Transmission pricing and performance-based regulation

Performance-based regulation (PBR) is influenced by the Bayesian and non-Bayesian incentive mechanisms. While Bayesian incentives are impractical, the insights from their properties can be combined with practical non-Bayesian mechanisms for application to transmission pricing. This combination suggests an approach based on the distinction between ultra-short, short and long periods. For ultra-short periods real-time pricing of point-to-point transmission services with the help of an ISO would be adequate. Pricing in short periods involves the calculation and payment of fixed fees and adjustments via RPI-X type formulas or profit sharing. While short-term pricing occurs under full commitment by the regulator, productivity-enhancing incentives may have to be tempered by long-term consideration, so that profit sharing may be preferable to pure price caps. Long periods mark the limits of regulatory commitment and are still short relative to network investments. As a result, incentives should be further weakened by adjustments based on rate-of-return regulation with a “used and useful” criterion. * The author’s research on this project was supported by NSF Grant ECS-0323620 to Carnegie-Mellon University on "EPNES: Dynamic Transmission Provision and Pricing for Electric Power Systems."