D.            Transmission Pricing 

1.         The Commission seeks to ensure transmission owners the opportunity to recover their revenue requirements for their transmission systems under Network Access Service.  This charge could either be a license plate rate (charge depends on zone of delivery) or a postage stamp rate (same rate applies for all load within the Independent Transmission Provider's service area) and would be paid by all entities serving load within the Independent Transmission Provider's service area.  Moreover, to facilitate trading across regions, we are proposing to change our policy on pricing of transactions that start and end in different transmission systems. 

2.         In addition, we are proposing to refine our policy on pricing of transmission expansions to provide incentives for market-driven solutions.  To facilitate the addition of much needed transmission infrastructure, we propose a regional approach to transmission expansion which includes extensive participation by Regional State Advisory Committees102 to identify the beneficiaries of a proposed expansion and how costs for that expansion should be recovered.

                        1.            Recovery of Embedded Costs

3.         Under the existing pro forma tariff, there are two types of transmission services – Network Integration Transmission Service, which is designed for the integration of resources and loads, and Point-to-Point Transmission Service, which is generally used to export power from one transmission system to another (through-and-out service).

4.         To recover the embedded costs of the transmission grid, the Commission has historically permitted transmission providers to assess an access charge, in the form of a load ratio share charge or a per kW per month charge, on all transactions taking place on the transmission provider's system.103  For a single transmission utility, these charges usually take the form of a "postage stamp" rate (i.e., the same charge for all customers' use of the utility's grid) and, for an ISO or RTO, a "license plate" rate (i.e., a different charge for the use of the entire regional transmission system that is based on the revenue requirement of the transmission owner's facilities, or "zone," where the transaction sinks).104  The access charge is assessed on all transactions making use of the transmission provider's system, including transactions where the generator and load are located within the transmission provider's system and where either the generator or the load (or both) are located outside of the transmission provider's system.

5.         While this method of pricing has been effective in recovering a transmission provider's revenue requirement, some changes are required to reflect the new Network Access Service and to address unintended consequences of the current rate design.  First, we propose that transmission owners recover embedded costs through an access charge assessed mainly to load-serving entities, based on their respective shares of the system's peak load, i.e., their load ratio shares.  Our goal is to minimize the distorting effects that an access charge can have on economic choices.  We propose to assess access charges primarily on loads, but not on generators, because the economic choices of loads (such as where to locate) are less likely to be affected by access charges than are the choices of generators.105  Moreover, even if access charges were imposed on generators or other market participants, it is likely that they would pass along most or all of their access charges to their customers, so that loads would ultimately bear most or all of the transmission fixed costs.

6.             Second, we propose to eliminate all "rate pancaking," which involves charging separate embedded cost charges for moving power over separate Independent Transmission Provider service areas.  We propose to eliminate rate pancaking both within an Independent Transmission Provider's service area and between service areas.  Rate pancaking impedes the ability of distant generators to compete with nearby generators by imposing charges to transmit energy from distant generators that are unrelated to actual variable transmission costs.  Assessing the access charge primarily to load-serving entities based on their load ratio share rather than on the number of service areas over which energy is transmitted increases generation competition by allowing distant generators to compete more easily with nearby generators.

7.         As discussed further below, we propose that customers paying access charges would receive Congestion Revenue Rights (or alternatively, revenues from the auction of Congestion Revenue Rights).  Thus, in exchange for paying the fixed costs of the transmission system, those paying access charges would receive the financial benefits – the stream of congestion revenues – resulting from usage of the transmission system.  In addition, we seek to minimize cost shifts that could result from our proposal, and we propose to maintain as much as possible the explicit and implicit transmission rights currently held by customers.  Thus, customers currently receiving Network Integration Transmission Service and firm Point-to-Point Transmission Service under the existing pro forma tariff would receive Congestion Revenue Rights based on their existing service levels.  However, there are two issues regarding access charges and the allocation of Congestion Revenue Rights on which we specifically seek comment.

8.         First, we seek comment on the treatment of existing customers taking long-term firm Point-to-Point Transmission Service that are not load-serving entities.  Such customers currently pay an embedded cost charge in order to receive firm Point-to-Point Transmission Service under the Order No. 888 pro forma tariff.  We believe that it would be inequitable for customers to receive an initial allocation of Congestion Revenue Rights unless they also pay a share of transmission embedded costs.  We also believe that it would be inequitable for customers to pay a share of transmission embedded costs without receiving an initial allocation of Congestion Revenue Rights.  Thus, we seek comment on two options.  One option is for these customers to continue paying their embedded cost charges in exchange for receiving Congestion Revenue Rights that reflect their current levels of Point-to-Point Transmission Service.  This option would help minimize cost shifts, while maintaining the transmission rights currently held by these customers.  On the other hand, this option would recover a portion of embedded transmission costs from customers that are not loads.  The second option is to eliminate the access charges for these customers while also allocating no Congestion Revenue Rights to them.  This option avoids recovering embedded costs from entities that are not loads.  However, it would result in some shifting of the responsibility for recovering embedded costs, and it would fail to maintain the transmission rights currently held by these customers.  We seek comment on the merits of these two options, as well as whether the Final Rule should select one option or, alternatively, allow customers to choose between them.106 

9.         The second issue concerns the treatment of load-serving entities in retail open access states that attract loads away from their traditional utility suppliers.  Under our proposal, a new load-serving entity that attracts load from other suppliers would be assigned a share of embedded costs – costs previously assigned to other suppliers.  In areas where there is no Available Transfer Capability for additional Congestion Revenue Rights, we seek comment on how such new load-serving entities should receive an allocation of the customer's former load-serving entity's Congestion Revenue Rights.  We propose that Congestion Revenue Rights "follow the load."  Thus, Congestion Revenue Rights previously allocated to other suppliers whose loads (and access charges) have been reduced would be reallocated to the new load-serving entities.

10.       We propose to permit the use of license plate rates such as those that are currently in effect within ISOs.  We seek comment, however, on whether we should retain license plate ratemaking only for a transitional period and at some later date, require that all regions have postage stamp rates.  Should the Commission upon the recommendation of a Regional State Advisory Committee accept an embedded cost recovery mechanism for the region which may vary from neighboring regions?

11.       To better illustrate the pricing proposals we have included Appendix F which identifies by customer types whether and under what circumstances they will pay the access charge and/or receive Congestion Revenue Rights under Network Access Service.

2.            Rates for Bundled Retail Customers

12.       When a vertically integrated utility joins a regional organization such as an ISO or RTO, the Commission has required that the utility execute a service agreement under the regional transmission provider's transmission tariff.  For instance, the Commission required the vertically integrated utilities in GridSouth to execute a service agreement under the GridSouth transmission tariff, thus ensuring that these utilities would take service for their bundled retail load under the same terms and conditions as all other users of the grid. 

13.       With respect to whether the GridSouth transmission charge should be applied to the bundled retail load, the Commission permitted the utilities to pay the transmission portion of the bundled retail rate, but required that the service agreement explicitly state the rate to be charged.107  The Commission added that having vertically integrated utilities pay GridSouth for transmission to serve their bundled retail customers does not make those utilities' retail rates subject to our jurisdiction.  Rather, the Commission stated its willingness to accommodate the utilities paying GridSouth a transmission rate equal to the transmission component of their bundled retail rates, as long as the price is clearly stated, reduced to writing in contracts with GridSouth, and is not accomplished by omission.108 

14.       Now that the Commission is asserting jurisdiction over all transmission service in interstate commerce, including that for bundled retail service, the question arises as to whether different charges for transmission service for wholesale and bundled retail customers should be permitted.  Allowing different rates for wholesale and bundled retail customers could lead to undue discrimination if the rate setting policies of the state and the Commission differ significantly.  The Commission seeks comment on whether all customers should be charged the same transmission rate either upon implementation of Standard Market Design or after a reasonable transition period of four years.

3.            Inter-Regional Transfers

15.       Under current rate designs, a user that transmits power from one region to another would pay two transmission charges to recover the embedded costs of the transmission provider from which power was exported as well as the embedded costs of the transmission provider where power is delivered to load.  As long as transmission owners have an opportunity to recover their embedded costs, to increase competition, we propose to prevent customers from being assessed multiple transmission charges.

16.       We have concluded that rate treatment for inter- and intra-regional transactions should be consistent to avoid creating artificial incentives or disincentives for trade across regions.  Thus, the design of rates for Network Access Service should eliminate the payment of multiple access charges, such that only one access charge is paid for power to reach load.  Accordingly, an export and through-and-out transaction originating in an Independent Transmission Provider's system and terminating at a load in another Independent Transmission Provider's system would pay only the access charge for the transmission system where power is ultimately delivered to load.109  This will encourage broader areas of competition by eliminating multiple access charges, and in particular would reduce the harsh inequities of regional boundary definition on those customers near such boundaries.

17.       It has become apparent that transmission pricing across RTO borders can have a significant impact both on power purchasing decisions and on RTO formation.  A customer's choice as to whether to purchase power from a generator located within the same RTO or a neighboring RTO is directly affected by the fact that one generator faces an additional access charge to reach the RTO in which the load is located.  This additional access charge may cause the sale to become uneconomic.110

18.       In addition, decisions on which RTO/ISO to join may be affected by inter-regional pricing.  Choices driven by the economics of transmission owner's merchant function's trading patterns, rather than by the most rational and efficient aggregation of transmission assets for a particular region, could result in oddly configured RTOs.

19.       Rate pancaking across the numerous transmission owning utilities that comprise the RTO has been eliminated by the implementation of license plate rates, while continuing to provide an opportunity for the transmission owners to recover their full revenue requirements.  We propose that the same or a similar rate structure should be applied to inter-regional transfers.  In a competitive market environment, reliability and the supplier's cost of generation, rather than sunk transmission costs, should be the primary drivers for a customer's choice of power suppliers.  To the extent rate design facilitates that result, transmission owners would have a greater incentive to join an RTO based on where their transmission facilities most benefit customers and markets, not on where their generators have better opportunities to make off-system sales (i.e., an access charge for exporting power from one region to a neighboring region should not be the deciding factor).

20.             However, absent other adjustment mechanisms, if customers going through and out of an RTO are no longer charged access fees by that RTO for transmission service, these costs would instead be borne by the load served by the RTO through the existing load ratio share methodology.111  Under the commonly used license plate rate design, load within a particular RTO zone would pay that transmission owner’s full embedded costs, including the portion that is currently contributed by through-and-out customers.  This may create problematic cost shifts for certain transmission providers that currently receive a significant amount of revenue from exports and wheel-throughs (e.g., AEP and Cinergy).  While simply eliminating the transmission charge for through-and-out service may avoid the skewing of purchase and sale decisions by inter-regional transaction charges, it will result in cost-shifting and may stifle new transmission investment since state regulators will not generally favor having their customers pay for facilities that may primarily benefit other states.

21.             Therefore, we propose to create a mechanism that recognizes the import/export quantities in establishing the revenue requirement to be recovered through the access charge.  We seek comment on two approaches that could be used.

22.       One method would be to have the "source" Independent Transmission Provider allocate a portion of its revenue requirement to the "sink" Independent Transmission Provider's transmission customers.  An Independent Transmission Provider's revenue requirement could be reduced by the amount of revenues associated with through-and-out service and that portion of the revenue requirement would then be included as uplift in the scheduling charge paid by all customers of the sink Independent Transmission Provider in whose service area the power sinks.  Under this approach, costs would not be shifted from the beneficiaries of the inter-regional transaction to the load on the source side of the transaction.  At the same time, embedded cost recovery would not interfere with short-run efficiency, since embedded costs would not be recovered in individual inter-regional transactions, but would instead be recovered through uplift from all customers in the zone of the sink Independent Transmission Provider.  This method would require a projection of inter-regional transfers and a rate filing to accomplish the re-allocation of costs between Independent Transmission Providers.  It would also require a decision as to how narrowly to focus the cost allocation (e.g., RTO to RTO, export zone to import zone).

23.             Alternatively, under a revenue crediting approach, inter-regional transfers could be priced at the load ratio share charge (or a similar transmission charge)112 and the inter-regional transaction charges would be netted out over some time period (e.g., one month or one year).  This method would assign the inter-regional charges to all customers within the sink Independent Transmission Provider.  The cost of transmission on a neighboring Independent Transmission Provider associated with net imported power could be charged to all of the net importing Independent Transmission Provider's customers through the Independent Transmission Provider's scheduling charge.  The revenues would be returned to all transmission customers within the net exporting Independent Transmission Provider.

24.       We seek comment on whether there should be a uniform cost allocation of inter-regional costs among all zones within an Independent Transmission Provider's system.  For instance, there will likely be opposition to a region-wide charge by customers who do not import power.  To address this concern, the inter-regional transfers could instead be netted out between zones within neighboring Independent Transmission Providers.  This way the costs would be assigned to all customers within the import zone and the revenues would be returned to the export zone.  These transmission costs could be assigned to the zone where the power was imported as if the neighboring Independent Transmission Provider's facilities were part of that zone.  Likewise, the zone where exports leave an Independent Transmission Provider would receive the transmission payments associated with the exports.  It is possible that the revenue sharing plan used by ISOs with license plate rates to resolve intra-ISO, interzone transactions could be broadened to encompass inter-RTO transactions.

25.       As noted above, the proposed rule advocates treating inter- and intra-regional transmission pricing the same.  As explained elsewhere, customers within the region who pay the access charge will be entitled to Congestion Revenue Rights or the revenues from the auction of those rights.  We propose a similar result for inter-regional transactions when customers in one region are paying a portion of the embedded costs of another region.  We seek comment on how to assign Congestion Revenue Rights to the customers of the importing region.  For example, if Midwest ISO is a net exporter to PJM, customers on PJM’s system will be obligated to pay a portion of Midwest ISO’s embedded costs.  PJM’s customers could receive a proportionate share of Midwest ISO's Congestion Revenue Rights. 

4.            Application of Inter-Regional Pricing to Parallel Path Flows

26.       To the extent the Commission adopts a true-up methodology for recovering the costs of through-and-out services, should a similar pricing methodology be applied to parallel path flows?  Parallel path flows are comparable in that one region benefits by the use of a neighboring region’s transmission facilities.  Parallel path flows are currently resolved through cooperation.  An alternative method would be to price all uses of the grid.  We seek comment as to how cost impacts of parallel path flows across regional borders should be addressed.

                        5.            Pricing of New Transmission Capacity

27.       The existing transmission grid has fallen far behind the demands that have been placed on it.  Over the last ten years, we have seen a strong increase in the amount of new generation, which has been built largely in locations that make the most economic sense for the builder of the generation (i.e., where land is affordable and economic sources of fuel, water and labor are near).  However, we have yet to see a parallel jump in construction of transmission infrastructure.  The absence of needed new transmission facilities has led to more and more congestion, which hinders customers from seeking and depending on more distant and competitive supply choices.

28.       The sluggishness of transmission construction is largely because:  (1) siting transmission is a long and contentious process; and (2) mismatches between those who benefit from the new facilities and those who pay for them, particularly when the two affected sets of customers are served by different transmission providers, are often more than enough to make sure the new facilities do not get built.  The Department of Energy's 2002 National Transmission Study points to state_by_state siting approval, a lack of regional institutions and a lack of clarity in regulatory pricing policy as several of the barriers to transmission investment.113

29.       The Commission's pricing policy for network upgrades, whether for reliability or economic reasons, has traditionally favored "rolled in" pricing, where all users pay an administratively determined share of new facilities.  This policy was based on the rationale that the transmission grid is a single piece of equipment such that system expansions are used by and benefit all users due to the integrated nature of the grid.  This method forms the basis of the pricing proposal in the Generation Interconnection proposed rule.

30.       If the expansion is for region-wide reliability, there is little disagreement as to who should pay for the necessary facilities – all ratepayers.  Likewise, interconnection facilities are non_controversial; there is general agreement that these facilities should be directly assigned to the interconnecting generator.

31.       What we see, however, is that economic expansions that would remove congestion and allow customers to reach more distant power supplies are the most difficult to get sited.  This is at least in part because state siting authorities have no interest in siting a line that benefits a particular generator or a distant load in another state because to do so would require the load on the constructing public utility's system to pay for the new facilities.  The state authorities, at a minimum, need assurance that the costs of that expansion will be paid for by those who benefit from the expansion in order to have sufficient incentive to site the new facilities.

32.       Our goal is to remove any cost recovery impediments to transmission expansion so that needed upgrades get built now.  Traditional means of expansion pricing may not be the most effective way of encouraging new transmission infrastructure, in part perhaps because they do not take into account the wide regional benefits of higher voltage upgrades that can accrue beyond a single transmission owner's system.

33.       We believe that a more precise matching of beneficiaries and cost recovery responsibility would encourage greater regional cooperation to get needed facilities sited and built.  Our preference is to allow recovery of the costs of expansion through participant funding, i.e., those who benefit from a particular project (such as a generator building to export power or load building to reduce congestion) pay for it. 

34.       The Generator Interconnection proposed rule introduced the idea that participant funding may be an acceptable pricing policy where an independent entity determines:  (1) the cost of and responsibility for needed upgrades; (2) congestion price signals to which the customer responds (along with Congestion Revenue Rights); and (3) the assumptions underlying the power flow analysis.114  

35.       The Commission envisions that, under Standard Market Design, the Independent Transmission Provider will perform all of these functions, which will allow the Commission to consider the use of participant funding.  However, full compliance with Standard Market Design will take some time.  We are eager to see new infrastructure in place as soon as possible and believe that participant funding will be a useful tool to make that happen.  Accordingly, we propose that, for proposed transmission facilities that are included in a regional planning process which is conducted by an entity, whether an RTO, ISO, or other independent entity, that is independent, we will consider participant funding for that project.

36.       In the absence of independence, we would apply a default pricing policy that would recognize the regional benefits of transmission expansions.  Under this default policy, we propose to roll_in on a region_wide basis all high voltage network upgrades of 138 kV and above.  Since lower voltage, sub_regional transmission needs are less likely to benefit the whole region, the cost of network facilities below 138 kV could be more appropriately allocated to a sub_region (e.g., a single transmission owner or a "license plate" zone) where the expansion facilities will be located.  Consistent with our proposal for interregional transmission service pricing, costs would be allocated to the region that benefits from the expansion, which may not be the same as the region in which the expansion facilities are located.  This proposal recognizes that high voltage expansions can have benefits beyond the borders of the local transmitting utility and, therefore, assigns a portion of these costs to more distant beneficiaries.

37.             Further, as we explain in Section IV.G.3, Regional Planning Process, we encourage the formation of Regional State Advisory Committees, which, in addition to facilitating the siting of regional expansions, can enable states to work together to identify beneficiaries of expansion projects and make recommendations on pricing proposals.  To the extent there is agreement within the Regional State Advisory Committee, the Commission would look favorably on a pricing proposal by the Regional State Advisory Committee if it is consistent with the FPA.  Such a proposal might take the form of roll_in, an assignment to beneficiaries, or some combination of the two.

            We seek comment whether these pricing proposals are appropriate to meet our goal of expediting needed infrastructure investment or whether another method would be more effective.


102Regional State Advisory Committee as discussed more fully in Section IV.K.

103A Network Integration Transmission Service customer pays a monthly demand charge based on its load ratio share of the transmission provider's monthly transmission revenue requirement.  The customer's load ratio share is based on the customer's hourly load coincident with the transmission provider's monthly transmission system peak.  The firm Point-to-Point transmission customer pays a monthly demand charge for each unit of capacity that it has reserved.

104Both PJM and New York ISO use a license plate rate design.  PJM and New York ISO have different rate designs for exports and wheel-through services.  PJM uses a weighted average of the charges of all transmission for these types of transactions.  New York ISO uses the transmission charge of the owner of the intertie that serves as the point of delivery to the adjacent system.

105Point-to-Point customers wanting to receive a direct allocation of Congestion Revenue Rights would also pay the access charge, as discussed below.

106We propose that Congestion Revenue Rights be directly assigned only to long-term firm customers, consistent with the existing pro forma tariff's right of first refusal.  Thus, short-term and non-firm point-to-point customers would not receive Congestion Revenue Rights under direct assignment.  These customers, therefore, may wish to structure their contracts such that they expire at the time Standard Market Design is implemented.  This way, while they would not receive Congestion Revenue Rights, they also would no longer be paying an access charge.

107Carolina Power & Light Co., et al., 94 FERC ¶ 61,273 at 61,999, order on reh'g, 95 FERC ¶ 61,282 (2001).

10895 FERC ¶ 61,282 at 61,991.

109However, the transaction would still be responsible for applicable congestion charges and transmission losses in the originating and any intermediate transmission systems.

110E.g., a load and Generator 1 with a cost of $25 are located in RTO A, and a competing Generator 2 with a cost of $24 is located just across the border in RTO B.  On its face (and absent congestion), it appears that the load should choose Generator 2 in RTO B.  However, because Generator 2 faces a $2 transmission charge from RTO B, it is unable to compete with Generator 1 even though it is a more efficient unit simply because of the additional access charge.

111This would also be true for a non-RTO Independent Transmission Provider.

112An explanation of how this charge may be calculated is contained in Appendix F.

113See DOE National Transmission Grid Study.

114The Commission is currently reviewing extensive comments on this topic in that proceeding.