Bridging the gap between theory and practice of transmission pricing

The authors describe some strategies for pricing transmission service. Traditionally, wheeling prices have been postage stamp rates based on the level of megawatt demand; a related approach would assign grid costs to customers based on their respective shares of overall megawatt-miles. Innovative regulators have recently approved transmission rates based on opportunity cost of foregone capacity and the incremental costs of additional capacity needed to enable delivery. Others determined prices designed to reflect short-run congestion costs on the grid. The authors assess these pricing approaches and their effects on the distribution of wealth and economic efficiency for both firm and interruptible services. 3 refs