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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

projects have been submitted into the interconnection queue as a direct result of the economic planning process and each represents minimal facility upgrades. In short, while the economic planning process is sending out useful information to developers, the revenue streams and the related level of certainty available through the interconnection process do not appear, at least so far, to be sufficient to promote the development of independent transmission projects. No significant projects have been proposed through the process to date. 36

PJM understands that, to get the economic upgrades built, it needs to reform its planning process:

We are approaching a replacement plan for aging transformers as if they were owned and operated by a single company. We are looking to apply a single set of criteria for determining which transformers need to be replaced across the whole market rather than continuing to have each transmission owner address the issue only as to their system. By applying this approach, we can prioritize transformer replacement based on their overall system impacts rather than simply by its impact within a single zone. 37

This proposed reform is an indictment of the transmission planning processes not only at PJM but at all RTOs. The reform itself clearly is desirable. But the fact that the reform is needed indicates that RTOs presently lack the authority to mandate economic upgrades, and that they cannot require that the most cost-effective upgrades be built first. This lack of authority guarantees that the RTOs are not providing—and cannot provide—least-cost transmission plans.

Where Do We Go From Here?

In response to requirements in Section 219 of the Energy Policy Act of 2005, FERC has initiated a rulemaking 38 on incentive-based transmission rates that are intended to encourage transmission investment. Whether this rulemaking succeeds depends upon whether it successfully addresses the fundamental causes of under-investment in transmission, which certainly include:

a) the division of responsibilities for transmission planning and investment;

b) the incentives for vertically integrated firms to use transmission to favor their own generation and loads; and

c) the endless debate over who should pay for transmission upgrades.

If this rulemaking merely throws money at transmission owners, it likely will have little effect in overcoming the main barriers to transmission investment, which are institutional rather than economic.

The solutions to the problem of managing long-term transmission-price risk lie in institutional reform. One possibility is that we might design markets in ways that give independent transmission firms sufficient authority to both build and manage transmission, and that also provide for cost-recovery mechanisms that will induce these firms to willingly offer LTTRs among their menu of services. With appropriate pricing, these firms could offer LTTRs at an expected profit while giving market participants incentives to make reasonably efficient locational decisions. A second possibility is that we might develop futures markets for electrical energy for a fairly large number of regional locations, not just the handful of locations that are scattered across the nation at present. These futures markets would apply to a long enough duration of years to give generation investors some assurance