A Dual Approach to Financing Transmission Expansion
27 Pages Posted: 6 Jan 2011 Last revised: 31 Jul 2011
Date Written: January 5, 2011
Cost allocation for transmission expansion is a particularly thorny problem, especially in the case where a new line crosses state boundaries. As Sauma and Oren (2007) note, sometimes there are misalignments between costs and benefits associated with investments in transmission, because payments for transmission investment and its use are made at the state level, but the economic impacts from these investments extend beyond state boundaries. As a consequence, transmission expansions that maximize social welfare may not produce Pareto superior outcomes, resulting in justifiable local opposition from such projects. This paper’s basic theme is that in absence of widespread penetration of merchant transmission in the United States, funding for transmission lines connecting interconnecting control areas should incorporate market-based principles to the maximum extent, while leaving no group worse off than before the expansion (with the exception of generators displaced by the line). The latter qualification is necessary to reduce opposition to a line seen as potentially harmful to key interest groups. The paper advances a two-part approach to financing transmission expansion consisting of a variable component, which provides essentially the same remuneration as an FTR, adjusted for lumpiness of transmission. The second is a fixed component, determined as a portion of the downstream RTO’s firm- and non-firm transmission charges attributable to the new transmission line.
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