A Comparison of Transmission Pricing Methods in Electricity Markets Worldwide

1. A Comparison of Transmission Pricing Methods in Electricity Markets Worldwide (Work from Past Group 38) Dariush Shirmohammadi dariush.shirmohammadi@om.com (+1 626 432 7562) CIGRE Conference Brasilia – September 23, 2003

2. Disclaimers • These presentation slides were accompanied by an oral discussion; the slides alone do not fully represent the presentation content. • This presentation represents the views of the speaker only. This presentation does not necessarily represent the views of OM.

3. Outline • Fundamental of pricing transmission services • Transmission pricing in restructured electricity markets • Transmission rights • Merchant transmission

4. Fundamentals of Pricing Transmission Services • Except in rare cases, transmission services are priced based on cost • Merchant transmission offers “value based pricing” • LMP based transmission pricing rarely covers the entire transmission price or even the bulk of it • Price of transmission service includes multiple components

5. Pricing Transmission Services: General Framework Step 1 Determine the transmission revenue requirement (TRR). Step 3 Step 2 Determine the Assign part or all of the incremental cost of the incremental system cost to Incr. Comp transmission transaction. the transmission transaction. Step 4 Adjust the TRR based on incremental cost of the transaction. Incremental Component Step 5 of the Transmission Price Divide the TRR into rate components. Step 7 Step 6 Allocate rate components to Sum transmission Transaction the transaction based on Embedded Component Price price components extent-of-use measures.

6. Components of Transmission Services Cost • Embedded cost: covering revenue requirements of the existing transmission facilities (amortization, taxes, hardware maintenance and operations, etc.) • Incremental cost: covers the “specific and new costs” “incurred” in providing the services • Operating costs due to losses and congestion (short-run costs) • Transmission reinforcements due to interconnections and network upgrades (long-run costs) • These costs are converted to prices based on pricing evaluation/allocation method and other pricing attributes

7. Principal Attributes of Transmission Price • Cost and price allocation/evaluation method • Spatial resolution of the price • Time resolution of the price • Payment responsibility • Ex-ante versus ex-post price evaluation • Transmission rights

8. Cost and Price Allocation/Evaluation Method • How costs related to embedded & incremental cost components of transmission service are evaluated and converted into price • Embedded cost • Postage stamp, license-place/zonal, MW-mile, etc. • Incremental costs: short-run & long-run • Marginal, average, average marginal, true incremental

9. Spatial Resolution of Price or Price Component • System-wide pricing: transmission prices or components thereof are insensitive to service delivery/receipt location • Zonal pricing: transmission prices or components thereof depend on the transaction’s delivery and receipt nodes • Nodal pricing: transmission prices or components thereof depend on the transaction’s delivery and receipt nodes/buses

10. Time Resolution of Price or Price Component • Annual pricing: transmission prices or components thereof remain the same for an entire year • Seasonal/monthly pricing: transmission prices or components thereof vary seasonally or monthly according mainly due to loading changes • “Hourly” pricing: transmission prices or components thereof vary on an hourly (sub-hourly) basis

11. Payment Responsibility for Price or Price Component • Transmission prices may be charged to either or both parties involved in a transaction, if that is the case • Supplies or their representatives such as marketers • Demands or their representatives such as load serving entities (LSEs)

12. Ex-Ante Vs Ex-Post Price or Price Component evaluation • Ex-ante based on simulated operation of the transmission system • Ex-post based on “actual” operation of the transmission system

13. Transmission Reservations and Rights • Hedge against congestion charges (and curtailment) of transmission service • Flowgate Rights (FGR) - Physical Transmission Rights • Point to point Financial/Firm/Fixed Transmission Rights (FTR) • Transmission rights are purchased from market operator (ISO/RTO/ITP) or in secondary markets

14. Transmission Pricing Method in the Current California Wholesale Electricity Market

15. Transmission Pricing Method in the England and Wales Wholesale Electricity Market

16. Transmission Pricing Method in the Australian Wholesale Electricity Market

17. Transmission Pricing Method in Norway in Nordic Wholesale Electricity Market

18. Transmission Pricing Method in Brazil Wholesale Electricity Market

19. Transmission Pricing Method in the Spanish Wholesale Electricity Market

20. Transmission Pricing Method in the Ontario Wholesale Electricity Market

21. Transmission Pricing Method in the South African Wholesale Electricity Market

22. Transmission Pricing Method in FERC’s Standard Market Design (July 31, 2002 Version)