Who Pays for Transmission?

It's not that we aren't getting transmission in. We are, just not as many miles as we'd like and not as many long lines as we need. On the national level,

It's not that we aren't getting transmission in. We are, just not as many miles as we'd like and not as many long lines as we need. On the national level, our investments are steady and growing, as seen in the Edison Electric Institute (EEI) February 2010 document “Transmission Projects: At a Glance.” But EEI points out that 70% of this investment is being spent within individual states. So why can't we get the larger projects going that cross state and regional boundaries?

Wind and Transmission

Connecting wind generation to the grid is having a significant impact on transmission investments, which make up 34% of the total transmission spend, according to EEI. So why does it seem like most major transmission projects coming out of the wind zones are jammed up?

I had assumed that obtaining right-of-way would be the biggest obstacle to building our bulk transmission lines, but now I am revisiting that assumption. It turns out, at least in the Southwest Power Pool (SPP) and in the Midwest Independent Transmission System Operator (MISO), the biggest obstacle is figuring out who pays.

Nearly half of the transmission lines in the United States fit within the SPP and MISO footprints, and these two system operators are located squarely in the center of the country. Therefore, what happens under the SPP and MISO footprints, in large part, will determine how successful we will be in sending the wind energy from the Midwest to load centers to the South and East.

Let's set aside the more detailed questions of whether the new bulk power lines are to be 345 kV, 500 kV or 745 kV and look at who pays.

Coming up with a formula for who pays is a lot like making sausage: It's messy. I got a glimpse of just how messy when I attended the Mid-America Regulatory Conference (MARC) held in Kansas City this year. I received a personal invite to attend from Jeff Davis, a commissioner with the Missouri Public Utility Commission, who took the lead in putting the MARC program together. I think maybe Davis likes to tangle, as his panels took on the major issues facing the Midwest today. Presenters included special interest groups, consumer advocates, transmission owners, smart grid devotees and the like. But the session that really grabbed my attention was entitled “The Tale of Two Tariffs: Will MISO and SPP Transmission Tariffs Deliver New Transmission and at What Cost?”

Here is the “rest of the story” on transmission expansion in the Midwest. John Bear, CEO of the Midwest ISO, shared that his organization is motivated to build transmission where appropriate, stating, “The MISO's value proposition depends on transmission expansion and scale is very important here.”

Bear referenced the “Regional Generation Outlet Study,” which shows customers will experience lower overall power costs in the region as additional transmission is built. But he cautioned that to move forward, “the MISO must have a regional tariff with workable cost-recovery mechanisms.”

The MISO is committed to filing a regional tariff with the FERC. The proposed MISO tariff has 80% of the transmission costs paid by the load through postage-stamp cost sharing. The current draft of the Midwest ISO tariff, proffered by the Organization of MISO States, would have 80% of the transmission costs paid by the load through postage-stamp cost sharing. The remaining 20% would be paid by generators. But the concept of a portion being paid by generators has plenty of critics. While Bear sees the need to send generators price signals so that they will locate generation properly, he also understands the impacts that this mechanism can have on the business models of generators, particularly existing generation.

Bear states, “We have yet to build any regional transmission in the Midwest ISO. Solving cost allocation in an equitable manner for all parties is a necessary step in enabling that construction.”

Nick Brown, president and CEO of the SPP, said that his organization's progress in gaining cost-allocation buy-in was in large part the result of recommendations by the Regional State Committee, composed of interest groups including state regulators. The resulting Highway/Byway cost-allocation methodology was 15 months in the making and the resulting request was approved by FERC on June 17, 2010. The idea is to break up transmission investment so that those who benefit the most pay the most. It works like this:

VoltagePaid for by RegionPaid for by Local Zone
300 kV and up 100% 0%
100 kV to 300 kV 33% 37%
100 kV and down 0% 100%

We have seen a lot of discussion over the past few years on how to fund economically and reliability-driven transmission investment. Brown has come to the conclusion that economics and reliability are inseparable, and it's a waste of time to try to distinguish between them. Brown is ready to start building out the network but, until recently, was is hampered by the lack of certainty in who will pay.

Both Bear and Brown are looking over long-time horizons as they address cost-allocation issues. And with the need to build voluntary support for these funding mechanisms, obtaining consensus is no easy task. But as the Obama administration is pushing hard for more transmission to transport wind to load centers, expect major transmission to be built within the SPP and MISO regions. But that is really just the first step. Or to quote Brown, “Once we have major transmission going up within our regions, we can increase our focus on building transmission between regions.

Coming up with routes and cost allocations is a time-consuming, maddening business requiring sometimes contentious discussions between transmission owners, system operators, special interest groups, FERC and state regulators. But over time, these efforts are starting to pay dividends. Expect soon to see major transmission going up under both the SPP and MISO footprints.r

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