Large RTOs and Traditional Transmission Pricing Don’t Mix

Historical electricity transmission pricing procedures such as postage stamp pricing and rolling-in may not be well suited for a regional transmission organization regime. Any assessment of potential benefits from RTO formation that assumes that these procedures stay in place is flawed if it ignores the potential for substantial extra costs prompted by use of these procedures. There appears to be widespread agreement that additional investment in the transmission system is needed to support the increasingly competitive wholesale electricity markets that virtually everyone believes are desirable, as well as to accommodate new generation capacity to meet growing demand in reliable fashion. Much discussion of this topic focuses upon certain types of problems that are believed to be impeding this new investment. These commonly discussed problems include (1) planning difficulties created by balkanized ownership and control of the transmission grid, (2) perceived parochial viewpoints of state and local regulators when they consider new transmission projects with benefits that are widely disbursed geographically but costs that are much more localized, and (3) perceived inadequate financial incentives that transmission owners have for investing in new transmission facilities. Separate questions, that have been less thoroughly examined, concern how the costs for new transmission investments should be recovered from users. In this article we ask whether historical transmission pricing procedures are likely to be appropriate when substantial investment in new transmission capacity is undertaken under a regime of RTOs that cover broad geographic areas. We address this question through the example of a developer choosing between locating a new generator near the load that it wishes to serve or near natural gas-producing areas that are remote from the load areas.