PJM/Midwest Market: Two Rival Groups Battle Over Grid Pricing


Should transmission owners get paid extra for distance and voltage?

Should transmission owners get paid extra for distance and voltage?

Fortnightly Magazine - December 2004

While the Midwest now appears set on competitive bidding for the electricity commodity, taking from PJM such tried-and-true elements as locational marginal pricing (LMP), financial transmission rights (FTRs), and a day-ahead market with a security-constrained dispatch, the region remains split over the pricing of transmission.

The fight centers on the network of ultra-high-voltage transmission lines built years ago by American Electric Power (AEP). Who should pay for that network under a market regime? The dispute asks no less of federal regulators than how to divvy up the profits and spoils of electric restructuring across geographic regions and industry sectors.

J. Craig Baker, senior vice president at American Electric Power, says it's only fair to give credit to utilities and ratepayers for the value they have added to the transmission network: "Utilities that have invested in strong and highly interconnected transmission systems bring valuable assets that contribute significantly to the expansion of markets."

Table 1 - Transmission Cost Allocation — Regional Plan

But on the other side, consultant Roy Shanker talks of a world ruled by commodity prices, as in PJM, New York, and New England, where the LMP at any given node defines the worth of the underlying grid assets: "Locational marginal prices coupled with financial transmission rights," he says, "these are the key economic signals. The basic energy markets are the best tool for reflecting the regional value of transmission."

But if the Federal Energy Regulatory Commission (FERC) can produce net savings by forging a huge power market from the Dakotas to the Atlantic, then Baker and AEP want a piece of that pie, to reward their shareholders (and ratepayers) for building a high-voltage network. They fear that if FERC dictates a classic PJM market design, with transmission not priced according to distance, voltage, or usage, that the power producers and consumers who export and import low-cost power-moving west to east-will corner all the gain.

The Two Rival Plans

Of two rival groups, one favors a license-plate regime, with consumers paying grid charges reflecting only the allocated cost of the lines owned by its native utility within its local control area. Consumers would cover that cost even if it included excess capacity. But they would not pay for any faraway high-voltage lines owned by other utilities, even if they used them to import power. This plan, known as the "Unified Plan," would echo the same basic pricing method already in use by the PJM grid operator. The grid access charge reflects the embedded cost of service of the lines located in the zone in which the load sinks. Unified Plan supporters include Alliant, Cinergy, most of the original transmission-owning members (TOs) of PJM, plus several stand-alone TOs, including ATC (in Wisconsin), ATSI (the FirstEnergy grid spinoff), International Transmission (DetEd spinoff), and Michigan Electric Transmission (formed from Consumers Power). ( See FERC Dkt. Nos. ER05-6, EL02-111, EL03-212, EL04-135, filed Oct. 1, 2004. )

The other group proposes a variation of a method known as "highway-biway," but blended