should result in high levels of reliability because centralized dispatching is assumed.

#### D.3. Choice of Service Quality

Transmission services can be differentiated according to several characteristics. These include the extent to which the service is “firm,” the probability of forced outages, the voltage level (and whether transmission is AC or DC), and the location of the service (point-to-point vs. area-wide). Users of transmission services value these characteristics differently, and proposals that allow choice in service qualities are likely to make better use of scarce transmission resources.

Regional transmission groups permit the design of pricing alternatives for transmission services with different qualities. In node pricing, each holder of a transmission capacity right is entitled to firm service over a contract path. Thus all services are “notionally firm” in the node pricing methodology. This is a disadvantage of this costing proposal, because it does not allow purchasers of transmission rights to elect different qualities of service.

Centrally-mandated prices are unlikely to provide for choices in service quality. If prices are based on the costs of transmission upgrades, the implied service quality would be firm. Under these conditions, transmission access would be required to be purchased on a firm basis when buyers might prefer a lower cost non-firm service.

#### D.4. Efficient Investment

This criterion speaks to the long run evolution of the electricity market. Transmission capacity is, by and large, a scarce resource. Any policy must encourage efficient expansion of the system. Existing institutions have been moderately successful at this process, but not enormously.

If buyers of transmission services have the right to force expansion when service is not available, the result may be too much expansion or expansion at the wrong place or time and in the wrong amount. If transmission owners are not obligated to expand, centrally-determined prices that only allow the owner to break even could result in too little investment. Owners of the assets would not achieve any substantial benefit from such investments and may suffer competitive losses by strengthening the position of others.

Node pricing would promise efficient signals for new investment only if the transmission cost function is well-behaved (i.e. concave). Unfortunately, there is every reason to believe that this is not the case (see, for example, Baldick and Kahn, 1993).

The regional transmission group allows a forum for the evaluation of alternative options to expand the network in a cost-efficient manner. Although private interests will attempt to promote a transmission resource plan that minimizes their individual costs, this strategizing can be checked through administrative oversight. While RTGs may encounter strategizing behavior by members that would distort investment decisions, they may improve on “business as usual” by resolving impacts on neighboring transmission systems. Both the costs of strategizing and the ability to internalize transmission impacts depend on the judicious choice of the size of the regional transmission group and on the conditions for membership.