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Transmission Upgrades: Who Pays?

Transmission Upgrades:
Fortnightly Magazine - November 2004

in an RTO

Figure 1 shows the flow of market money from those who pay for service to those who provide service. Excluded from the diagram are:

  • Payments to the transmission owners for network service;
  • Monies collected for through-and-out service, which the RTO collects and distributes to the transmission owners; and
  • Payments by the load to the RTO to cover the operational and administrative costs of the RTO.
  • No specific RTO is assumed in Figure 1. However, the model assumes that marginal losses are included in the LMP, as is the practice in the New York ISO and ISO-New England, and as is proposed in the Midwest ISO and PJM.

    The basic LMP equation is represented as the sum of various price components:

    LMP (at bus "i") =

    LMP(at the reference bus) +

    LMP(congestion at "i")+

    LMP(marginal losses at "i")

    This mathematical LMP framework will not be discussed here. The reader is referred to publicly available descriptions. 6

    A Congestion-Reduction Example

    Assume a simple RTO system with four generators as the sources and five load buses as the sinks. Figure 2 shows the system for a one-hour period before a congestion-reduction project is implemented. For simplicity, assume that the Ancillary Service Revenue and Ancillary Payments are zero (i.e., ignore their impact). Figure 2 shows the generation and load, as well as LMPs at each bus for the one-hour period. By focusing on a one-hour period, the mechanics of the calculation of benefits are more easily demonstrated. For simplicity, this RTO has only one load zone. The term "Generator Variable Costs" includes fuel costs, variable operation and maintenance expenses, and emission allowance cost.

    complete the economic picture for this one hour, the following will be calculated:

  • Marginal loss credits
  • FTR revenues
  • Marginal loss credits represent the over-collection of monies for losses: they represent the difference between the payments from the load (excluding congestion) and the revenues paid to the generators (excluding congestion). Figure 3 shows the marginal loss credits for this hour. As a practical matter, these would not be settled hourly. Excluding congestion-related payments, loads paid $252.00 more to the RTO than the RTO paid to generators. This overpayment is returned to the load.

    FTR revenues represent payments to FTR holders. FTR revenues represent the difference between congestion payments by the load and congestion revenue paid to the generators. The total FTR revenue that the RTO will collect is shown on Figure 4. Like marginal loss credits, these revenues belong to the load. 7 Likewise, FTRs are not settled hourly as they are in this example.

    One may now calculate the revenues and payments for generators and loads in this RTO. Figure 5 shows the tally. If the generators and loads in this example are part of a vertically-integrated utility, the net generator revenues of $928.25 in this example (= $5,838.25 - $4,910.00) are "owed" to the load. If these net generator revenues are subtracted from the net load payments of $5,838.25, the net cost to serve the load is equal to $4,910.00, or the sum of the generators' variable costs (the