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Long-Term Transmission Rights: A High-Stakes Debate

The absence of long-term transmission rights could exclude potential competition—and cause higher electricity costs.

Fortnightly Magazine - March 2006

creating transmission rights beyond those supported by existing physical transmission networks, the debate over the responsibility for guaranteeing transmission rights is limited to the narrow question of who pays for any shortfalls in congestion revenues relative to the nominal values of transmission rights. The suggested solutions have included: issuing quantities of transmission rights that are expected to be significantly less than congestion revenues; 30 issuing only short-term transmission rights, so as to minimize potential errors in forecast transmission system capabilities; 31 prorating downward the payments to transmission rights holders when shortfalls occur; 32 and “socializing” the shortfalls by recovering them from all load. 33 This is a debate over how to divide up a pie of a fixed size, rather than over how to make the pie bigger.

How Should the Transmission Rights Pie Be Divided?

The debate over divvying up the pie involves at least three major questions. First, should transmission rights be given away for free (“allocated”) to certain transmission customers, or should they be auctioned? Second, if the rights are given away for free, who should be the lucky recipients? Finally, how should transmission rights be allocated among transmission rights of different durations ( e.g., short-term versus long-term rights)? The answers to these questions involve assertions about (among other things) the different rights of old versus new customers, the desirability of supporting some generating technologies over other technologies, and the necessity of LTTRs. Midwest Stand-Alone Transmission Cos.—a group of companies with common interests that often join together in filings at FERC—point out the sterility of this debate:

If an underlying transmission access problem is not corrected, then the award of FTRs of a longer duration has the effect of shifting risk over time among transmission customers and/or market participants. … It would be vastly more desirable to ensure that transmission capacity expands to keep pace with the needs of all customers, rather than merely deciding which entities bear congestion-related risks. 34

Who Is Responsible for Transmission Investment?

The problem of offering LTTRs is, at its root, a problem of determining how the transmission system will expand over time, how generation can get built in the right places, and who will pay for those investments. Everyone salutes the flag of building more transmission, 35 but there is no consensus about who should be responsible for actually building it nor about how transmission investors should recover the costs of construction.

The fundamental problem is that power industry restructuring has occurred in a fashion that, in most regions, has left a vacuum of responsibility for the long-term management of transmission congestion, particularly for transmission investment. RTOs generally take responsibility for assuring construction of “reliability upgrades” to the transmission system; but they have been reluctant to exercise leadership in the con- struction of economic upgrades that supposedly can be pronvided by the market. PJM has been quite forthcoming in admitting the failure of its policy with respect to economic upgrades:

Our economic planning process has not been successful to date with respect to stimulating independent development of transmission projects. Only five transmission