Indirect costs have not traditionally been recognized in COS, but are increasingly important today. In transmission constrained regions, the costs of inadequate transmission service are significantly higher. Failure to account for indirect costs in transmission pricing will lead to inadequate incentives for transmission investment. When PBR was modified so that the transmission company incurred the costs of constraints, these costs dramatically declined. The Promise of PBR There are a number of challenges to implementing PBR for transmission.
Indirect costs are volatile and difficult to forecast.
Ensuring revenue adequacy requires balancing compensation and price signals accounting for embedded and incremental costs, and addressing the dilemma that indirect cost reduction can lead to lower revenues. However, regulation must respond to the challenges of underinvestment in transmission today. Left to itself, the market is unlikely to fully meet transmission needs. Regulation must provide adequate incentives for efficient operation and timely expansion. PBR for transmission can be structured to provide the right price signals to transmission owners, operators and investors, and those who use the system.