Let's Get the Funding Right

There is no denying that the nation's transmission system needs to be upgraded, modernized and expanded, and economic transmission expansion is a key

There is no denying that the nation's transmission system needs to be upgraded, modernized and expanded, and economic transmission expansion is a key component to fulfilling that vision. Economic projects relieve congestion, thereby freeing up lower-cost power to displace the higher-cost power that was originally dispatched due to insufficient transmission capacity.

Public policy should be aimed at improving the grid to support a competitive wholesale market. The Federal Energy Regulatory Commission's (FERC's) Order 2000 states that regional transmission organizations (RTOs) must employ a transmission pricing system that will promote efficient use and expansion of the transmission system. The RTOs must also be responsible for planning large-scale regional projects, as these projects will enable the wholesale markets to function efficiently and beneficially.

Currently, the prevailing method across the country for economic project cost recovery is the participant funding model. This model relies on the generation or load cost savings (not applicable to transmission-only utilities), credits or capital offsets from deferred reliability projects, or incremental transmission service revenue to justify construction. The nation needs a funding policy that encourages, rather than discourages, the construction of economic projects.

Nearly every RTO in the country currently has only participant funding available for economic projects. A participant funding regime will create free-rider problems, as the benefits of a large-scale transmission expansion are diffuse and long-lived in nature.

Once an economic project is deemed beneficial by the according RTO, that particular project should be constructed and included in the accompanying regional transmission tariff. Economic projects need a cost-allocation mechanism similar to reliability projects or base-plan-funded projects, for at least the reason that different allocation protocols will create an incentive for parties who stand to be allocated fewer costs under the pretense of a reliability project. These parties will likely protest the validity of the economic modeling process.

Currently, for a reliability project in the Southwest Power Pool, one-third of the project is socialized regionally and two-thirds is socialized amongst benefiting zones based on megawatt-mile calculation. The Midwest Independent Transmission System Operator has a similar process but assigns a 20/80 split, with 80% being allocated to large subregions based on the extent to which they were seen to benefit in the initial analysis.

POSTAGE-STAMP METHODOLOGY

A region-wide postage-stamp methodology needs to be adopted over other more unwieldy approaches. Postage-stamp methodology recognizes that it is nearly impossible to identify the specific beneficiaries of a project when many years of revenue requirements are to be assigned. The postage-stamp methodology will increase the likelihood that more project sponsors will step up to build the needed large regional projects. And the methodology would create one pricing zone, thereby leveling rates across the footprint while improving economic dispatch for load-serving entities.

Transmission expansion provides strategic benefits such as price stability, increased reserve sharing and firm capacity, insurance against contingencies during abnormal system conditions, environmental benefits, reduction of additional energy infrastructure and transmission access for renewable energy resources.

THE IMPORTANCE OF ECONOMIC PROJECTS

There are several key conclusions to keep in mind regarding economic projects:

Conclusion 1: Today's economic project is tomorrow's reliability project. In fact, the difference between the two categories is not always clear, and the debate about “beneficiary pays” can be endless.

Conclusion 2: Don't allow the debate to postpone economic projects to the point that they migrate from “need” to “crisis.” As stated by some RTOs, reliability and economics are inseparable.

Conclusion 3: There is an obvious link between congestion reduction and reliability, so let's stop treating reliability projects as “musts” and economic projects as “wants.”

Transmission expansion is needed. The current economic project cost-recovery methodology will impede any significant transmission expansion. Having no cost allocation for economic projects does not provide the proper incentives to build economic projects. Public policy should be aim to improve the grid to support a competitive wholesale market and thus address economic project cost recovery.

The most logical solution is a state- or region-wide postage-stamp methodology for the high-voltage transmission expansion. The time for change is now.


Carl Huslig is the president of ITC Great Plains.

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