The U.S. electric power grid is complex. Multiple players are involved beyond the local utility from generation to transmission and distribution. In this article, we’ll explore transmission contract settlements, also known as transmission billing, which is settling or billing for the services a transmission provider has delivered.
The Role of ISOs and RTOs
Before we get into the types of transmission contracts and rates, we should first set the stage with a little background. The U.S. electric power grid is managed by several Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs). Formed by the Federal Energy Regulatory Commission (FERC), RTOs and ISOs are responsible for controlling, coordinating, and monitoring the electric grid in specific regions of the country. For example, the Midcontinent Independent System Operator (MISO) is responsible for portions of 15 states in the Midwest and South, while ISO-NE is responsible for six states in the New England region.
ISOs and RTOs don’t generate electricity; local utilities do that. Instead, these organizations are responsible for the transmission of electricity within and through their specified region. In accordance with federal regulations, each ISO and RTO must submit a transmission tariff to FERC for approval each year. This legal document outlines, among other things, the rates the provider will charge for electricity to flow through their grid. The grid operator’s transmission tariff defines two transmission service contracts — Network Integrated Transmission Service (NITS) and Point-to-Point (PTP). Settlements are handled differently for each, so let’s start with NITS.
Network Integrated Transmission Service Contracts
Network Integrated Transmission Service (NITS) contracts address the transmission load within the provider’s service area. The rate for these transmission services depends on the provider’s annual transmission revenue requirement (ATRR). The ATRR is the revenue the grid operator needs to provide services to its customers and deliver a fair return to shareholders.
Let’s say a grid operator determines that its ATRR is $5 billion this year. To collect that revenue, each customer pays a calculated percentage of that $5 billion. Here’s how that’s determined: First, the grid operator identifies their system peak, or the point at which the load is highest across the entire territory for a given month. Then, they determine the customer coincident peak (CP), or the load for each customer at the time of system peak. The percentage of the ATRR for which each customer is responsible is then calculated as the customer CP divided by the system CP. In other words, each customer’s transmission costs = ATRR*(Customer CP / System CP).
Of note, a customer’s coincident peak may be lower or higher than their maximum peak usage, but that’s not considered when using this settlement formula because if you sum every customer’s CP, your total will equal the system peak — the maximum load the operator can expect to see during the period.
While transmission costs comprise 90-95% of the NITS fees billed by a grid operator, some ancillary services (A/S) charges are included in the settlement. Monthly rates for scheduling, system control and dispatch services, regulation and frequency response services, and energy imbalance services are all approved by FERC as a part of the grid operator’s tariff. A/S charges are typically calculated as the approved monthly rate multiplied by the customer’s non-coincidental peak or maximum load for that month.
Point-to-Point Transmission Contracts
The other type of transmission contract is called Point-to-Point (PTP). A PTP contract addresses electricity that’s wheeled through, or passed through, the provider’s region on its way to a neighboring ISO or RTO. For example, if Canada sells power to Oklahoma, that power will have to first travel through MISO before it reaches its destination in the Southwest Power Pool (SPP).
The grid operator’s tariff defines how they can bill for the electricity wheeled through their grid. Rather than focusing on a ratio to allocate the ATRR target as with NITS, PTP contracts bill based on each megawatt the grid operator transferred.
Two factors impact the rate a provider will charge — firmness and service increment. PTP transmission services are either firm (higher priority) or non-firm (lower priority). If the wheeled energy is used to power residential areas and critical infrastructure like hospitals, that energy is considered firm. Things like manufacturing and industrial customers would be considered non-firm. The operator will prioritize wheeling firm power if the grid is under stress.
Customers must make a reservation with the grid operator to receive wheeled power. In other words, you need to tell the provider that you need 400 MW of firm service between X and Y time. Reservations can last years, months, weeks, days, or hours — the specified time frame is the service increment. The billed rate for the reservation will differ depending on the service increment and whether it’s firm or non-firm. It may also differ based on the time of day the pass-through happens, depending on how the operator’s tariff is written.
Customers pay to reserve the capacity, so the grid operator bills for the amount reserved, whether consumed or not. Reservations can be resold and redirected if not fully utilized to recover costs.
As with NITS contracts, PTP transmission contract rates include ancillary services charges as defined in the tariff and approved by FERC. PTP settlements also include charges for transmission losses that occur when electricity is sent over long distances.
PCI’s GenManager Streamlines the Settlement Process
As noted at the top of this blog post, the U.S. electric grid is complex, so it seems natural that settling transmission contracts would be equally as complex. PCI’s GenManager is a front- and back-office software solution that can simplify and automate the detailed workflows required for ISO/RTO settlements. Learn more here.