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To Pool or Not to Pool: A Distracting Debate

Fortnightly Magazine - January 1 1995

retain their most important features of coordination and dispatch, but will require modification of their participation and pricing rules to make them compatible with a competitive market. The actual PoolCo proposals envision voluntary participation with dispatch and pricing based on customer bids. Within this framework, a wide range of bilateral contracts can develop through contracts for differences that separate the financial instrument from product delivery.

Furthermore, under the PoolCo proposals, the use of special bids for which generators effectively declare certain plants as "must run" allows participants to create the same outcome as bilateral physical contracts that match certain plants with certain loads. Hence the PoolCo model permits both types of bilateral contracts in the wholesale market. The PoolCo provides open access to the transmission system and the power dispatch, leaving the independent operator to separate ownership from usage.

From the other direction and perspective, a strictly bilateral reliance on the invisible hand is not possible. After some initial confusion, the participants in the continuing analysis of the electricity market recognize that the characteristics of the electricity system require the continued existence of a system operator. The only issue is the scope of the system operator's functions. At a minimum, the system operator must coordinate the actions of the market participants (em to avoid violation of short-term system operating constraints (em and provide balancing services that ensure both load following and backup for uncontracted demand. To preserve a possible distinction from the PoolCo models, we might refer to the system operator functions under the rubric of an OpCo model.

Three Questions

These OpCo balancing functions require that the system operator have operational control over a minimum number of flexible generating plants and loads. The precise minimum number is difficult to define (em views range from many to few. However, it may not be necessary to define the number, depending on how we answer three remaining questions about the nature of the services provided under the OpCo. We start with the nature of the balancing function. For the flexible plants and loads, the balancing function is a dispatch function. The only issue here is whether the OpCo should operate the flexible plants to achieve the lowest possible cost under an economic dispatch:

Should the system operator

be allowed to offer an

economic dispatch service

for some plants?

The alternative approach would be to define a set of administrative procedures and rules for system balancing that purposely ignore information about the costs of running particular plants. There are feasible options (em such as minimizing the use of the transmission wires (em that would preserve reliability and maintain system balance; however, the costs would be high. If we are to find an economic dispatch, then the argument runs that the system operator should be best suited to do it. Although there are minor differences between textbook definitions of natural monopoly, the common theme is that a single firm can provide the lowest total cost in serving a particular market. The economics (em the costs (em are essential: The distinctive characteristic of a natural monopoly is