Socializing The Grid: The Reincarnation of Vampire Wheeling

            The common aphorism is that electricity flows along the path of least resistance.  But that aphorism is just the shorthand way of describing the way electricity flows along all available paths, loading those available paths such that the marginal losses on the various paths are the same.  A scheduled transaction from Pittsburgh to Philadelphia will change the loading of the lines in Tennessee and Ontario, maybe not much, but at least an amount that can be calculated.  Of course, loading lines in Tennessee or in Ontario will change the loading on the PJM lines between Pittsburgh and Philadelphia.  The lines in Tennessee and Ontario can be considered to be parts of parallel paths for moving electricity between Pittsburgh and Philadelphia.

            It should be noted that the loading of lines in one region changes the loading of lines in another region, not necessarily increasing the loading, but changes the loading.  For instance, moving electricity from Pittsburg to Philadelphia loads lines from west to east.  If before this movement Ontario had been moving electricity from east to west, the Pittsburgh to Philadelphia transaction would tend to lower the loading on the wires in Ontario.  Thus, Ontario would benefit from the parallel path flow associated with a contract to move electricity from Pittsburgh to Philadelphia.

            The effect of a Pittsburgh to Philadelphia transaction on Ontario is part of a paradigm known as the “Lake Erie Loop Flow.”  A search of the FERC electronic library for 2009/2010 reveals 80 different documents with the term “Lake Erie Loop Flow” in several different dockets, including one docket (ER08-1281) that is effectively on the results of market manipulations associated with the “Lake Erie Loop Flow.”

            When I published my first paper, “Tie Riding Freeloaders–The True Impediment to Transmission Access,” Public Utilities Fortnightly, 1989 December 21, I was concerned that the contract path methodology would reward those transmission owners who were aggressive in signing transmission contracts to the detriment of the Ontario’s and the Tennessee’s in the above Pittsburgh to Philadelphia transaction, that is, the other transmission owners who were supplying the parallel path.

During the 1990s, the General Agreement on Parallel Paths (GAPP) proposed a sharing of wheeling revenue among the transmission owners just to the west and south of PJM.  GAPP only dealt with wheeling revenue.  A direct sale by one of the participants into PJM did not produce wheeling revenue and thus was outside the settlement provisions of GAPP.  The GAPP experiment lasted about three years.  GAPP contrasted with my proposal that the transmission owners cash out unscheduled flows on a real time, geographically differentiated basis.

            About the time of “Tie Riding Freeloaders”, El Paso Electric Company built a new high voltage (345 KV) transmission line that roughly paralleled an existing low voltage (115 KV) transmission line owned by Plains Electric Generation & Transmission Cooperative (now a part of Tri-State Generation and Transmission Association).  The lower impedance of the El Paso line resulted in substantial amounts of Plains electricity flowing on the El Paso line instead of on the Plains line.  El Paso sought to obtain revenue from Plains for the loop flow that was occurring on the network.  Plains called the concept Vampire Wheeling and fought the El Paso claim for compensation.  The issue was eventually settled in a transmission planning forum.

            Twenty years later the claim of Vampire Wheeling has re-arisen, but with the name of transmission cost allocation.  Owners of new high voltage transmission to be built in the footprint of large RTOs are seeking an investment driven revenue requirement that will be paid by all parties within the RTO footprint, whether or not the parties have agreed to the line or believe that they will benefit from the line.

The most egregious example of this unfairness is MISO relative to Michigan.  MISO transmission owners are planning major transmission lines to move electricity (much of it generated by wind) from the Great Plains to the Midwest, to the part of the MISO footprint that is south of Michigan but does not include Michigan.  Most of the electricity is likely to be sold to utilities even further east along the Atlantic Seaboard.  The current plan is to socialize the cost of the transmission lines by requiring all customers in MISO to pay based on their retail load.  Michigan objects for several reasons, including

  • Michigan’s law that obligates Michigan utilities to source a large amount of wind generation in-state.
  • Much of the wind generation will be going on to PJM and then to the East Coast, without Michigan being on the path.
  • Though Michigan is currently an integral part of MISO, a situation that will soon change when FirstEnergy changes from being part of MISO to being part of PJM, making Michigan connected to the rest of MISO only through PJM.

I believe that a suitable alternative approach is to cash out on a real time basis all unscheduled flows of electricity between and among the transmission owners, with the RTO’s frequently being treated as the transmission owner for those lines that have been socialized.   The price differentials across a transmission system would reflect the marginal line losses.  Since marginal costs are greater than incremental costs, the burdened system would earn greater revenue than it would incur in line losses.  Conversely, since marginal costs are less than decremental costs, the paying system would pay less than the line losses it saved by the loop flow on the neighboring system.

Reliability issues would be addressed by having the prices respond appropriately.  When lines are congested, the marginal line losses nominally increase, resulting in greater price differentials across the congestion point.  Similarly, when generation plants are strained, then all prices would increase.

In the Plains/El Paso example, the differences between the scheduled flows at the interfaces between the two utilities would have real time prices that change frequently.  The differences between scheduled and metered flows would be priced, with one utility effectively paying the other for fuel at each location, at least most of the time.  When the generation systems become strained, the prices would together float up when there is a shortage and float down when the constraint is minimum load conditions, such as those I discussed in

  • “Renewable Electric Power—Too Much of a Good Thing: Looking At ERCOT,” Dialogue, United States Association for Energy Economics, 2009 August; and,
  • “A Pricing Mechanism To Facilitate Entry Into The FCAS Market: Comments Of Mark B. Lively, Utility Economic Engineers,” Investigation Of Hydro Tasmania’s Pricing Policies In The Provision Of Raise Contingency Frequency Control Ancillary Services To Meet The Tasmanian Local Requirement, Office of the Tasmanian Economic Regulator, 2010 July 9.

The prices at the various interconnection points would disperse when the lines were constrained.

Socializing the Grid

A friend sent me a message overnight that asked me, since my friend says I have an understanding of utility issues, to identify the misstatements in a 2009 January 15 article “Browner: Redder than Obama Knows” by Steven Milloy.,2933,480025,00.html   My response is below.  Now, as I am posting this to my blog, I realize that the article is over two years old.  When I began writing my response, I had focused on the January 15 and thought that I was only 11 days behind the time instead of two years.  Oh, well.  The interest in the article is current even if the article isn’t.

Before I talk about the Fox article, “Browner: Redder than Obama Knows”, let me talk a little about the socializing of the electric system, an issue I have been trying to correct for over twenty years.

Electric systems improve reliability by increasing the number of generators connected to the grid.  More generators with enough capacity and we are more likely to have enough electricity for everyone.  Electric generators have great economies of scale.  Larger units mean less steel and concrete per KW or KWH.  Perhaps more importantly, fewer power plant employees.  Manning an operating room 24×7 for a 2,000 MW plant takes not many more people than for a 300 MW plant.

So, eighty years ago electric systems were in a quandary.  To maintain high reliability, electric systems needed more units.  To keep costs low and improve profit margins relative to a fixed price, electric systems needed larger units.  So the trade off was between more, therefore smaller, units versus larger, therefore fewer, units.  The solution was to interconnect with one’s competitors which increased the number of units connected to the grid and allowed utilities to build larger, less costly, units.  In the summer of 1969 and from 1971 to 1976 I worked for American Electric Power (AEP).  In perhaps ten years times, AEP went from building 280 MW generators, to 800 MW, to 1300 MW, being able to achieve those economies of scale by having more interconnections with its neighbors than almost any other utility in the US.

Those interconnections created a form of socialism.  The utilities did not figure out how to charge each other for the increased reliability provided by the interconnection.  Reliability came to be considered to be a public good, not to be charged for.  Reliability regions created rules for their interconnected utilities, such as having a 20% reserve margin for each utility or having spinning reserves equal to the size of the largest unit.  If we assume only the 20% reserves, then a very small utility could build one large unit to enjoy the economies of scale and rely on the large number of interconnected units for reliability.  If an industrial facility builds and operates a cogeneration plant (whose per KWH fuel costs because of the steam usage is half of the per KWH cost of a conventional plant), then the industrial facility will not want to have a spinning reserve requirement that reduces the generation by on the cheapest unit on the system.

Over twenty years ago I wrote “Tie Riding Freeloaders–The True Impediment to Transmission Access,” Public Utilities Fortnightly, 1989 December 21 arguing for a de-socialization of the electric system, both of the generation component discussed above and of the transmission component.  I say that we need a system to pay for unscheduled flows of electricity on very small time increments.  That way the small utility with the single large unit would pay the current value of electricity whenever the unit went down.  If the unit always failed during the summer peak, then the prices would be very high.  If the utility did sloppy maintenance and the unit was out more than the average for the rest of the grid, then the utility would be making frequent payments.  The reliability regions were not able to devise a reserve rule to penalize the sloppy maintenance practices or the bad timing issues.  I say that pricing the unscheduled flows achieves the appropriate grid discipline, or at least better grid discipline.  India put into place such a pricing mechanism and improved its grid discipline.

The physical interconnection created a form of socialism of the generating system.  Real time pricing of the imbalances would remove some of that socialism.

For the transmission system, socialism comes in the form of loop flow.  Engineers often use the short hand of saying electricity flows through the path of least resistance.  But, when there are several paths of relatively low resistance, the electricity divides among those paths such that the marginal line losses on each path are the same.  Thus, two parallel identical lines will split the load equally between them.  Attach something to one of the lines and the load will split in some slightly different way, but not all going to the one line with the least resistance despite the short hand.

Higher voltage lines have lower resistance than do lower voltage lines.  Higher voltage lines are more expensive per mile of wire but less expensive per KW-mile, with much lower line losses.  Consider this another example of economies of scale.

Consider a small utility that has a low voltage transmission line connecting its customers over a long corridor.  Consider a large utility serving roughly the same corridor that builds a high voltage transmission line parallel to the other line.  If the lines are connected to each other at each end, total line losses are reduced when some of the power from the small utility travels on the wires of the large utility.  If there is a scheduled transaction for the flow, the small utility will pay a wheeling fee to the large utility.  Generally there is no scheduled transaction and the small utility gets a free ride, a form of socialism.  Some describe the claim by the large utility for a wheeling fee to be “vampire wheeling.”  My article says that the network needs to price this unscheduled flow by differentiating the price geographically in addition to the temporal differentiation discussed above.

In regard to the Fox article, the aiding and abetting has taken the form of support for carbon taxes that would impact utilities differently.  A utility with a large nuclear fleet would see its competitors costs go up.  That would competitively advantage the nuclear fleet owner and in restructured markets, such as those operated by ISOs, the price of energy from the nuclear fleet would go up by the carbon tax without the cost of the nuclear fleet going up.

In regard to decoupling, some utilities will weatherize my home, with little or no charge to me.  That will lower the amount of electricity that I consume for HVAC.  The utility will treat the cost it incurred to weatherize my home as a legitimate rate case expense.  This raises the price that everyone, including me, pays.  If the utility has 100 customers, then I end up paying in higher rates less than 1% of the cost that the utility incurred to pay for weatherizing my home.  With a thousand customers, I pay less than 0.1%.  But I will pay for weatherize other peoples’ homes.  Except, that my new, green and economy minded, wife and I already spent a fortune on new double paned windows and other weatherizing features.  So my costs will not get socialized but I would pay the cost incurred by the utility for weatherizing others.

The Fox article presents three ways for decoupling, different ways for the utility commission to treat the weatherization costs as a legitimate rate case expense.  Or the government could use stimulus money for the same purpose, a different form of socialization.

My comments above don’t actually identify and explain misstatements, just explain some of the statements.