1. Transmission Pricing & Regional Electric Markets
Transmission Pricing: A Regulator's Perspective
Zagreb, Croatia
May 2001
Karl A. McDermott
Vice President
National Economic Research Associates, Inc.
875 North Michigan Avenue, Suite 3650
Chicago, IL USA 60611
Telephone Facsimile:
Internet:
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2. Regulatory Context for Transmission Pricing
Regulatory Goals/Trade-offs Often Conflict
What are the goals for transmission pricing?
Recover costs of providing services
Provide incentives for efficient use of system in short-run
Provide incentives for long-term investment
Promote electricity trading in non-discriminatory manner (externality issues)
Protect consumers from monopoly practices
Meet international standards
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3. Recovering Total Costs
Total cost recovery is necessary for viable commercial operations
Large fixed cost investment tends to drive a wedge between marginal and average cost
Total costs can be recovered in many different ways, the trade-offs impact different customer classes differently (although equal sharing in fixed cost recovery is not likely to be efficient)
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4. Recovering Total Costs
Embedded cost
Pros:
date verifiable and subject to audit
“simple” to calculate
emphasis on financial data can encourage financial discipline
Cons
past does not predict future
significant adjustments required if inflation has eroded value of rate base
no incentive for performance
Current records may not be accurate enough to implement this method
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5. Recovering Total Costs
Marginal cost
Pros:
Economically “efficient”
Takes into account the actual resource costs that are needed to meet demand
Cons
Probably does not recover total revenue
May be controversial to calculate
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6. Short-run Efficiency
Transmission networks experience opportunity costs when multiple users share the network.
Re-dispatch costs are incurred when users schedule transactions that cause the dispatch order to change and increase the total cost of providing service
“Congestion costs” are real and need to be priced
Loop flow can cause costs on seemingly unrelated portions of the network
Short-run efficiency requires that users who cause the increase in costs face an increased price to reflect those costs
Result may be that certain transactions will no longer be economic
Ancillary services
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7. Congestion Control
Traditional engineering methods (TLRs, central planning, etc.)
Priority service (firm, non-firm)
Price signals
Nodal pricing
Bidding for backdown
Tradable transmission rights
Regulators need to assess the extent of the problem in deciding which method to use. In the US, transmission constraints can be significant in many areas of the country thus more sophisticated, market-based methods are needed. In countries with excess transmission capacity, encouraging cost recovery and trading is probably a more pressing need.
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8. Long-run Efficiency
Transmission networks require on-going capital and maintenance investment.
Investment in network needs to be driven by the use of the network.
Incentive to expand network comes from the opportunity costs of not expanding network
If network is congested into a load center such that $1 billion in congestion costs are calculated annually then investment that is equal to or less than $1 billion is warranted to relieve the congestion (zero congestion is not optimal)
Transmission providers need to have confidence that they will have a reasonable opportunity to recover prudently incurred expansion costs
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9. Long-run Efficiency Rolled-in pricing Incremental pricing
Should new facilities be treated as an increment to the network?
This type of pricing shares the benefits of the network externalities
Incremental pricing
Should only those that directly benefit from investment pay for it?
Access fees (two-part tariffs)
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10. Promote Electricity Trading
Multiple party trading makes transmission pricing and the terms and conditions of transmission service more complicated
Would a simple transmission tariff make more sense in the beginning stages of reform?
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11. Protecting consumers
Transmission remains a “natural” monopoly for the most part
Consumers expect that services should reflect costs (of course the question is what cost)
Terms and conditions should be complex enough to function on a long-term basis, but simple enough for reasonable people to understand
Charging for economic costs, even if they are above the revenue requirement does not constitute monopoly power abuse
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12. International Standards
Meeting international standards may not be feasible in the short-term
Providing a reasonable time for adjustment to new system, as well as providing “good” (although maybe not perfect) incentives for investment is a good first step
In first steps toward meeting international standards, regulators will need to prioritize goals. Regulatory choices should implement the least cost reforms first and then move on to more sophisticated and costly reforms. It is very likely that most of the benefits of restructuring will come about with the least costly and most unsophisticated reforms
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13. Summary
The targets (goals) of transmission pricing are numerous and often conflicting
Appropriate instruments need to be used to address the financial, economic and regulatory issues
Putting a system that “works” in place should be first step. Sophisticated approaches to transmission pricing should be phased-in over time as the benefits exceed the costs of doing so.
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