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Every Last Penny

Transmission cost allocation, the worth of the grid, and the limits of ratemaking.

Fortnightly Magazine - August 2010

and 500-kV facilities.

“The actual source of energy delivered to one zone within PJM from another … cannot even be traced, and is even independent of contractual arrangements.”

The record in the case contains studies that purport to show the likely effect on monthly retail utility bills for typical residential ratepayers within the PJM region.

Testifying for the Fair Pricing Group, the private consultant Richard Wodyka estimates that a socialized allocation for all grid project costs at issue in the remand case would boost retail bills for all residential customers across the entire PJM footprint by an average of 15 cents per month—as low as 12 cents for Penelec; 13 cents for Allegheny, 14 cents for AEP, BG&E, Duquesne and others; 15 cents for Dayton, Dominion Virginia Power, PECO, and PEPCO; 16 cents for Delmarva and ComEd; and up to 18 cents for Atlantic Electric, Jersey Central, and Rockland Electric.

Wodyka’s study assumes an annual carrying charge of 19.1 percent for all allocated grid costs, plus typical monthly residential consumption of 1,000 kWhs. (See PEPCO comments, Wodyka affidavit, pp. 30-36.)

Another witness however, calculates rate impacts higher by a full order of magnitude. Perhaps someone has misplaced a decimal point.

Thus, David J. Scarpignato, director of RTO regulatory affairs for Old Dominion Electric Cooperative, but testifying for PEPCO, shows residential rates climbing 1.7 mills per kWh for ComEd, or about $1.30/month on average for Illinois monthly residential consumption of 765 kWhs. For Dayton, Scarpignato sees socialized costs adding 1.6 mills per kWh, or about $1.46/month on average (Ohio) consumption of 910 kWhs. (See PEPCO comments, Scarpignato affidavit, attach. A.)

Nevertheless, ELCON’s argument about masked price signals still appears troubling for adherents of socialization.

As ELCON points out, “attempts to socialize costs across FERC-created organized markets are ironic because the locational (nodal) pricing regime was intended to facilitate locational—not regional—solutions to reliability, congestion, and resource adequacy. The commission cannot have it both ways.”

Even PJM recognizes this potential inconsistency in its recent landmark (and copyrighted) study on the issue:

“Transmission cost allocation methods,” writes PJM, “should at least be neutral and not run counter to incentives provided in the energy and capacity market designs.” (See, A Survey of Transmission Cost Allocation Issues, Methods and Practices, PJM, March 10, 2010, p. 20.)

It is notable that First Energy applied to move from MISO to PJM only eleven days after the 7th Circuit announced its ruling. And just five weeks ago, Duke Energy sought the same move for its Ohio and Kentucky utility subsidiaries. (See FERC Docket EL10-1562, filed June 25, 2010.)

As pointed out by consultant Michael Schnitzer, director of the NorthBridge Group, and testifying for Dayton Power, these recent decisions point out the importance of grid-cost allocation.

“Prospective new entrants,” he states, “are obviously watching this proceeding carefully to make sure that FERC does the right thing.”