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East Vs. West: Growing the Grid

The models and motives behind tomorrow’s transmission expansion.

Fortnightly Magazine - April 2006

after noon spot LMP prices running much higher for in the service territories of Baltimore Gas & Electric and Potomac Electric Power than for AEP, Allegheny Power, Dayton Power & Light, or even the PJM system overall. As for the source of the transmission congestion, the commission in particular cited the Doubs substation and the Doubs-Mt. Storm 500 kV circuit. Most impressively, however, the PSC presented two power price maps, similar in form to Zibelman’s exhibits from PJM, but this time showing snapshots of prices on particular summer afternoons. One of those shots, reproduced here shows a remarkable “Maginot Line” separating the high-priced mid-Atlantic seaboard from the lower-priced interior of West Virginia, western Pennsylvania, and Ohio (see Figure 3).

Clearly, the integration of Midwestern utilities into PJM had not exploited all available market opportunities. Thus the new project proposal from AEP.

The AEP Project. The 550-mile Interstate Project would originate at AEP’s Amos Substation in West Virginia (part of its network of 765-kV lines), then span the Potomac River to Allegheny Power’s Doubs Substation, near Frederick, Md., and terminate in New Jersey at the Dean substation, operated by Public Service Electric & Gas. According to AEP, the line offers a significant alternative path to existing west-to-east grid constraints across PJM, which should make locational energy prices less volatile between western Maryland and the load centers along the Baltimore-Washington corridor (see Fig. 4).

AEP estimates that its new line could end up costing about $3 billion. Yet that figure would pale when compared to congestion costs expected in PJM over the next 20-30 years, where congestion hit $800 million in 2005, and was expected to exceed $1 billion this year, according to Michael G. Morris, AEP’s chairman, president, and COO. Moreover, AEP predicts that its new line would reduce transmission losses by approximately 280 MW during peak loading conditions—equivalent, when measured across all hours, to avoiding the nominal capital investment of $175 million required for a new combined-cycle gas turbine power plant.

To soften the cost blow, AEP has created “AEP Transco,” a wholly-owned subsidiary designed as a stand-alone grid company, conducting no commerce outside of its primary business of financing, constructing and owning transmission lines and making grid service available from those facilities. This move will help AEP justify its request for financial compensation of the type that FERC promised in its recent rulemaking on transmission investment incentives, such as expense treatment for pre-construction costs, rate-base recovery of construction work in progress, and a higher rate of return. (AEP also has asked for an adder of 200 basis points, should FERC end up deciding that a new grid expansion warrants such a generous reward if it serves regional needs.)

When asked how PJM would go about reviewing AEP’s Interstate Project, PJM Chief Communications Officer Terry Williamson told Fortnightly that the RTO would “consider all aspects of the project including, cost-benefit analysis, in so far as examining the value the line brings, versus the economic impact it will have on a variety of factors, such as congestion and generation.”

The Rate Design Question.