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East Vs. West: Growing the Grid

The models and motives behind tomorrow’s transmission expansion.

Fortnightly Magazine - April 2006

All of this leads to the most important question: Who pays?

Last spring, in a key order, FERC acknowledged that AEP’s integration into PJM had raised doubts about whether PJM’s policy of license-plate pricing still was valid for setting the basic RTO access charges for regional transmission service. 5

In fact, FERC had recognized the problem much earlier, back when it issued its proposed SMD rulemaking, that license-plate pricing becomes unfair when an RTO eliminates its internal wheeling charges, as PJM had now done, with the demise of utility-imposed through-and-out (T&O) charges:

“This may create problematic cost shifts for certain transmission providers that currently receive a significant amount of revenue from exports and wheel-throughs— e.g., AEP and Cinergy.”

For its part, PJM has proposed to maintain its current license-plate rate design until Jan. 31, 2008, albeit in “modified” form, with the cost of some new facilities spread beyond the local rate zone under Schedule 6 of its Operating Agreement, and Schedule 12 of its Open Access Transmission Tariff (OATT). By contrast, AEP has proposed a “highway-byway” design, whereby grid costs are spread across the entire RTO footprint for high-voltage RTF lines (regional transmission facilities) of 345 kV or higher. Craig Baker, AEP senior vice president for regulatory services, argues why:

“On its face, it makes no sense that participants in an active electricity market stretching from Chicago, Illinois, to the eastern shore of the United States, who are able to take advantage of the vast transmission system in the PJM region, would not share in the responsibility of carrying the costs of the regional network.” 6

To be clear, AEP’s application filed at FERC for its new Interstate Project does not make the proposal contingent upon FERC acceptance of its proposed RTF rate design. That said, however, the two clearly were meant for each other.

Suppose AEP should convince FERC to accept its proposed RTF transmission rate design for all utilities across the entire PJM footprint. How would that affect consumers served by other retail utilities, residing in other service-territory rate zones?

Dennis Bethel, AEP’s managing director for regulated tariffs, provides a rough picture on how that would work out in his testimony presented last September in the same case.

As Bethel explains, some PJM utilities, naturally, would own more high-voltage RTF line-miles than others, and would claim proportionately higher shares of the total RTO-wide RTF revenue requirement. Thus, the RTF plan would create winners and losers. Utilities owning the most significant portions of the high-voltage RTF asset base (those with the highest percentage of RTO-wide revenue requirement for RTF facilities) would receive credits. Those owning smaller shares of RTF lines would run a deficit, and would end up reimbursing their transmission-rich cousins.

For example, as Bethel explained, six utility zones would “experience net charges” of anywhere between 1 percent and 11 percent of the transmission revenue requirement otherwise assigned to that utility zone under the current license-plate pricing regime. Five zones (utilities) would see net charges of 20 percent to 31 percent of their erstwhile zonal revenue requirements. Four zones,