Cheap gas, regulatory uncertainties, and a technology revolution are re-making the U.S. utility industry. Top executives at three very different companies—CMS, NRG, and the Midwest ISO—share their...
Barriers to Transmission Superhighways
History teaches us that the most successful American businesses emerge from the crucible of competition.
projects—such as AEP’s new backbone for PJM—the overarching policy principle behind network transmission pricing needs to be simple if it is to be effective.
As an example, one need look no further than the development of the interstate highway system in the 1950s that stimulated national economic growth. Before that ambitious plan was hatched by the federal government, farmers in California found it hard to compete in markets in the Midwest and the East because transportation costs were prohibitive. The overall American economy in effect looked much more like today’s American electric system—regionalized, and less efficient than it could be because of transportation bottle-necks.
Prior to its success, the development of the interstate highway system raised many of the same issues churned up today with the development of electric transmission superhighways. When a new interstate highway was proposed, it changed the pattern of usage of connecting state and local roads. Typically, the federal highway fund would pay some “interconnection costs” to finance the expansion of interconnecting roads, but it could not and did not fund claims on all of the potential impacts on state roads.
The bedrock principle behind the interstate highway system was that it generally was productive to increase the carrying capacity of roads between states: It allowed each state to do what it did best, and to trade with other states. Thus, California became a source of produce for the entire country, while agriculture in other states languished because it could no longer compete with California’s produce.
California’s exporters paid a “transmission cost” to get their goods to market, but it was largely a marginal, variable cost (the cost of the transport service), while the cost of the infrastructure itself was socialized across all taxpayers.
Since the interstate system was first developed, much thinking has been done about how best to charge for the benefits of enhancements to the system. The states and the federal government each have a share to pay, and the allocation of costs is a matter of regular wrangling between them. But the bedrock principles—that it is good to have roads with lots of carrying capacity, to monitor and address congestion, and to invest in enhancements wherever they are needed—by now are widely accepted.
The same level of acceptance needs to come to the country’s electric transmission system. The development of ISOs/RTOs is a step forward in getting states out of their pre-interstate highway mode of thinking, but even ISOs/RTOs can fall prey to old-fashioned thinking about how to charge for transmission services.
Network vs. Point-to-Point Service
The most typical, traditional, and ultimately unconstructive form of transmission pricing is “point to point.” To be sure, it occasionally may be economically sensible to charge a specific supplier and a specific customer a specific, project-based fee for moving energy and capacity services between them. But these instances are, and should remain, rare.
The most exciting innovation in the development of ISOs/RTOs is network-transmission service, in which the independent grid operator finds the most efficient way to move energy and capacity services from one area to another without