A recent national electricity transmission study conducted by Analysis Group/Economics Inc. found that it generally would be less expensive to locate power generation closer to consumers and build natural gas pipelines when needed, than to build generation near the gas fields and transmit the power to consumers located farther away.

However, the study — commissioned by Southern Co. — found that under current federal regulatory policies, where gas pricing is “distance sensitive” and transmission pricing is not, “exactly the wrong price signal is being provided to generators.” The report added that inconsistent pricing does not make sense for two competing energy infrastructures. These are some of the key problems with traditional regulatory policies that are inhibiting investment in new transmission facilities and distorting location decisions by new generators, the report stated.

Atlanta-based Southern pointed out that on Oct. 10, Allen Franklin, Southern’s CEO, testified before Congress regarding the need to provide better transmission pricing signals to generators as an incentive to locate closer to customers and in areas not requiring substantial new transmission investment (see NGI, Oct. 15). Franklin testified that the problem presented is critical to his company, as over 30,000 MW of new generation is seeking to locate in Southern’s service area — an amount far greater than will be needed by area consumers.

He rationalized that because most of this generation will be sold outside of the region and will require major expansion of the transmission system, it most likely would have cost less and would have been more reliable to locate the generation closer to its customers. However, because generators don’t face the true costs they impose on the transmission system, they are more likely to locate closer to sources of gas to fuel the plants, without regard to the transmission costs imposed.

In a second study issued by Southern titled a “Southern Company Transmission Pricing Proposal,” the company proposed a solution to the current “inefficient pricing regime.” It includes a regulated pricing framework that takes into account the major factors that affect the incremental costs of providing transmission service — distance, congestion — and recommends more closely aligning electric transmission and gas pipeline pricing policies.

“Distance sensitivity is factored into the pricing proposal by using a zonal rate system, where longer distance transactions over multiple zones pay more than shorter transactions within a zone,” the company said. “Congestion is dealt with through the use of locational marginal pricing, and losses are handled through distance-based loss factors or some other method of measuring marginal losses.”

The proposal also suggests that generators who create the need for transmission upgrades that do not benefit other customers should pay for those upgrades, in return for which they would receive rights to use the transmission system without paying congestion costs. These transmission rights could be sold to third parties in a secondary market. Southern said “participant funding” will ensure that generators face the costs of the location decisions they make, leading to more efficient decisions and eliminating uneconomic and unnecessary transmission investment. By streamlining the process, the company said consumers would benefit from the end result of lower energy costs.

The company’s proposal also touches on the importance of sufficient returns on transmission investments to provide the proper incentives for expansion of the networks. Because the nature of the transmission business is changing dramatically, Southern argues that returns have to be re-evaluated as well.

The proposal further emphasizes the importance of incentive or performance-based rates, particularly for regional transmission organizations (RTO) that are being formed around the country, and the need to “eliminate regulatory lag” for cost recovery of the sizeable investments that will be made in the transmission system over the next decade.

Copies of both reports are available on Southern’s web site at www.southerncompany.com.

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