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Increases in PJM’s Transmission Costs and Your Energy Bill

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This post was written by Marjorie Philips and David Scarpignato of the Direct Energy Government & Regulatory Affairs team.

Recently, it has been noted that PJM’s transmission costs have gone up exponentially. Some resources have implied this is due to generation retirements, such as coal plant retirement, when actually, there are a number of causes of increased transmission costs, particularly over the last few years due to the need to upgrade aging infrastructure.

A major component of these transmission costs are known as Network Integration Transmission Service rates or NITs. The charges under NITs may be offset in the transmission owner’s tariff rates by “Transmission Enhancement Credits”, or transmission upgrades charged to neighboring zones. The customer only sees the netting of the charges and credits. How do these charges increase, you ask? Keep reading! 

As an energy consumer, you pay both distribution (local wires) and transmission (higher voltage wires that support long transport from generation to load areas) rates. Transmission rates are filed by each individual transmission owner to reflect its investment (past, present, and potentially future to reliably transport electricity), and permit a return. 

Transmission Upgrades
Today, PJM directs building of new transmission, referred to as transmission upgrades, and allocates those costs to transmission owner zones, which are then reflected in the transmission rates on your energy bill. These upgrades are required for either reliability, economic efficiency, or to meet operational performance criteria.

In addition, pursuant to the new FERC Order 1000, transmission upgrades may be mandated to accommodate growing state programs for renewable resources. PJM allocates these costs pursuant to a very transparent process known as the Regional Transmission Expansion Plan (RTEP). Quoting directly from the PJM website, [RTEP] “identifies transmission system additions and improvements needed to keep electricity flowing to 51 million people throughout 13 states and the District of Columbia. Studies are conducted that test the transmission system against mandatory national standards and PJM regional standards. These studies look 15 years into the future to identify transmission overloads, voltage limitations and other reliability standards violations. PJM then develops transmission plans in collaboration with Transmission Owners to resolve violations that could otherwise lead to overloads and black-outs. This process culminates in one recommended plan – one RTEP - for the entire PJM footprint that is subsequently submitted to PJM’s independent governing Board for consideration and approval.” The approved upgrades are then filed with the Federal Energy Regulatory Commission (FERC).

Here is a quick overview of the types of transmission upgrades:

  1. Operational upgrades are determined in order to correct areas on the system that are prone to chronic operational challenges even though they do not fail the planning reliability criteria, which are only analyzed for peak load rather than everyday operational situations.
  2. Economic upgrades may be recommended when congestion reaches a certain threshold and persists; a test determines the amount of market efficiencies that would be produced by the upgrade versus its cost and then decides whether the project should be built.
  3. Public policy upgrades may be implemented in order to accommodate growing renewable resources requirements at the state level. It’s important to note that when new generation outside of the public policy upgrade process, such as new gas turbines, wants to interconnect into the PJM grid, the generation owner must pay for the upgrades to the system in order to make that generation deliverable throughout PJM, and customers do not pay for these upgrades. A large percentage of total transmission upgrade costs are actually paid for by generators.

How the RTEP Process Translates to Increased Transmission Costs
Through the RTEP process, PJM has authorized substantial upgrades, which in some cases PJM subsequently deems unneeded due to changes in system load growth or changes in generator dispatch. For instance, a combustion turbine may end up getting run more often than a coal plant due to new limitations put on the coal plant by the Environmental Protection Agency. In these instances, transmission owners are compensated for investments that had been FERC-approved through the RTEP process until termination of the projects. Until the past few years, little major backbone transmission has been built. Recently, however, with the addition of large projects such as the Roseland-Susquehanna Electric Reliability Project (PPL/PSE&G) and Lexington-Cloverdale 500kV Rebuild Project (AEP/Dominion), transmission costs have increased exponentially, although generally they remain less significant than energy costs. These large projects are considered reliability projects and are extremely expensive, largely because of regulatory and environmental approvals necessary to construct these greenfield upgrades.

How Do These Increased Transmission Costs Affect Your Energy Bill?
Project costs are allocated based on a net benefits test. Because transmission is a network of lines and not simply lines that connect serially from one source to one load area, it’s difficult to control which lines carry each generator's output. Rather, each line in the transmission network carries some electrons from many generators to many areas of load. Therefore, PJM cannot build a line or upgrade to simply serve one load area or one generator. Building a transmission line or upgrade actually ends up benefiting many load areas or many generators and PJM charges the cost of these upgrades to all beneficiaries - customers on the PJM system who benefit from the upgrades - based on how much they benefit from the new line or transmission upgrade.

How Can You Reduce Your Transmission Costs?
Generally, industrial and commercial customers can reduce their transmission costs by reducing their peak contribution to load. Customers without interval metering, which includes most residential customers, may reduce their charges by less energy usage overall. 

If you have questions regarding these transmission costs increases, please contact your Direct Energy Business representative. 

Posted: September 05, 2014