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Transmission Upgrades: Who Pays?

Transmission Upgrades:
Fortnightly Magazine - November 2004

system's production costs). These computations are shown on Figure 5, lines 16-18. While one might expect this to be the case in a vertically-integrated utility, it is comforting to know that this approach arrives at a familiar result using LMP mathematics. In fact, one carefully examining the equations in Figure 1 would have predicted this result.

After a Congestion- Reduction Project

One may now examine the same one-hour period with one change: implementation of a project to reduce congestion. This project might be the addition of a phase-shifting transformer or a new or upgraded transmission line to add redundancy (new) or to increase its capacity (upgrade). 8 While the loads are the same as before, the generation dispatch has changed, reducing costs. Although total losses would be slightly reduced (thereby reducing the generators' collective output), they are assumed to remain the same in this example. The results are shown on Figure 6, along with comparable tables showing the impact on marginal loss credits (Figure 7), FTR revenues (Figure 8), and RTO revenues and payments (Figure 9). 9 As one might expect, the congestion-reduction project reduced costs: The zonal LMP decreased from $24.92 to $23.81/MWh and total production costs declined from $4, 910 to $4, 516, or $394. In a vertically integrated utility, this reduced production cost would measure the entire economic benefit of the congestion-reduction project. However, if generation is independently owned, their economic gains or losses they experience may not flow back to the customers. The change in net revenue for each generator will determine which generators benefit or lose from the congestion reduction project.

Winners and Losers

Figure 10 shows the project's benefits to the load and to each generator, and Figure 11 shows this data graphically. As noted previously, if this congestion-reduction project were implemented in a vertically integrated utility, the measure of benefits is the change in production costs, or $394 ($4, 910 to $4, 516). A vertically integrated utility would be expected to compare the revenue requirements of implementing the congestion-reduction project with the fuel (and purchased power) savings forecasted over some future period. However, in an RTO with deregulated generation, the benefit from the perspective of the load is only $193.08. In this simple example, Generators #1 and # 3 increased their net revenues (or profits before taxes) by $185 and $178.67, respectively, while Generator # 2 and # 4 lost $137.75 and $25, respectively.

Cost-Allocation Implications

Consider an RTO like the Midwest ISO. It serves 11 states, three of which (Illinois, Michigan, and Ohio) have deregulated. The remaining states have traditional vertically integrated utilities. The Midwest ISO is in the process of trying to define the proper "benefits" measures for economic transmission upgrades as well as an equitable means for allocating costs to customers from such upgrades. In the Midwest ISO as well as other RTOs, the resolution of the issue is still a work-in-progress.

This example in this paper raises policy issues that all stakeholders (loads, generators, and state regulators) should consider in the Midwest ISO, as well as in other RTOs where there