What is electricity transmission?
In order for electricity to get from power plants to users, it needs to travel across wires. “Transmission” and “distribution” refer to the different stages of carrying electricity over poles and wires from power plants to a home or a business.
Transmission is the “interstate highway” of electricity delivery. It refers to moving electricity over long distances, often on very tall poles, to bring it close to areas of demand like cities and towns. Moving the electricity around a city and town on familiar neighborhood utility poles (or sometimes underground) is referred to as the distribution of electricity. Here is a depiction of the difference using the familiar appearance of transmission and distribution poles[1]:
One key difference between transmission and distribution is voltage. Transmission lines, transformers, substations and other equipment have voltages of 69 kilovolts (kV, equivalent to 69,000 volts) and above, while distribution lines typically operate at 35 kV or less.
Collectively, transmission and distribution lines make up what is commonly called “the grid.” Transmission and distribution are two separate stages or systems on the grid.
Who regulates the rates for electricity transmission?
Usually it is the Federal Energy Regulatory Commission (FERC). FERC is responsible for ensuring that the rates, terms, and conditions of the transmission of electricity in interstate commerce are just, reasonable, and not unduly discriminatory or preferential. In some areas of the country—such as Alaska, Hawaii, and much of Texas (which has a separate grid)—transmission of electricity is not in “interstate commerce” and so does not come under FERC jurisdiction, but in most parts of the country, FERC has jurisdiction over the rates, terms, and conditions of transmission.
On the other hand, the rates, terms, and conditions for the distribution of electricity are generally not under FERC jurisdiction, and would instead be regulated by a state or local agency with jurisdiction over electric rates.
Who pays for electric transmission rates?
Any electricity customer relies, to some extent, on transmission service and therefore pays transmission rates. If you are a retail end-user of electricity in your home or business, however, there is probably not a separate line item for transmission rates on your electric bill. Instead, the transmission rates approved by FERC are likely included in other portions of your bill, such as your energy usage charges. When transmission rates rise, your electric bill may increase eventually, but unless your utility itemizes transmission charges on your bill, it would be difficult to know how much of your bill increase is due to higher transmission rates.
What are formula rates for electricity transmission?
Traditionally, whenever utilities sought transmission rate increases, they had to file a rate case at the Commission. The purpose of the rate case is to establish the utility’s “cost of service” for providing transmission service. Cost of service includes the costs to the utility of building, operating, and maintaining transmission facilities, plus a reasonable return on investment to compensate the utility’s shareholders and debtors for their investment risks. Rate cases are typically lengthy, expensive proceedings overseen by an administrative law judge and require discovery of evidence and expert testimony—like a court trial.
As an alternative to a rate case, FERC allows utilities to use formula rates for transmission service. Under this approach, FERC reviews and accepts as the rate a formula for calculating the utility’s cost of service, including clear definitions of inputs to that formula and a process for updating rates every year as the utility’s costs change. A formula rate reduces the expense and burden for FERC and the utility to update transmission rates. However, formula rates must still be monitored closely to ensure that the utility does not overearn relative to the cost of service for providing transmission service (plus a reasonable return on invested capital), while continuing to provide service safely and reliably. Formula rates are designed with safeguards in place so that FERC and transmission customers can confirm that: (1) the utility is using correct data as inputs to the formula rate and (2) calculations are performed consistent with the approved formula. If both of these conditions are true, FERC presumes that the resulting rates are just and reasonable.
How does a transmission formula rate work?
Transmission formula rates are designed to calculate a utility’s cost of providing transmission service, which is then used to set rates. An example of a traditional cost-of-service formula is shown below. While actual formula rates would contain more details, this simple example will give you a flavor of how this works.
As briefly described above, a utility’s cost of transmission service generally consists of the following categories:
- Return—the cost of financing the utility’s investments, which compensates the utility’s shareholders and debtors for the risks they bear investing their capital
- Operation and Maintenance—the cost of operating and maintaining transmission facilities
- Depreciation Expense—the cost of building transmission facilities, spread over time
- Other Expense—other costs of service not accounted for in the other cost categories
- Income Taxes and Other Taxes—the cost of income taxes and other taxes incurred by the utility
- Other Operating Revenue—any revenues a utility receives from services other than transmission service (for example, rent payments from telecommunications utilities for use of electric poles).
Adding these costs together yields the utility’s annual cost of service, or in other words, the amount of annual revenue a utility requires to provide transmission service.
| Cost of Service = R + O&M + DE + OE + IT + OT– OR |
|---|
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R = Return O&M = Operation and Maintenance DE = Depreciation Expense OE = Other Expenses IT = Income Taxes OT = Taxes Other Than Income Taxes OR = Other Operating Revenue |
Each year, a utility with a formula rate would update the variable inputs to the formula: operation and maintenance expenses, depreciation and other expenses, income and other taxes, and other revenues. However, the return is treated differently, as it depends in part on the approved rate of return, which is determined in separate FERC proceedings rather than being a part of the utility’s annual formula rate update. To ensure transparency, utilities with a formula rate must follow detailed rules, known as formula rate protocols, which govern (1) how the utility implements the formula to calculate rates each year, and (2) how a transmission customer or interested party can challenge the utility’s calculation.
What are formula rate protocols?
Formula rate protocols govern how the utility discloses information to customers and resolves rate disputes, and thus play an important role in fulfilling FERC’s mission to ensure that transmission rates are just and reasonable. Customers, state regulators and advocates, and other interested parties have an opportunity under the formula rate protocols to seek and receive detailed information about the utility’s annual inputs into the formula rate, to conduct reviews, and to advance challenges to the inputs. Because utility accounting can be nuanced, the protocols also require utilities to disclose any accounting changes from the prior year.
How do formula rate protocols help customers and interested parties?
One of the key functions of formula rate protocols is establishing the timing of key events leading up to the ultimate filing with FERC of the updated inputs to the formula rates. For example, the formula rate protocols for a utility usually indicate:
- the timing of annual proposals to update the cost inputs and other data into the formula rate;
- the requirement to notify interested parties of the dates and locations of meetings on the rate inputs (often with virtual connection options);
- the timing for customers and interested parties to file document and information requests with the utility; and
- the timing for advancing challenges to the utility’s proposed inputs. Typically this would include an initial informal challenge process with the utility directly, and, if not resolved through those informal discussions, through a formal challenge to FERC.
What should I do if I am dissatisfied with a utility’s annual update, formula rate, or formula rate protocols?
If you are concerned about the utility’s annual inputs and the relevant deadlines have not passed, you should pursue your rights as described in the formula rate protocols, including your right to seek information, challenge the utility on inputs, and, if not resolved, to formally challenge the update in the FERC proceeding that addresses the utility’s formula rates. A formal challenge would require intervention in the applicable FERC proceeding.
If you are concerned about a utility’s formula rate protocols, please note that FERC has also been reviewing formula rate protocols and in some cases requiring utilities to implement enhanced protocols to provide greater opportunities for annual review by interested parties. OPP can help you determine whether there have been any recent rulings or if there is an open FERC proceeding that is already addressing the utility’s formula rate protocols. If there is not, you may be able to file a complaint under Section 206 of the Federal Power Act (FPA) if you believe that the utility’s formula rate protocols are unjust and unreasonable.
If you believe that the formula rate itself (that is, the set of FERC-approved formulas that the utility is using to set the rates) is unjust and unreasonable, you may also seek to advance an FPA Section 206 complaint at FERC.
If you need assistance with intervening, making a FERC filing, or if you have questions, you may reach the FERC Office of Public Participation by e-mail at OPP@ferc.gov or by phone at (202)502-6595.