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Merchant Transmission Redux

Financial transmission rights and regulated returns have not induced needed construction. Presenting an alternative model.

Fortnightly Magazine - September 2006

calculated by simulation. The orange breakpoint in each bar shows actual congestion. In years 1 through 10, the sponsor shares the area above it with the LSE per their contract. The LSE’s income is unaffected by the sponsor’s payments to the TO and RTO. In years 11 and after the LSE and ratepayers would share all of the saving in congestion costs. Because actual congestion in year 7 exceeds simulated congestion, the sponsor receives no revenue but remains liable for contracted payments to the LSE, TO, and RTO.

The percentage of congestion cost savings that LSEs share is indirectly set by the rule that caps the sponsor’s annual revenue at 95 percent of its value under a rolled-in rate. To maintain the expectations of all interested parties, the percentage should be set in advance and fixed for the life of the contract. We propose running simulations to forecast congestion costs over the contract life and comparing their value if the project is built with their value if it is not built.

The simulations must account for forecasted load growth, as well as new (and abandoned) generation and transmission at their expected dates of operation. The difference between the simulated amounts in each year is an estimate of the sponsor’s revenue absent any regulatory constraints. Subtracting each year’s rolled-in cap from unconstrained revenue and summing allows one to compute the LSEs’ percentage that keeps the sponsor within the rolled-in constraint. RICC encourages efficiency because it gives the sponsor no guarantee of cost recovery, while allowing it to keep every dollar of savings that it earns as a result of efforts to keep its costs down.

The Benefits of RICC

There are no apparent obstacles to implementation of RICC in the existing regulatory environment. It is consistent with FERC’s policies, and with RTO planning and queueing processes. Most important, however, RICC promises some of the benefits of competition where its scope has hitherto been severely limited, and reallocation of risk in ways that we see more often in competitive markets than in regulated ones.

RICC is consistent with regulation because it offers a backstop equal to 95 percent of the cost-based rolled-in rate. It also has aspects of a market-based system because the sponsor receives income commensurate with benefits created, but only for a fixed number of years. Since competitive entry into transmission is unlikely to occur, setting a fixed termination year is a reasonable regulatory alternative. Payments to the LSE, TO, and RTO allow them and ratepayers to share the benefits, while properly putting responsibility for cost causation on the sponsor. RICC is an alternative to construction by utilities that in no way limits their future options. Because the sponsor handles all funding and bears most of the risk, there is no need to allocate costs among LSEs as would happen with rate-base transmission. Operations also can be more flexible because there is no need for the common requirement that LSEs take their deliveries at particular nodes.

RICC can be implemented in ways that are minimally disruptive of existing RTO and utility planning