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Commission Watch

Solving the dilemma.
Fortnightly Magazine - April 2004

Experiment, Aug. 31, 1999. 4 The GAPP experiment revealed the magnitude of the parallel-path pricing problem for both "through" and "out" transactions. 5 The experiment focused on through transactions among four companies that participated for the entire two years: First Energy, Allegheny Power Service Corp. (on behalf of its operating utilities), Southern Company Services Inc. (on behalf of its operating utilities) and Ontario Hydro. Most through transactions were subject to revenue redistribution among participants based upon how much of each transaction flowed on their system. The "through" charges collected by one company-the contract path transmission service provider-were redistributed.

The experiment concluded that under large-scale implementation, 69 percent of revenue would have been allocated to other than the contract-path provider. For "out" transactions, one week of actual transactions were monitored. For this small sample, 41 percent of the power flowed on the direct-connect interface between control areas, with the remaining 59 percent flowing on other system interfaces.

The simplicity of the revenue redistribution approach used in the GAPP experiment is that it required no change in the business format for transmission service. The contract-path provider was the seller of transmission service, charging its posted transmission rates. However, its collections were redistributed based upon flows. 6 In cases where a transmission provider was not the contract path provider, it would receive revenues based upon the flow impact of specific transactions on its facilities. In addition, the method used in the GAPP experiment could be implemented throughout the Eastern Interconnection using the NERC Interchange Distribution Calculator.

The experiment tried two revenue redistribution methods, but the final report concluded that an untried third method would work best. This method-referred to as the "1-keep" method-would work as follows:

  • The contract-path transmission service provider would retain a fraction of the contract-path revenue equal to the portion of the transaction that flowed on its system. This portion is defined as its transaction participation factor (TPF).
  • The remaining non-contract-path transmission service provider (TP) would receive the residual contract-path revenue in accordance with this formula:

[TP Transmission Rate x TP TPF) / Sum of TP Transmission Rate x TP TPF]

The example below shows how the 1-keep method would work for a hypothetical transaction where Transmission Provider B is the contract-path provider (see Figure 1).

Transmission Provider B would receive 35 percent of the revenue, corresponding to its TPF of 0.35. The remaining revenue is distributed in accordance to the formula. TPs with the lower transmission rates would receive proportionately less revenue than their TPFs (e.g., D), while TPs with the higher transmission rates would receive proportionately more than their TPFs (e.g., C).

In today's regulatory environment, transmission service providers may be RTOs (such as MISO and PJM) or utilities affected by RTOs. The method described above would work well with a mixture of providers. If the transmission service provider were an RTO, the revenues it collected would need to be allocated to its customers. For RTOs with zonal rates (such as MISO and PJM) the revenues could be allocated directly to the zones with the affected facilities. Of course, some