Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

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

the parties who are most likely to build transmission ( i.e., transmission owners) and of the parties responsible for overseeing transmission planning ( i.e., the RTOs) indicate that they have little or no interest in addressing the long-term problems created by transmission price uncertainty. The fundamental cause of this disinterest is that electricity markets have been restructured in a way that discourages the parties who are best able to manage long-term transmission price risks from actively doing so.

Are Long-Term Transmission Rights Necessary?

The battle lines are clearly drawn. On one side are transmission-dependent market participants who believe that LTTRs are a necessary component of efficient competitive markets. On the other side are investor-owned utilities, RTOs, and others who believe either that electricity markets have no need for LTTRs, that the markets already have tools equivalent to LTTRs, or that only minor tweaking of market designs is needed to provide the benefits of LTTRs.

The advocates of LTTRs emphasize that LTTRs are needed to encourage efficient generation investment. 2 As stated by the American Public Power Association (APPA):

No APPA member wants to sink the required high capital costs into a state-of-the-art base load clean coal unit, only in the end to pay natural gas-determined prices for the power because of the imposition of LMP-based transmission congestion charges that cannot be fully hedged on a long-term basis. 3

Many parties thus regard the absence of LTTRs as a factor that discourages generation entry. They assert that the consequent underinvestment in generation can lead to serious competitive problems, including fostering of market power. As stated by Federal Trade Commission staff:

Providing potential generation entrants and other market participants with means to manage long-term transmission risk is likely to help develop competitive wholesale electric power markets. In a market economy, entry is a critical factor that contributes to the development of competitive markets. Entry erodes existing market power, provides more customers with products that closely match their preferences, and brings innovations that reduce costs to market. However, efficient entry may be discouraged or delayed by high levels of risk (relative to expected returns) that cannot be managed through long-term supply contracts or other arrangements. Lack of efficient entry may harm consumers through higher prices, less customer choice, and inefficient production that wastes real resources. 4

Some advocates of LTTRs see LTTRs as part of the larger need for forward markets and price stability. 5 Such price stability is seen as helping encourage investment in generation and reducing price risk for consumers.

On the other side of the debate are parties who believe that LTTRs are unnecessary for essentially three reasons. First, these parties say that few market participants actually are interested in obtaining LTTRs. 6 For example, referring to the transmission rights that it offers in the form of transmission congestion contracts (TCCs), the New York Independent System Operator says that “the majority of market participants have not indicated great interest in TCCs with a duration beyond two years. … Demand for TCCs of extremely long duration appears to be low.” 7