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Economic Planning Measure: Societal Impact Test vs Consumer Impact Test

This economic planning measure compares the Societal Impact Test and Consumer Impact Test in determining the feasibility and benefits of projects. It analyzes changes in consumer and producer surplus to make recommendations for investment decisions.

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Economic Planning Measure: Societal Impact Test vs Consumer Impact Test

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  1. Economic Planning Measure Background TAC - April 7, 2006

  2. Economic Terminology The economic value, or Societal Surplus (SS), of a product is the sum of the Consumer Surplus (CS) and Producer Surplus (PS). In other words, the economic value is shared by consumers and producers. Producer surplus is due to all producers being paid the market clearing price although some would have been willing to be paid less. Consumer surplus is due to all consumers paying the market clearing price although some would have been willing to pay more. P CS S p PS D q

  3. Important Equalities • Changes in consumer surplus are equal and opposite to changes in producer revenue • In a market with efficient pricing of congestion rights, where the proceeds of the sale of these rights are returned to consumers • Changes in societal surplus are equal and opposite to changes in producer costs • For an equal quantity served • An algebraic proof of this is available

  4. Options • Societal Impact Test: the increase in the societal surplus (equal to the reduction in production costs) due to a project must exceed the incremental cost of the project • Consumer Impact Test: the increase in consumer surplus (equal to the reduction in generator revenues) due to a project must exceed the incremental cost of the project

  5. Societal Impact Test: Considers only whether a project has benefit to society as a whole and not whether consumers or producers receive the short-term benefit Since consumers pay all costs in the long term, they ultimately benefit from decisions which increase the societal surplus Individual projects may not immediately benefit consumers (and may cause consumer costs to go up in the short term) May not recommend projects to fix load pockets with high LMPs, but some of this congestion may be solved through generation siting Consumer Impact Test: Consumers pay for all transmission investment, so it seems congruous to fund projects that repay consumers Can justify bad projects, such as removal of transmission capacity Consumer impacts are hard to predict because they are affected by generator bidding behavior and terms of bilateral contracts Transmission projects that pass only the consumer test inefficiently transfer revenue from generators to consumers, with a resulting long-term impact on generation investment. Test Comparison

  6. Options • The two options being considered are: • Continue to use the Societal Impact Test to recommend projects; or, • Recommend projects that pass either the Societal Impact test or the Consumer Impact Test. • WMS voted in favor of Option 2

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