Southern proposes distance transmission pricing policy

By the OGJ Online Staff

HOUSTON, Nov. 12, 2001 – Southern Co. said electricity transmission pricing should be sensitive to distance, departing from current Federal Energy Regulatory Commission’s pricing policy.

FERC is currently developing the plan for how large regional transmission organizations would be structured and operate, including paying for the cost of moving electricity on the grid. Part of the impetus for organizing regional transmission grid operators is to eliminate rate “pancaking,” which raises the cost of shipping electricity between local control areas.

Southern’s new pricing proposal, released in a report earlier this month, would clearly link transmission prices to distance. Within the territory served by Southern’s utilities, it costs the same to move power 1 mile or 300 miles, the company said.

Atlanta-based Southern claimed this raises energy prices and harms electric system less reliability. The current price system encourages generation to be built close to natural gas pipelines to minimize gas costs that are sensitive to distance. But it also means power plants are located far from load centers.

Southern said the pricing system has created a substantial need for new transmission that would not otherwise be required. Southern estimated $6-$9 billion in new transmission investment over the next 5-6 years will be required to serve the merchant plants being added in its geographic area – nearly three times the book value of it existing transmission assets.

The transmission pricing system evolved out of the old vertically integrated utility model. Transmission costs were hidden in bundled retail rates. New power plants were located based on the lowest combined cost for generation and transmission. Transmission made up a very small component of overall bundled rates.

Today, generation and transmission decisions are made by separate companies using separate costs incentives. Before, only fixed costs were considered. Now transmission costs at the margin must be considered.

“Transmission costs, at the margin, are becoming a very significant cost of providing electric power,” Southern said. Southern proposed dividing the new RTOs into geographic zones to send appropriate distance sensitive price signals to generators.

Generators would pay for the fixed cost of existing transmission based on the number of zones they cross in serving load. The allocation of the fixed costs of the system would be based on actual use of the system. This means transactions that use more of the system between the point of generation into the system and the load served by that generation, will pay more than those transactions that use less of the system.

Southern also proposed the beneficiaries an expanded transmission facilities should pay for it and receive firm rights in return. If existing customers do not benefit, they should not be required to share in costs of upgrades, Southern said.

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at

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