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Transmission Upgrades: Who Pays?
How to allocate the costs.
Efforts to establish and quantify congestion-reduction and loss-reduction projects are progressing in electric markets with locational marginal price (LMP) regimes. The Path 15 upgrade approval by the California ISO two years ago was largely based upon its economic benefits. A draft report from the Electric Reliability Council of Texas (ERCOT), , states that ERCOT will consider transmission projects that are "economically justified by the reduction of congestion and losses." 1
The regulations from FERC Order No. 2000 can be interpreted as placing the responsibility on the regional transmission organization (RTO) to initiate these economic upgrade projects:
Such economic projects usually involve transmission upgrades that relieve bottlenecks, thereby freeing up lower-cost power to displace higher-cost generation dispatched due to insufficient transmission capacity. In addition to causing higher operating costs, inadequate transmission may affect reliability if the full output of a generator is not realized due to transmission constraints.
In markets that impose a generation reserve requirement upon their load-serving entities (LSEs), generation should be deliverable if it is to be counted toward meeting the region's reliability needs. Despite the obvious link between congestion and reliability, most planners consider these separate problems. Meeting reliability standards is a "must," while reducing congestion is a "want," since it is viewed as an economic issue only. This paper will use this commonly accepted framework, viewing congestion-reduction projects as discretionary economic investments. Therefore, the major issue facing central planners and stakeholders in an RTO is: "Who should pay for the cost of an economic upgrade?"
In the absence of participant funding, cost-allocation is a critical issue in regions that use zonal (a.k.a., "license-plate") rates. The "who pays" question becomes, "Which zone(s) should be allocated a portion of the project's revenue requirements?" True participant funding leaves decisions on economic upgrades to the marketplace: Any entity may self-fund an economic transmission project in return for the incremental financial transmission rights (FTRs) created by the project, as well as the lower (or higher prices) resulting from the project. 4 Zonal rates are not affected since the funding for the project is never included in any zone's revenue requirements. Some markets have imposed participant funding on new generation interconnections, thereby providing incentives for new generators to consider both the transmission cost and congestion impacts of their siting decision. PJM requires new generators to participant-fund their related network upgrade costs. Order No. 2003 permits participant funding in an RTO as an alternative to its "crediting with interest" policy. 5
However, for non-interconnection related transmission projects targeted at congestion or loss reduction, the issue of who should pay is still being addressed in RTOs. The obvious answer is that "beneficiaries" should pay. However, the complexity of LMP markets, coupled with deregulation, has made this question a difficult one to answer. This paper addresses this issue by examining the impact of a hypothetical congestion-reduction project on generators and loads from two perspectives:
When the generators and loads are part of a vertically-integrated utility; and When the generators are independently owned in a deregulated environment.
The Flow of Money