Flow-based pricing ends
subsidies inherent in grid-wide,
postage-stamp rates.
I
n Order 888, the Federal Energy Regulatory Commission suggested 11 principles for forming an independent system operator, or ISO. In its third principle, the FERC offered this guidance on transmission pricing:
An ISO should provide open access to the transmission system and all services under its control at non-pancaked rates pursuant to a single, unbundled, grid-wide tariff that applies to all eligible users in a non-discriminatory manner. %n1%n
Several of the ISOs now under consideration across the nation face tough decisions on transmission pricing. %n2%n The most obvious literal interpretation of the FERC's third principle would be to set the price for ISO transmission by rolling embedded costs into a single, grid-wide, postage-stamp rate. Under this method, revenue requirements for bulk transmission facilities turned over to the ISO would be tallied. This aggregate ISO revenue requirement, divided by the total load (determined using the 12-month, coincident-peak method), would yield a postage-stamp rate for all transactions.
In theory, this simple approach to pricing would put power producers on equal ground in the competition to serve load. However, this proposal creates many issues for transmission owners, state and federal regulators, and transmission customers.
Several basic problems emerge under the single, grid-wide, postage-stamp rate suggested by the FERC:
• Recovering costs (the traditional "revenue requirement");
• Dealing with "rate shock" for eligible customers;
• Determining whether eligible bundled customers choosing to remain bundled take service at ISO rates;