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Barriers to Transmission Superhighways

History teaches us that the most successful American businesses emerge from the crucible of competition.

Fortnightly Magazine - May 2006

did not need.

To take a recent example, American Electric Power (AEP) proposes that a new entity—AEP Transmission Co.—develop a 765-kV interstate transmission project. AEP’s new transco will be an LLC, not an LSE or a traditional transmission owner. It proposes to withdraw energy and capacity in the market surrounding AEP’s Amos substation in West Virginia and to inject energy and capacity in the market surrounding the Deans substation in Eastern New Jersey. If this proposal follows the usual interconnection process, it will be subject to interconnection costs (discussed above) in both the point of withdrawal and the point of injection. 1

Under the PJM transmission development rules hashed out in the last four years, this project will need to request firm transmission injection rights (FTIRs) in New Jersey, if it plans to allow generators in West Virginia to offer capacity services to LSEs in New Jersey. If all of the generation in the retirement queue in New Jersey does in fact retire, there will be more injection capacity for the interstate project, and its interconnection costs will be lower; if that generation does not retire, there will be less injection capacity for the interstate project, and its interconnection costs will be higher.

The difference between the interconnection cost estimates can be in the tens of millions of dollars (and could delay implementation of a project). And yet, under the current market rules, because the capacity payment situation is so uncertain, the generators cannot be sure how long they will remain in service, and the interstate project sponsors cannot be sure what their interconnection costs will be.

This is a structural problem, one which helps explain why there are not more independent transmission projects. Interconnection costs are virtually impossible to predict, so that is not a good basis for a new business.

There is no tactical or small-scale solution for this problem. The solution will come only by implementing a coherent capacity/reliability pricing policy. Such a policy is in place in New York, but for other ISO/RTOs it is still on the drawing board or before FERC.

The Network Transmission Pricing Problem

The evolution of the pricing of network-transmission services is the second area where the planning processes of ISO/RTOs can have unintended consequences for new transmission lines. Repayment of the original cost of the transmission system is effected by “network service” tariffs paid by users of transmission services. Typically, load-serving entities then pass on a “network transmission service charge” to their customers. New customers can ask for transmission in one of two ways: network service (the most flexible) or point-to-point service (firm or non-firm).

Under the open-access rules, if there is transfer capacity on the existing system, transmission organizations are required to make that capacity available at designated firm or non-firm tariff schedules. In this construct, a new point-to-point service request within an ISO/RTO is usually not necessary because network service is sufficient.

The emergence of independent transmission projects between control areas creates new challenges and opportunities for network transmission pricing. For the sake of stimulating new, creative, and independent transmission