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Real-time Pricing, Not Restructuring

Fortnightly Magazine - May 15 1995

Real-time Pricing, Not Restructuring

Richard Abdoo's article, "Wisconsin Electric's View of a More Competitive Industry," (Feb. 15, 1995), brought this quote to mind: "We trained

hard. . . . But it seemed that every time we were beginning to form up into teams we would be reorganized. I was to learn later in life that we tend to meet any situation by reorganizing; and a wonderful method it can be for creating the illusion of progress while producing confusion, inefficiency, and demoralization" (Petronius (em 256 BC).

We don't need to restructure the electric industry, creating new bureaucracies while slicing and dicing the current structure. Enhanced economic efficiencies come from better pricing of the electricity flows in Mr. Abdoo's chart of the re-regulated utility framework. Too much electricity now flows without an associated price, an issue I first raised in the pages of this magazine five years ago (see "Tie Riding Freeloaders (em The True Impediment to Transmission Access," Dec. 21, 1989). Applying an appropriate price (maybe even any price) to such unscheduled flows would immediately expand the economic benefits available from the joint dispatch of generators owned by different organizations, be they utilities or independent power producers. Indeed, the Federal Energy Regulatory Commission's recent docket (No. RM94-20-000, "Alternative Power Pooling Institutions Under the Federal Power Act") favors a pricing mechanism for unscheduled power flows. WOLF (Wide Open Load Following) pricing for unscheduled flows can serve as mortar (em it not only fills the cracks, it holds the bricks together.

In a sidebar to his article in the same issue, "The Market Transition: Is FERC Pricing Policy on the Wrong Side of the Road?," Charles Bayless raises the issue of a customer's right to return. As he astutely points out, the customer never left. Instead, the customer bought some services at a lower price from other vendors and continued to buy ancillary services from the utility. Mr. Bayless claims that the customer would buy these ancillary services at "regulated, below-market prices," but I believe he understates the issue. The customer gets many ancillary services for free. The solution is real-time pricing for unscheduled flows of electricity, especially for ancillary services. And when the customers want to come back, the same mechanism can be used for their entire consumption.

Many of Mr. Bayless' principal issues relate to "long-term" contracts, such as the transmission line with an embedded cost of $7 and a replacement cost of $100. Real-time pricing for the use of the line eliminates his concern about having to sell to the first party to request to use the line. The owner would receive the appropriate real-time price for the line's use (em be that $1 or $2,000. If the owner receives $2,000 frequently enough, the owner or someone else will build a parallel line. But for that to occur, energy prices must be able to clear the market almost instantaneously. WOLF provides that instantaneous market clearing price.

The effect of these changes on customers is discussed in the same issue by Messrs. Costello, Burns, and Hegazy in "How State Regulators Should Handle