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Transmission's True Value

Adding up the benefits of infrastructure investments.

Fortnightly Magazine - February 2012

construction of the line supported 2,560 jobs, generated $9.5 million in tax revenue, created $464 million in total economic stimulus and will provide income to local communities of $62 million over the next 40 years. The increased reliability of the electric system has provided economic development benefits by improving operations of existing commercial and industrial customers and attracting new customers. Lastly, the Arrowhead-Weston line also provides insurance value against extreme market conditions, as was illustrated in a NERC report noting that if Arrowhead-Weston had been in service earlier, it would have averted blackouts in the region which impacted an area from Wisconsin and Minnesota to western Ontario and Saskatchewan, affecting hundreds of thousands of customers.

The range of the benefits addressed in ATC’s study substantially exceeds the range of benefits typically quantified or even discussed in most transmission benefit-cost analyses. Too often, such analyses leave out important transmission benefits simply because the broad range of the benefits and long time frame over which they accrue makes it very difficult to quantify their full extent. As the FERC noted: “[C]ost-benefit analyses often evaluate benefits at a distinct point in time. Because power flows change constantly with fluctuations in generation and load, as well as the addition of new transmission facilities, generation resources, and loads to the system, such static analyses cannot capture all benefits over time. Therefore, relying solely on the costs and benefits identified in a quantitative study at a single point in time may not accurately reflect the [benefits] of a given transmission facility, particularly because such tests do not consider any of the qualitative, ( i.e., less tangible) regional benefits inherently provided by an EHV transmission network. No single analytical study can reflect future needed expansions to the electric grid to support regional power flows as system conditions change and the manner in which the function of earlier expansions will change once integrated with future expansions.” 2

In fact, the industry has tended to over-rely on formulaic analytical frameworks that capture easy-to-quantify benefits such as production cost savings, but generally don’t consider the fuller range of benefits that improved transmission infrastructure can provide. This is exacerbated by the fact that types and magnitudes of transmission benefits are highly specific to the nature of individual projects and the regional power market in which they operate.

As examples from transmission benefit-cost analyses show, while formulaically derived or easily quantified benefits often are too low to justify an investment, the sum of all identified benefits often significantly exceeds the cost of the projects.

Production Cost and Load LMP

The most commonly quantified economic benefits of transmission investments are reductions in simulated fuel and other variable operating costs of power generation, generally referred to as “production cost” savings, and the impact on wholesale electricity market prices at load-serving locations of the grid— i.e., locational marginal prices (LMP). These production cost savings and load LMP benefits typically are estimated with models that simulate generation dispatch and power flows subject to defined transmission constraints. In a recent assessment of RTO performance by the FERC, the majority of