More than a decade ago, working at the energy laboratory at the Massachusetts Institute of Technology, the late Fred Schweppe devised a novel scheme for pricing electric transmission. His solution? Do nothing. Simply ignore transmission. Or, for those of you old enough to remember what utilities used to say about open access, "Just say node."
What Schweppe discovered, as told by Sally Hunt and Graham Shuttleworth in their recent book, Competition and Choice in Electric (John Wiley & Sons, Ltd., 1996), was that any attempt at transmission pricing is largely "redundant." The costs don't matter (except, perhaps, for line losses in a condition of zero constraints.) Instead, you simply estimate the price of generation at each and every busbar, or "node," in the grid. All else equal (no undue "market power"), the difference in energy prices at nodes A and B should give you the true price of transmission from those two points.
Schweppe eventually refined his ideas in the landmarks study, Spot Pricing of Electricity (Kluwer Academic Publishers, 1988), with co-authors Michael C. Caramanis, Robert E. Bohn, and Richard D. Tabors. That work forms much of the basis for today's "poolco" proposals. Today, a decade after the idea was born, the FERC is at last taking arguments on locational pricing for electric transmission.
A Slush Fund?
The case at the FERC involves the Pennsylvania-New Jersey-Maryland Interconnection. PJM member companies have filed an interconnection agreement, a tariff and a transmission owner's agreement governing wholesale trades in the new PJM power pool (see FERC Docket Nos. OA97-261-000 and ER97-1082-000).