Opinion ID: 151421
Heading Depth: 3
Heading Rank: 1

Heading: Locational Marginal Pricing

Text: California ISO proposed to use locational marginal pricing (LMP) to set wholesale electricity prices. With an LMP-based rate structure, prices are designed to reflect the least-cost of meeting an incremental megawatt-hour of demand at each location on the grid, and thus prices vary based on location and time. Each LMP consists of three components: (i) the cost of generation; (ii) the cost of congestion; and (iii) the cost of transmission losses. See First Market Redesign Order ¶ 50. The first component refers basically to the baseline cost of serving load [4] anywhere on the system in the absence of congestion and transmission losses. Id. With respect to the second component, we have explained: LMP ... incorporates the cost of congestion into the price of energy. Under the LMP system, [an ISO] takes into account the limits on available transmission capacity when determining the price of energy at each node in its transmission grid. This results in higher energy prices at nodes that require the use of congested transmission lines and lower prices in less congested areas. ... LMP [therefore] ... giv[es] market participants incentives to avoid congestion-causing transactions [and] is also more economically efficient: scarce transmission capacity is allocated to those who value it most instead of being physically rationed. Wis. Pub. Power, Inc. v. FERC, 493 F.3d 239, 250-51 (D.C.Cir.2007). The third component, transmission losses, refer[s] to the amount of electric energy lost when electricity flows across a transmission system: it is a function of the square of the amount of the current flowing on the wire and of the resistance it encounters. In general, the current on a given transmission line remains a constant, and the loss associated with a single transmission of electricity is primarily a function of the distance the electricity is transmitted. [An ISO] must deliver to the electricity customer the entire amount contracted for, regardless of the inevitable loss, so a transmission customer [ i.e., a load-serving entity] ... generally compensates [the ISO] for lost energy either by providing more energy at the injection point than the electricity customer receives at the withdrawal point, or by providing energy in-kind to the transmitting utility. Sithe/Independence Power Partners, L.P. v. FERC, 285 F.3d 1, 2 (D.C.Cir.2002) (citation omitted). In other words, unless the load-serving entity self-supplies sufficient electricity to make up for the amount lost during transmission, it must compensate the ISO for the losses. Transmission losses can be calculated on either an average or a marginal basis. If transmission losses are simply averaged system-wide and allocated to all load-serving entities pro rata, cross-subsidies result: parties that schedule[] long-distance transmissions pa[y] too little, while those that schedule[] shorter transmissions pa[y] too much. Wis. Pub. Power, 493 F.3d at 252. Marginal loss pricing, by contrast, recovers transmission losses on a transaction-by-transaction basis by ... treat[ing] every transmission as if it were the last (marginal) transmission on the system. This pricing scheme sends more efficient signals to market participants, but because transmission losses increase with the amount of current in the system, treating every transmission as the marginal transmission produces revenue in excess of actual losses. Id. California ISO proposed to incorporate the marginal cost of transmission losses into LMPs, arguing this was necessary to assure least-cost dispatch and establish nodal prices that accurately reflect the cost of supplying the load at each node. First Market Redesign Order ¶ 66 (footnote omitted). The ISO acknowledged that revenue collection would exceed losses and therefore proposed to credit excess revenues back to load-serving entities on a pro rata basis by reducing the cost of each megawatt hour purchased by a proportionate amount of the excess revenues. See id. ¶¶ 67-68. Finally, California ISO proposed to create several zones, called load aggregation points. Within each zone, the ISO proposed to calculate an average zonal price based upon the weighted average of the nodal LMPs within the zone. Suppliers would continue to be paid the precise LMP at a given node, but consumers would pay the aggregated price of their zone. California ISO contended that using zonal pricing for loadfor a transition period would protect consumers in congested areas from the sudden increase in costs that otherwise would result from the switch to an LMP-based market. The Commission approved California ISO's adoption of LMP, finding it would promote efficient use of the transmission grid, promote the use of the lowest-cost generation, provide for transparent price signals, and enable transmission grid operators to operate the grid more reliably. First Market Redesign Order ¶ 63. The Commission accepted the ISO's proposal to reflect marginal losses in its calculation of LMP, because doing so sends more accurate price signals and assures least-cost dispatch. Id. ¶ 90. Sacramento and Imperial challenge the Commission's approval of California ISO's proposal to include marginal loss charges in LMPs. They argue the Commission's finding that marginal loss charges would necessarily lower costs was in conflict with the Commission's previous orders and lacked substantial evidence. Sacramento also challenges the Commission's finding that marginal loss charges would result in transmission service equivalent or superior to that offered under FERC's pro forma tariff. Imperial challenges the Commission's finding that marginal loss charges would lead to just and reasonable rates and further argues the Commission exceeded its statutory jurisdiction by authorizing the ISO to assess marginal loss charges to transactions in which Imperial uses its transmission ownership rights.