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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

it carries, a figure that is unrelated to the builder’s income. A new line with more capacity produces more benefits for producers and consumers, but smaller FTR-related gains for its builder. Incremental generation benefits both the builder and the consumers of its power. Incremental transmission benefits users but cuts the payoff to its builder. A policy that can align those incentives is more likely to get transmission built than a policy that puts them in opposition.

The RICC System

Our proposed policy—reduction in congestion costs (RICC)—rewards transmission investors who lower those costs, with larger rewards for larger cuts. RICC allows any eligible investor (perhaps a hedge fund, an independent power producer, marketer, or large customer) to fund investments in “economically beneficial transmission” (EBT). As in other “participant funding” plans, an RTO or some other planning organization separates projects into those required for reliability and EBT lines that will lower congestion costs. The RTO attends to investment in reliability lines. Utilities have rights of first refusal to construct EBT lines as rate-based investments. Those they choose not to build will qualify for RICC treatment.

An EBT project’s sponsor bears all of its capital costs and associated risks. The upgrade becomes property of the transmission owner (TO), a utility, or an independent transmission company. The TO uses it to deliver power to a load-serving entity (LSE), possibly itself or an affiliate. The sponsor’s RICC income arrives over a contract term of 10 years or some other agreed-upon duration. The RTO computes that income in a shadow settlement process based on avoided congestion costs, described in more detail below. If savings are negative or zero, so is the sponsor’s revenue. All of the affected parties benefit. LSEs in the area are paid a set percentage of the gross congestion savings. The sponsor also pays an administration fee to the RTO, and an operation and maintenance fee to the TO.

To ensure that ratepayers also get a better deal and regulation continues to function, the sponsor’s gross RICC revenue is capped at 95 percent of total costs to ratepayers under traditional rolled-in pricing. RICC also discourages projects that facilitate the exercise of market power. In the savings calculation, any nodal price that increases due to the new line is capped at its old level. The sponsor receives none of the new FTRs that the line creates, which the RTO is free to allocate as it wishes. Upon the contract’s termination, the depreciated line reverts to the TO’s rate base for regulation as usual. A sponsor that fails to recover its costs over the contract period has no regulatory recourse.

Estimating Savings

The sponsor’s income is the difference between congestion costs absent the line and those that remain when it is in operation. The latter is no problem, but estimating congestion “but for” the line will require system simulations.

We propose that the RTO perform a daily simulation using the previous day’s load and generation conditions, but with the line removed. In Fig. 1, the height of each bar equals annual congestion costs without the upgrade as