As the experience of the last two summers has shown, a grid that was built primarily to interconnect generators for reliability purposes is now being asked to facilitate economic transactions. It may not be up to the job. The FERC has addressed the issue of reliability and incentives for transmission expansion in its Order 2000. Policy Objectives for Transmission Pricing Transmission pricing must send the right price signals to market participants and compensate transmission owners and investors. Today, however, ISOs operate the system, current owners and future investors diverge, and generators are either divested entirely or managed out of separate affiliates.
Price signals send critical information to all users of the electricity system.
This last signal is particularly the case for merchant transmission, which some argue is the future of economic grid expansion. Some argue, let the market do the job of providing incentives for future transmission investment. The incentive for private investment will come from the value of transmission rights as indicated by locational price differentials. However, the more transmission expansion reduces this price differential, the lower the market value of the new transmission rights. Therefore, private investors may inefficiently undersize expansions.