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Transmission Upgrades: Who Pays?

Transmission Upgrades:
Fortnightly Magazine - November 2004

is a mix of vertically integrated and deregulated utilities. 10

    1. The revenue requirements for new transmission facilities are currently recovered in the transmission rates charged to customers (i.e., the load in this example). If generators benefit from an economic upgrade, should they be assessed a charge that is proportional to their benefits? If so, how should such a charge be calculated and levied? What about generators who lose net revenues as a result of the upgrade? Should they be compensated?

    2. If the answer to charging or crediting generators is "no" because some of the generators are deregulated, should the RTO benefit/cost criteria for implementing economic upgrades only measure the benefits to those loads that will pay the cost? Assume that a "load-only" benefit measure is adopted in an RTO because of the presence of deregulated generation. 11 Since loads only receive a portion of the benefits, the resulting benefit/cost ratio will be lower in a deregulated model than in a vertically integrated regulatory environment. To illustrate, suppose that the cost of the upgrade in the example is $100, and that the RTO has adopted a minimum acceptable benefit/cost threshold of 2.5. With a "load-only" RTO test, the benefits are $193.08, resulting in a B/C ratio of 1.93. In the vertically integrated environment the benefits are $394, resulting in a B/C ratio is 3.94. The project would fail the RTO test and not be constructed. However, it would probably be built in a vertically integrated environment since the B/C ratio is much more favorable.

    3. Given that the "benefits" from an economic project can vary among any subset of market participants, should any market participant be allowed to voluntarily self-fund (i.e., participant-fund) economic transmission projects that fail the RTOs economic criteria but that meet its own criteria? The answer should be "yes" since this approach would leave all market participants (loads and generators) with more ability to lower costs (loads) or improve profitability (generators) than in a centrally planned RTO with a minimum economic criterion. State regulators in vertically integrated regime should determine whether the RTO has left unfunded additional cost-effective economic transmission projects that its utilities should fund.

Participant funding will give stakeholders an additional method of funding economic transmission upgrades. Projects that meet a "load-only" benefits test can be planned and implemented by the RTO, with their cost recovered in zonal rates. However, with participant-funding, market participants can work with the RTO to plan additional upgrades that meet their own economic criteria. They can elect to participant-fund projects that are beneficial to them and thereby not impose the economic cost of the project on zonal rates.


  1. See ERCOT draft dated July 12, 2004.
  2. See 18 CFR, § 35.34 (j) (1)
  3. See 18 CFR, § 35.34 (j) (7).
  4. Lower prices are beneficial for loads, but higher prices benefit generators.
  5. Order No. 2003 (104 FERC 61,103), paragraph 28, discusses participant funding. The default "crediting with interest" approach is in Order 2003-A (106 FERC 61,220) in the Standard Large Generator Interconnection Agreement, Section 11.4. Under this approach, the transmission customer receives