Computing the Cost of

Unbundled Services
Lee Willis’, John Finney2, and Greg Ramon3

central tenet of electric power industry deregula-

tion is that the delivery of electric power
(a service) must be decoupled from the purchase
of the power itself (a product) and priced and contract-
ed separately. Transmission of electricity must be
offered and priced separately from the power itself,
and delivery of power must stand on its own as a
business. Regardless of the precise nature of the deregu-
lated system’s rules and structure, this means
that transmission system operators need to know the
actual operating costs of providing transmission
services to their customers.
Accurate knowledge of the actual costs of providing
transmission services, particularly costs that vary as a
function of time, location, or load pattern is vital to a sys-
tem operator for a number of reasons:
Pricing of transmission services in many regulatory
frameworks is mandated to be based upon cost.
Accurate knowledge of cost is thus required to
determine prices that are defensible to both regula-
tory scrutiny and customer challenges.
Operating decisions regarding economy of opera-
tion require knowledge of how costs relate to alter-
natives available to the transmission system.
Business decisions with regard to operations,
investment, and commitments to customers all
require accurate knowledge of costs and how they
vary, if for no other reason than so the operator
can make certain that the sum of all revenues
exceeds the sum of all costs.
A recently completed research and development
project developed a prototype transmission access pric-
ing (TRAP? program to compute operating (variable)
cost of transmission services for these purposes. The
completed software represents a new type of power
system software application and serves as both an
indicator of future open transmission access analytical
needs and a forum for further R&D.

Locational Analysis of Costs

I ABB Systems Control, * ABB Transmission Technology Institute,
Tampa Electric Company
The cost to deliver electric energy varies as a function of
time, system status, and location within a power system.
Temporal and state-related behavior of costs and how
they vary as generation and load patterns shift can be
handled by comparison of different scenarios or cases.

16 IEEE ComputerApplications in Power ISSN 08950156/96/$5.0001996 IEEE


Figure 1. Cost o f power delivered to a site varies from
place to place within a power system (left side of equa-
tion shown a t each bus). It can be computed unambigu-
ously as several “unbundled” component services.
However, determination of the locational aspects of cost
(Figure 1) must be done by analyzing actual locations of
equipment and loads within the system and their inter-
action within each case.
Therefore, detailed assessment of costs as a function
of location, as well as rapid and accurate computation of
how these costs vary with respect to operating decisions,
equipment availability, and contractual commitments to
deliver power (e.g., wheeling transactions) was a primary
goal of the software research and development.
There are several possible frameworks within which
data, display, and the locational and temporal analysis of
transmission services can be performed, including zonal,
spatial, and arc-node, each with advantages and disadvan-
tages. We selected an arc-node framework for the
database, display, and analytical function for several
reasons. First, computation of cost on a nodal basis is the
most precise format possible, since it computes costs by
analysis of actual electrical flows and equipment utiliza-
tions and performance. Second, existing information sys-
tem infrastructures a t most electric utilities have
transmission system data in this format. Third, arc-node is
most likely to be quickly understood by power engineers.
Unbundling Transmission Services
In addition, a critical design requirement for any
transmission costing software for application in the
United States is computation of costs on an unbundled-
services basis, as shown in Figure 2. According to the
US. Federal Energy Regulatory Commission (FERC),
providers of transmission services will be required to
offer the basic transmission service (moving electric
power) in conjunction with several mandatory or
voluntary ancillary services, such as losses make up,
reactive support, and reserves. These services must be
offered separately, and priced individually.
Since most regulatory climates will require that trans-
mission service prices be cost-based, an operating utility
has a strong motivation to determine the unbundled
costs precisely, for three reasons:
Its customers will buy ancillary services selectively.
Even if the total (bundled) price is accurate, unreal-
istic breakdown of prices for ancillaries will lead
customers to buy those that are underpriced and
not buy those that are overpriced.
Accurate costs provide the correct price
signals (from an economic sense) t o foster
comparable service and fair competition,
creating a stable market and a potentially prof-
itable competitive environment for the sale
of electric power.
Accurate assessment of the cost of ancillary
services permits the transmission system operator
to make correct decisions about how it will gener-
ate, buy from third parties, or otherwise provide
these services.
Among the transmission services that were assessed
in our prototype software development are cost of
power, losses, reactive support (vars), load following,
generation reserve, and congestion cost.
8 94 = 3 37+0 14 + 043 + 0
Figure 2. Unbundled locational cost {cents per kWhr)
computed on a nodal basis. Here, cost has been unbun-
dled (right side o f equation a t each bus) into energy,
losses, reserves, reactive and regulation (summed for
display purposes) and congestion, a t each bus in the sys-
tem. The line in red has reached its limit and is the cause
of the non-zero congestion costs (rightmost cost shown
a t each bus.).
October 1996 17
Cost of Power cost the transmission
Though not part of operator must allocate
delivery services per se, to customers if provid-
the cost of the power ing this service.
itself was computed
on a nodal basis for Generation Reserve
two reasons. First, Reliable and secure
some ancillary ser- operation of a power
vices (losses, reserves, system requires that
regulation) depend both spinning and
on power production stand-by generation
resources; inclusion of be available t o cover
production cost in the reasonable contingen-
computations clarifies cies. Requirements to
procedures needed to make reserves available
optimize overall cost, also place con-
as well as unbundle straints on transmission
and allocate costs. Sec- capability. Computation
ond, several deregulat- of reserve is rather
ed electric pricing straightforward, but its
mechanisms (for exam- allocation on a nodal
ple, the location-based Figure 3. Costing analysis identifying a line (red) whose capacity basis is tricky, because
limit forces an out-of-meritre-dispatch of generation in order to
pricing system) define t h e potential failure
accommodate a requested increase of 100 MW in an ongoing
the cost of transmis- transaction and showing power flow results (as opposed to of many generators
sion service between cost results as in Figure 2) for the recommended system state at different locations
two points in a system to accommodate the congestion. may be covered by the
as the net difference in same reserve.
the total price (power plus delivery) between those two
points. Capital Recovery and Network Operation
Two costs not included in the transmission cost analysis
Losses are the capital recovery cost of the system equipment
Movement of power through a transmission grid creates and the charges for the transmission system operator’s
losses, which must be made up by appropriate genera- services of scheduling, controlling and dispatching the
tion and for which movement of power (transmission) system. Computation and allocation of these costs are
must also be allocated. The cost of losses is a considered straightforward (see For Further Reading).
substantial element of the delivery cost. The costs vary Both can be computed as off-line tables, and used in allo-
with loading, flow pattern, location, and distance. cating costs to transmission system users on an access
or standard-fee basis.
Reactive Support
Reactive losses and voltage support in a power system Congestion Cost
must be accommodated in order both to provide transmis- Perhaps the most technically interesting variable operat-
sion of power and to assure system operation. Reactive ing cost associated with transmission service, and an
losses provided by generation are a mandatory service issue expected to become critical under open access, is
within FERC ruling 888 (the utility must offer to provide the congestion cost associated with equipment and
them, and the customer must buy them from the utility). security constraints. Assuming that a power system is
operating at the most economic and secure state possi-
Load Following ble for a given pattern of generation and loading, the
Tracking variations in load and maintaining system fre- request for an additional transaction (movement of
quency requires availability and control of generation, a power from one location to another) can sometimes only

18 IEEE ComputerApplications in Power

be accommodatec if the system operator redispatches
the generation to release transmission capacity along a
constrained line, or otherwise ease a constraint limiting
the system’s transfer capability.
Such a situation is illustrated in Figures 3 and 4, where
to accommodate a transaction at high levels, the system
operator must redispatch generation out-of-merit (in
terms of bid prices) to respect the capacity constraint
on one line. The congestion cost of this out-of-merit redis-
patch is allocated to the new transaction. It also changes
the marginal cost of power at some (but not necessarily
all) buses in t h e system. As shown in Figure 4,
congestion cost can escalate so it exceeds the
highest marginal generation cost in the system (often the
case when the amount of generation that must be dis-
patched out-of-merit exceeds the magnitude of the addi-
tional transaction flow). In some cases and at some
locations, marginal congestion cost can be negative,
which means that increases in load at those locations (or
reductions in generation) would lead to more efficient
per-unit operation of the system overall.
Cost Analysis Program
The transmission access cost analysis program
computes total and marginal cost of unbundled electric
services, including t h e costs for power, losses,
congestion, reserves, reactive support, and load
200
150
Figure 4. Marginal cost for the transaction shown in
Figure 3 a s a function of amount o f power wheeled.
While meeting all other obligations, a t present the sys-
tem can deliver up to 215 MW without encountering
any congestion ween). Increases beyond that encounter
increasingly expensive o u t d m e r i t adjustments which
escalate price.
following, all on a nodal basis, based on a full ac analysis
of the actual flows and equipment performance
in the power system, including generation, transmission,
and firm and interruptable loads. It can model
generation dispatch based upon traditional heat-rate
curves or on a bid basis, o r with a combination
of the two. Through comparison of before and after
cases, it similarly computes the incremental costs
associated with any proposed point-to-point or
network service transaction.
In addition, to provide a useful platform for the study
of pricing methods, the program computes prices based
on the GAPP (general agreement on parallel paths) and
MW-mile methods. At the moment, the program has a
straightforward graphics user interface and oneline data
editing and display system as shown in Figures 2 and 3,
which was developed more from the perspective of
R&D software development purposes than to any heavy
planning or operations application needs. Figure 5 shows
the overall structure of the program.
Reformulated Optimal Power Flow
The program’s core analytical engine is based upon a
modified optimal power flow (OPE) with both p r e and
post-processing of its internal variables. The OPF used in
the prototype program was written specifically for this
one R&D application and is based upon advanced
sequential quadratic programming algorithms. This
particular method was selected for its flexibility
during development, since the exact nature of final
computational needs was not known at the start of
the project. It is compatible with nearly any OPF
approach that could be used.
Internally, the program involves three steps. Figure 6
shows the overall structure of data and algorithmic
flow. First, power system parameters, cost and bid data,
along with data which describes the specific pricing
options chosen, and any transfer limits, a r e pre-
processed to form an objective function and set of
constraints consistent for the optimal power flow.
The second steps involves solution of the optimal power
flow, which produces a primal solution set describing
the power flow along with a corresponding set of
dual variables. Both are transferred to the third step, a
post-processor module that determines and unbundles
the nodal prices into the components according to the
allocation method selected by the user using a
constrained decomposition technique. The result
gives the lowest cost operating state for the system
October 1996 19
(including identification fast enough to be
of adjustments need- useful for both
ed t o accommodate offline planning
congestion) as well a s and online control-
the unbundled transmis- room evaluation.
sion services costs The basic algo-
at all nodes in the sys- rithm seems satis-
tem model. factory as a trans-
mission services
Provision for costing engine.
Secure Operation In addition, test-case
Security of operation for application indicates
a power system general- that a transmission sys-
ly requires that the sys- tem’s cost behavior is
tem be maintained in Figure 5. The transmission access costing program uses an opti- often quite unlike its
states that satisfy post- mal power flow a s the core of the computational engine. electrical behavior, t o
contingency constraints the point that is often
for the loss of any of its major components. The p r c and counter-intuitive (largely because planner’s and opera-
post-processor optimal power flow shown in Figure 6 tor’s intuition is based upon past experience with only
does not consider such constraints on operation. At electrical behavior). In general, cost of providing trans-
present, these are accommodated by transferring the mission services does rise as load and wheeling dis-
system s t a t e computed by a security-constrained tances are increased, as one would expect. However, the
OPF, along with its computed transfer limits FTC), from
the EPRI TRACE program, a s the base case for the
program (Figure 7). Use of the “starting case” and
maximum transfer limits from the TRACE program
permits application of the costing engine in a framework
likely t o respect security constraints, and identifies
which transactions can be accommodated a s
firm contracts and which only as nonfirm because of
security considerations.
While the costing analysis and t h e TTC-security
analysis both utilize optimal power flow algorithms, the
two applications use far different reformulations of the
OPF, and there are no present plans to combine the two
into one program. The partitioning into the costing
and TTC/ATC-security components also has advantages
of solution modularity, development autonomy,
and integration flexibility.

Early Experience with Application

The prototype program was developed primarily as a
research tool. While limited to less than 500 buses,
experience to date has revealed a number of useful
results. From the standpoint of algorithm and software,
the research reached three major conclusions:
Computation of unbundled, location-based base- Figure 6. An optimal power flow using the sequential
case, marginal, and incremental prices can be done quadratic programming approach is computed in
in an unambiguous manner. series with pre- and post-processor modules specific
The analytical engines appear stable, robust, and to the costing analysis.

20 IEEE ComputerApplications in Power


~ o ~ p a r~ienf o~rand
e after eases,
osts associated with
sed point-to-point
service transaetio~
Figure 7. Provision for constraints on operation to assure
secure operation within, for instance the NERC first-contingency
guidelines, is provided by interface to security constrained OPF
analysis such a s the EPRI TRACE (used for security constrained
analysis in all the authors research to date).
highest costs in a system are often not on the most high-
ly loaded lines; costs do not always increase substantial-
ly as loadings approach transfer limits; contingencies do
not always increase costs by substantial margins; and
shedding significant load after a contingency hardly
reduces costs. Overall, neither cost nor electrical perfor-
mance is better behaved or easier to analyze; they are
just different.
Reduction of Large System Models
One concern raised by research to date is the legitimacy
for costing purposes of reduced models of large power
systems. For example, since cost behavior of transmis-
sion networks appears t o be quite different than
electrical behavior, it is natural to question whether
a 4,000-bus model of a 20,000 bus system, reduced
on the basis of traditional electrical equivalencing
criteria, will be a valid model for cost analysis and
pricing purposes. Therefore, the current development
goal is to increase the dimension of the transmission
cost analysis program to 20,000 buses, alleviating the
problem for a majority of cases and minimizing the
potential for error due to this cause for very large pools.
However, the whole issue of reduction guidelines for
cost-behavior analysis is something that needs to
be examined further.
User Interface Challenges
Transmission transaction cost analysis presents
both the transmission planner and operator with
myriad new variables and constraints, in addition to
the traditional electrical power flow data. With so
many factors, all varying spatially and temporally, all
linked in often complicated, multidimensional inter-
actions, all differing in how they react to constraints,
it is difficult for the user of a transmission costing
program to easily grasp the overall character of the
system’s behavior, and to distinguish its primary
constraints and behavior patterns from secondary
and tertiary factors.
As developed (Figure 2) the transmission access
costing program may have application as an online
tool to compute transmission transaction costs (Fig-
ure 7). But for planning or strategic evaluation,
where success depends heavily on interactive par-
ticipation of a human being, new display concepts,
perhaps far different than traditional network dia-
grams and plots, seem necessary to make maximum
use of the computed results. This is a second area
for further work.
Costing Analysis: A Part of the Future
In an open access power industry, analysis of costs
and cost flow will become as routine and as sophis-
ticated as analysis of electrical performance is at the
present. In fact, profit-motivated utilities very likely
will need cost-analysis methods whose quality,
auditability, and defendability exceeds programs used
today. Experience with the prototype transmission
access pricing program has shown that effective
transmission access costing software can be developed,
and that the approach described in this article is a
sound method.
For Further Reading
J. Finney, H. Othman, and W. Rutz, “EvaluatingTransmission Con-
straints in System Planning,” presented at the 1996 IEEE PES Sum-
mer Meeting and to appear in IEEE Transactions on Power Systems.
G. Ramon et al, Interconnected Operation of Transmission
Systems, North American Electric Reliability Council, Princeton,
NJ, 1996.
B.F. Wollenberg, A.J. Wood, Power Generation, Operation,
and Control,Wiley Interscience, New York, 1995.
E.R. Tufte, The Visual Display o f Quantitative Information,
Graphics Press, Cheshire, Connecticut, 1983.
Biographies
Lee Williis is manager of T&DTechnology for ABB Systems Control
in Cary, North Carolina. A Fellow of the IEEE, he is vicechair of the
PES Power System EngineeringCommittee.
John Fmey is a senior engineer in at the ABB Transmission
Technology Institute in Raleigh, North Carolina. He has BS and PhD
degrees in electrical engineering from Georgia Tech.
Greg Ramon is director of Engineering for Tampa Electric Com-
pany. A registered engineer in Florida, he is chair of the NERC Task
Force on Interconnected Operations Services.
October 1996 21