Locational marginal pricing (LMP), a key component of FERC’s massive standard market design (SMD) proposal for U.S. wholesale power markets, will fail in the absence of so-called participant funding for new transmission construction and upgrades, a top official with Southern Co. said last Wednesday.

The thorny issue of pricing proposals for transmission network upgrades and expansions in the U.S. has received increased attention at FERC in recent months and was the subject of an all-day technical conference at Commission headquarters in Washington, DC.

“Without participant funding, I strongly believe that locational marginal pricing and market-based congestion will fail,” said Bruce Edelston, director of policy and planning at Southern, who appeared on one of several panels at the technical conference.

“The reason I believe that is that if, in my decision as a customer, I can be assured or I can predict that somebody else is going to pay the cost of relieving congestion as a result of my location decision, then I’ll locate anywhere because I don’t have to face the cost of my location decision,” Edelston said.

“Or, even with respect to my use decisions, if I’m located in a congested area and if somebody else is willing to pay the cost of relieving the congestion, then why wouldn’t I continue to use more power in that area even though that’s not the most efficient solution?”

In addition, Edelston said that participant funding is more consistent with the use of demand side management and distributed generation. Moreover, participant funding can help send the right price signals, which in turn can spur the development of technologies designed to boost transmission capacity, he argued. “If we socialize costs, if we roll in costs, again, we’re providing everybody with the wrong price signals,” the Southern executive said. With rolled in pricing, transmission projects are paid by all users of the regional grid.

Edelston made his remarks in response to comments offered by FERC Commissioner William Massey earlier in the day. “When I look at this issue, I look at it in the context of what I consider to be the centerpiece of standard market design, which is locational marginal pricing,” Massey said.

“It seems to me, all the working parts of standard market design ought to fit together in some cohesive way,” he added. “If the centerpiece is locational marginal pricing, it seems to me that some sort of participant funding is more consistent with that.”

At least one of the purposes of the technical conference was to try and hammer out a more exacting definition of participant funding. “One of the challenges with talking about participant funding is that if you talk to different people, they will all tell you ‘Well, I’m in favor of participant funding,’ and then when you ask them what participant funding is they’re 180 degrees away from each other,” said Frank Schiller, a vice-president of Progress Energy.

Schiller took a crack at trying to define participant funding. “It’s generally any methodology that allocates costs of new transmission facilities and upgrades according to who has benefited the most by the investment,” he said. “If a load-serving entity or a generator is benefiting particularly from a proposed transmission addition, we believe that the costs should be allocated to that entity and should recognize the exceptional level of benefit.”

But the Progress Energy executive also said that “does not mean that most transmission upgrades should be, at the end of the day, funded in that way. To the contrary, our view is that, except in unusual circumstances, the majority of transmission costs should be rolled into an overall transmission rate base.”

The Southern Governors Association in September urged FERC to issue an order that would immediately shift its transmission pricing policy to a participant funding model. In response, FERC Chairman Pat Wood sent a letter to the southern governors making it clear that his agency is far from opposed to the idea of participant funding. Wood pointed out that a closer reading of FERC’s recent notice of proposed rulemaking on SMD for interstate electricity markets illustrates the agency is far from opposed to participant funding.

More recently, FERC last month issued an order signaling that sponsors of the SeTrans regional transmission organization (RTO) were headed in the right direction on several fronts, including the RTO’s proposed protocols covering market design, operations, pricing, planning and the concept of participant funding to pay for transmission expansions. Commissioner Nora Brownell cautioned at the time, however, that the SeTrans’ sponsors needed to be “very specific, very clear” in the future on what the rules would be with respect to participant funding.

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