Southern Company today released two reports on critical issues facing the nation`s electric transmission system that need increased attention by federal policymakers.
The first report authored by the economics consulting firm Analysis Group/Economics, Inc. presents some of the key problems with traditional regulatory policies that are inhibiting investment in new transmission facilities and distorting location decisions by new generators.
On October 10, 2001, Allen Franklin, Southern Company`s chairman, president and CEO, testified before Congress regarding the need to provide better transmission pricing signals to generators so that they will be incented to locate closer to customers and in areas not requiring substantial new transmission investment. The problem presented is critical to Southern Company, as over 30,000 MW of new generation is seeking to locate in Southern Company`s service area - an amount far greater than will be needed by area consumers. Most of this generation will be sold outside of the region, and will require major expansion of the transmission system. In most of these cases, it would have cost less and have been more reliable to locate the generation closer to its customers, but because generators don`t face the true costs they impose on the transmission system, they are more likely to locate closer to sources of gas to fuel the plants, without regard to the transmission costs imposed.
The study conducted by Analysis Group/Economics finds that it generally would be less expensive to locate generation close to consumers and build gas pipelines when needed than to build generation near the gas fields and transmit the power to consumers located far away. Yet under current Federal regulatory policies, where gas pipeline pricing is distance sensitive and transmission pricing is not, exactly the wrong price signal is being provided to generators. Inconsistent pricing simply does not make sense for two competing energy infrastructures.
Southern Company has proposed a solution to this current inefficient pricing regime, which is described in the second report being released today - a "Southern Company Transmission Pricing Proposal." The proposed solution is a regulated pricing framework that takes into account the major factors that affect the incremental costs of providing transmission service - distance, congestion and losses, more closely aligning electric transmission and gas pipeline pricing policies. Distance sensitivity is factored into the pricing proposal by using a zonal rate system, where longer distance transactions over multiple zones pay more than shorter transactions within a zone. Congestion is dealt with through the use of locational marginal pricing, and losses are handled through distance-based loss factors or some other method of measuring marginal losses.
The Southern Company proposal also suggests that generators who create the need for transmission upgrades that do not benefit other customers should pay for those upgrades, in return for which they would receive rights to use the transmission system without paying congestion costs. These transmission rights could be sold to third parties in a secondary market. This form of "participant funding" will ensure that generators face the costs of the location decisions they make, leading to more efficient decisions and eliminating uneconomic and unnecessary transmission investment and thus reducing energy costs for consumers.
The Southern Company proposal also points to the importance of sufficient returns on transmission investments to provide the proper incentives for expansion of the networks. The nature of the transmission business is changing dramatically, and returns have to be re-evaluated as a result. Also emphasized is the importance of incentive or performance-based rates, particularly for regional transmission organizations that are being formed around the country, and the need to eliminate regulatory lag for cost recovery of the substantial investments that will be made in the transmission system over the next decade.
Southern Company Reports (PDF):
Analysis Group/Economics Study (PDF):
Southern Company (NYSE: SO) is a super-regional energy company with more than 32,000 megawatts of electric generating capacity in the Southeast. It is one of the largest producers of electricity in the United States. Southern Company is the parent firm of Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Nuclear, Southern Company Energy Solutions, Southern LINC, Southern Telecom and Southern Power, which includes the company`s growing competitive generation business in the Southeast. Southern Company brands are synonymous with excellent customer service, high reliability and retail electric prices that are 15 percent below the national average. With more than 500,000 shareholders, Southern Company common stock is one of the most widely held stocks in the United States.