To Pool or Not to Pool: A Distracting Debate

Fortnightly Magazine - January 1 1995
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The debate over the merits of pool-based markets as opposed to reliance on bilateral transactions and the invisible hand of competition began without much care taken to define the details of the bilateral alternative. On closer examination, however, we find the two approaches have much in common, being more like different pews than different churches. A further debate that emphasizes only the few differences would not inform so much as distract from solving the common problems. We should put the debate to rest and move on.

The organization of the pool-based wholesale market can be found in a number of variants that differ across countries. What the several "PoolCo" variants have in common is the ability to simplify the development of bilateral transactions. An efficient PoolCo needs and aids in the development of a bilateral contract market. The PoolCo model assumes that virtually everything that happens in the competitive market happens through commercial bilateral markets, including virtually all investment decisions for new load, generation, and transmission facilities. The exception and the focus of the PoolCo is in the coordination of physical delivery and pricing of the associated services, over the very short term, say on a half-hourly basis. The PoolCo operates only in the short-run to deal with system interactions and charge users for the real costs of using the system. The details of PoolCo operation and spot-market pricing can and should be designed to impose virtually no constraints on the terms and conditions of commercial arrangements in bilateral contracts. One reasonable test to apply to the design of the PoolCo could be that it would permit any economically efficient bilateral transaction.

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