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To Pool or Not to Pool: A Distracting Debate

Fortnightly Magazine - January 1 1995

not the lack of an alternative to a monopoly, but rather that providing supply through a monopoly is the lowest-cost solution. The arguments underlying the PoolCo proposals stand squarely behind the proposition that economic dispatch is a natural monopoly. Therefore, the natural answer is that the OpCo should be able to consider costs and provide an economic dispatch for some plants and loads, at least those belonging to the flexible components that must exist at some minimum level.

Once the economic dispatch service is available for some plants, access rules must be established to determine who can participate. Hence, the second question about the role of the OpCo:

Should generators and customers be allowed to participate in the economic dispatch offered by the

system operator?

The arguments for the bilateral end of the market emphasize that the minimum number of flexible plants is a very small fraction of the total. The prediction may be that only the minimum number will participate. Or, the argument may imply that participation in the economic dispatch should be restricted to the smallest number of plants possible. However, the natural extension of open access and the principles of choice suggest that participation should be voluntary. With only the caveat that a minimum number of plants must be kept flexible, the principle should be that market participants can evaluate their own economic situation and make their own choice about participating in the OpCo economic dispatch or finding similar services elsewhere in the market.

Because the OpCo is a monopoly, it will be subject to some form of regulation, and its pricing rules a matter for public oversight. If the OpCo does consider costs and choose an economic dispatch for the flexible plants, there is an issue involved in setting the prices that will apply to the associated power flows. And these same prices will play a central role in defining comparable transmission tariffs for those who do not participate in the economic dispatch. Which brings us to the third question about the role of the OpCo:

Should the system operator apply marginal cost prices for power provided through the


The simplest conceptual approach would be to set an administrative price or penalty for the power obtained through the OpCo economic dispatch. If set too low, however, the price will be an incentive for participants to rely too much on the supply from the OpCo, constituting a subsidy that the OpCo may not be able to support. Set too high, the administrative price becomes a penalty that provides incentives to avoid

the economic dispatch and raise overall system costs. The alter-native of marginal cost pricing based on participant bids has obvious appeal. Under an economic dispatch for the flexible plants and loads, it is a straightforward matter to determine the locational marginal costs of additional power. These marginal costs are also the prices that would apply in the case of a perfect competitive market at equilibrium. In addition, these locational marginal cost prices provide a consistent foundation for the design of

a comparable transmission tariff for all uses