Electrical power transmission charges are the costs of delivering electricity from power plants to your local utility providers. No matter where you live—whether in a deregulated state with a retail energy supplier or a regulated state- these charges are included in your electricity rate.
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What Is Electric Transmission
Electric transmission is how electricity travels from power plants to local utilities before reaching homes and businesses. In the U.S., more than 200,000 miles of transmission lines are part of what’s known as the power grid. These lines are essential for ensuring a steady and reliable Electricity Supply for residential and commercial consumers.
Electric transmission costs are included in electricity supply charges in deregulated states and are usually measured in dollars per kilowatt ($/kW). Transmission line owners set a tariff or rate for using their lines, which is typically collected by retail energy providers.
People often confuse electric transmission with electric delivery. Transmission involves high-powered lines that move electricity across long distances, while delivery happens over local utility lines that bring electricity directly to homes and businesses.
Types Of Transmission Rates
Electric transmission rates are determined by state and federal energy regulators. These costs are ultimately passed on to consumers through their electricity bills. Whether a customer is paying a fixed or index-based rate in a deregulated market or a standard utility rate in a regulated market, transmission costs are always included in the total electricity price.
Let’s look at the different types of electric transmission rates.
In deregulated energy markets, retail electricity suppliers and utility companies collect customer transmission fees and forward them to grid operators.
1. Network Integration Transmission Service (Nits)
Network Integration Transmission Service (NITS) is a fee that transmission line owners charge to recover costs and earn a regulated profit. Since few new transmission lines are being built, existing transmission owners monopolize power grid infrastructure. Their revenue and profit margins are regulated to ensure fair pricing for consumers.
NITS charges help transmission owners cover their annual costs while guaranteeing a set income, known as revenue requirements. These fees are determined using a fixed or projected rate set one year in advance. Each year, transmission rates are adjusted to reflect actual costs.
2. Transmission Enhancement Charges
Many grid operators include transmission enhancement charges to improve the reliability of the power transmission network. These charges are part of the Regional Transmission Enhancement Plan (RTEP) for the PJM electric grid.
Grid operators collect these fees to encourage and compensate transmission owners for upgrading and strengthening their transmission lines. These charges are included in Network Integration Transmission Service (NITS) fees in some regions.
3. Transmission Adjustments
Depending on the terms of your energy contract, your rate may change if transmission rates are adjusted. Many electric suppliers now include clauses in their contracts allowing them to charge customers extra fees when transmission rates change. These unexpected charges usually occur when NITS charges are set for the year but later adjusted. When this happens, the increase in your bill due to the transmission rate change will appear as a separate line item labeled “energy pass-through charge.”
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Who Regulates The Rates For Electricity Transmission?
The Federal Energy Regulatory Commission (FERC) usually handles this responsibility. FERC makes sure that the rates, terms, and conditions for transmitting electricity across state lines are fair, reasonable, and not overly biased or preferential. However, in certain parts of the country—like Alaska, Hawaii, and much of Texas (which has its grid)—the electricity transmission is not considered “interstate commerce,” so it falls outside FERC’s control. In most other areas, though, FERC does regulate the rates, terms, and conditions for electricity transmission.
On the other hand, the distribution of electricity is typically not regulated by FERC. Instead, a state or local agency overseeing electric rates in that area would be in charge of those regulations.
Who Pays For Electric Transmission Rates?
Every electricity customer depends, to some extent, on transmission services and therefore pays for transmission rates. If you’re a residential or business customer, you might not see a separate charge for transmission rates on your electric bill. Instead, the transmission rates approved by FERC are usually included in other parts of your bill, like your energy usage charges. If transmission rates go up, your electric bill could eventually increase. Still, unless your utility lists transmission charges separately, it can be hard to know how much of the increase is due to higher transmission costs.
How Does A Transmission Formula Rate Work?
Transmission formula rates calculate the cost a utility incurs to provide transmission service, which then helps determine the rates charged to customers. Below is a simple example of a traditional cost-of-service formula. While actual formula rates are more detailed, this basic example will help you understand the general concept.
A utility’s transmission service costs typically fall into these categories:
- Return: This covers the cost of financing the utility’s investments. It compensates the utility’s shareholders and debtors for the risks they take when investing their capital.
- Operation and Maintenance: The cost of running and maintaining the transmission facilities.
- Depreciation Expense: This represents the cost of building transmission facilities over time.
- Other Expense: This includes other service-related costs not covered by the different categories.
- Income Taxes and Other Taxes: This covers the utility’s income taxes and any other taxes it must pay.
- Other Operating Revenue: This includes a utility’s revenue from services other than transmission, such as rent payments from telecommunications companies that use the utility’s electric poles.
| Cost of Service | Description |
|---|---|
| R = Return | The cost of financing the utility’s investments. |
| O&M = Operation and Maintenance | The cost of running and maintaining transmission facilities. |
| DE = Depreciation Expense | The cost of building transmission facilities, spread over time. |
| OE = Other Expenses | Other service-related costs not covered by other categories. |
| IT = Income Taxes | The cost of income taxes incurred by the utility. |
| OT = Taxes Other Than Income Taxes | The cost of taxes the utility must pay, other than income taxes. |
| OR = Other Operating Revenue | Revenue from services other than transmission, such as rent from telecom companies using electric poles. |
Each year, a utility with a formula rate updates the variable inputs to the formula, including operation and maintenance expenses, depreciation, other expenses, income and other taxes, and other revenues. However, the return is handled differently. It partly depends on the approved rate of return, which is set in separate FERC proceedings and not included in the utility’s annual formula rate update. To ensure transparency, utilities with a formula rate must follow specific rules, called formula rate protocols. These protocols outline (1) how the utility calculates rates each year using the formula, and (2) how transmission customers or other interested parties can challenge the utility’s calculation.
What Are Formula Rate Protocols?
Formula rate protocols explain how utilities share information about their rates with customers and handle disputes over those rates. These protocols help make sure that the prices customers pay for services are fair. They give customers, state regulators, and other interested groups the chance to see the details about how utilities set their prices each year. These groups can also ask questions, review the information, and challenge any parts of the rate calculation if they think something is wrong. The protocols also require utilities to report any changes in their accounting practices compared to the previous year, since utility accounting can be complex.
How Do Formula Rate Protocols Help Customers And Interested Parties?
Formula rate protocols help customers and interested parties by setting clear timelines for key steps in updating the rates charged by utilities. These protocols usually cover:
- When the utility proposes changes to the costs used in setting the rates.
- How and when will interested parties (like customers) be informed about meetings where these proposed changes will be discussed, often with options to join virtually?
- The deadlines for customers and others to ask the utility for documents and information related to the rate changes.
- The process and timing for challenging the utility’s proposed rate changes are as follows: starting with informal talks with the utility and, if needed, moving to a formal challenge with FERC (Federal Energy Regulatory Commission).
This helps ensure that everyone has enough time and opportunity to stay informed and provide feedback on the proposed rate updates.
How Are Electric Transmission Rates Calculated?
Electric transmission rates are determined based on how much electricity a customer needs, measured in kilowatts (kW). These rates are calculated each month using the customer’s Network Service Peak Load (NSPL), which is a value that represents their highest electricity use during a billing period. The transmission tag, often close to the customer’s peak demand, helps set this rate, although it’s not always the same.
To calculate the transmission rate, the formula is:
(NSPL x Transmission Rate x Days In Period) / Forecasted Period Volume
In simple terms, the rate depends on the customer’s highest monthly demand for electricity, the cost per unit of electricity transmission, the number of days in the billing period, and an estimate of the electricity usage.
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Fixing Vs. Floating Transmission Rates
When running a business in a state where the government does not set electricity prices, you can choose how to pay for transmission rates—the cost to move electricity from the power plant to your business. You can either “fix” these rates for the length of your energy contract or let them “float,” meaning they change based on market prices. The best choice depends on your business needs.
1. Fixing Transmission Rates
Many businesses choose to fix their transmission rates, meaning the price for moving electricity stays the same throughout their contract. This makes predicting and controlling costs easier because you know exactly what you will pay for electricity. Fixed rates are reasonable for businesses that prefer stability and want to avoid surprises in their bills.
2. Floating Transmission Rates
Some businesses, especially larger ones, prefer to let transmission rates float. This means the price can change, depending on the market. While fixed rates can sometimes include extra fees for future risks, floating rates don’t have these added costs. However, because transmission rates can only be locked in for one year, businesses with floating rates may avoid paying for risks that could never happen.
Transmission Operators
Transmission operators manage the electrical systems that deliver power across the country. Their job is to ensure there is always enough electricity to meet the needs of homes and businesses. In some states where the energy market is open, Independent System Operators (like the NYISO in New York) or Regional Transmission Operators (like PJM in the Mid-Atlantic) handle this task. Public utility companies often own and manage the transmission networks in states with more government control.
These operators do many important things to keep the power grid running smoothly. They decide where and when electricity should be generated, predict how much electricity people will use each day, manage situations like power outages, and plan improvements to the grid. Their main goal is to keep the electric grid reliable, ensuring people always have the necessary power. Energy brokers also help customers understand how transmission costs affect their electric bills.
Transmission Rate Tariffs
In areas managed by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs), companies with transmission lines can make money by charging fees to energy suppliers and users. These fees help cover the costs of maintaining and improving the transmission system. The Federal Energy Regulatory Commission (FERC) must approve these fees to ensure they are fair and reasonable for everyone.
Different RTOs and ISOs have their fee structures, but these typically help pay for:
- Building and maintaining infrastructure
- Funding new projects
- Providing reliable service
- Covering energy losses on the grid
Transmission rates in many parts of the U.S. have gone up over time. This is due to aging equipment, the need to include new energy sources, and changes in energy demand.
When comparing the transmission rates of two nearby utilities, PECO and PPL, there is a noticeable difference in their Network Integration Transmission Service (NITS) rates.
PECO charges $22,998 per megawatt per year, while PPL charges $88,606 annually. Despite both utilities being in neighboring areas, PPL’s transmission costs are much higher than PECO’s. This large difference could be because PPL has significantly invested in upgrading its transmission lines. Utility companies like PPL can earn a return on their investments, leading to higher transmission rates in the short term.
Customers living in the PPL service area might wonder why their electricity bill is higher than that of their neighbors in PECO, even though they are both served by the same PJM grid. One reason could be local electricity congestion costs, which change in real-time depending on supply and demand. However, the main factor causing higher electricity prices in PPL is the significant increase in transmission costs.