[BETA] Fortnightly

The electric power industry lies in the midst of major change, including a shift to market-based wholesale prices. Market players and regulators will recognize that competition requires a shift in thinking on key issues such as resource planning before the market is developed enough to provide adequate price information. It is during this interim period that newly available hourly system lambda information could prove useful.

The outlines of the future wholesale power market are becoming increasingly clear. The market will probably resemble other commodity markets. Suppliers and buyers will engage in price discovery and a mix of short- and long-term transactions. As the markets develop, market-price hedging mechanisms such as futures contracts may emerge and even become commonplace.

This final outcome will likely occur only after years of debate and experimentation. Currently, market participants, regulators, and others are debating key structural issues. These debates cover system operations, reliability, market making, and transmission issues. For example, in the California restructuring debate, "PoolCo" and "NetCor" conceptual frameworks are being debated. In many other states, regulatory agencies are initiating review of retail wheeling, stranded assets, and other aspects of deregulation.

And these debates won't occur in a vacuum. As they continue, utilities will downsize, merge, write off assets, and search for ways to cut operating costs. Wholesale and retail customers will continue to look for cheaper suppliers for their existing loads. Power marketers will work to shape commercial arrangements to their vision of a full-fledged electric commodity market.

Nevertheless, as it awaits the future, the electric industry in some key respects will appear as it always has. Utilities will maintain reserves, operate their systems, and remain subject to regulation. But regulators, producers, wholesale customers, marketers, and others will increasingly seek price information (em information not yet fully available. We believe that during this period the industry can and will use hourly system lambda data as price proxies.

Hourly system lambda data has been available since June of 1994 from the Federal Energy Regulatory Commission (FERC). But this data now offers new uses, such as:

s Tracking incremental cost savings

s Evaluating wholesale offers

s Resource planning and plant valuation.

For many participants, these commodity market concepts will represent a "gestalt shift." We believe that the changes occurring in the electric market will recast planning and lead to greater public scrutiny of the industry. Although planning approaches will be different, we do not expect the substance of decisions to change. The most economic options will not change. They will just be found in a different way.

Hourly System Lambda

Electric competition received a major boost with the passage of the Energy Policy Act of 1992 (EPAct). This legislation created "electric wholesale generators" and gave wholesale customers the right to request transmission service. The EPAct also requires the FERC to collect and make public transmission planning information. In creating the new FERC Form 715, Annual Transmission Planning and Evaluation Report, the Commission also changed its existing FERC Form 714 to require reporting of hourly system lambda and demand data. This information was first submitted in June 1994