therefore is an interim action to a new, yet undefined, end-state. A permanent solution should also address one of the most vexing problems in pricing inter-regional power transfers: pricing parallel-path flows. In fact, in its NOPR, FERC addressed this problem with an invitation for comments:

"To the extent that the commission adopts a true-up methodology for recovering the costs of through-and-out services, should a similar pricing methodology be applied to parallel path flows? Parallel path flows are comparable because one region benefits by the use of a neighboring region's transmission system. Parallel path flows currently are resolved through cooperation. An alternative method would be to price all uses of the grid. We seek comment as to how cost impacts of parallel path flows across regional borders should be addressed." ³

The Answer: Pricing Parallel-Path Flows With T&O Rates

Methods for parallel-path pricing were addressed in the 1997-1999 General Agreement on Parallel Paths (GAPP) experiment, whose results were reported in Final Report: General Agreement on Parallel Paths