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New England Power Pool: A Bridge to Competition

Fortnightly Magazine - July 1 1995

flexibility to enter into contracts that best meet their obligations. We believe this can be accomplished in a fully competitive, but also accountable and efficient marketplace.

Internalizing Reliability

NEPOOL, now serving 20,000 megawatts of load, was formed in the early 1970s in response to an Northeastern Seaboard blackout (em by all definitions a significant, negative externality (em that left 30 million people without power on November 9, 1965. NEPOOL instituted a two-part system of accountability: First, and most easily understood, is the notion that members with load-serving obligations must have sufficient capacity (em physical or contractual resources (em to meet their customers' load reliably. Second, and more complicated, is the idea of a central but independent institution to sort out costs, benefits, and accountability.

This second dimension of accountability includes three components:

s Dispatch. A central (regional) dispatch for NEPOOL-member generation facilities to meet poolwide demand at the lowest total regional short-run fuel cost, without regard to ownership.

s Settlement. An after-the-fact "accountability" settlement that determines how members would have dispatched their system to serve their individual loads on a stand-alone basis.

s Forwards. A bilateral forward market in which members can optimize their power-supply mix by selling, purchasing, or exchanging resources with members and nonmembers.

NEPOOL energy transactions are governed by interchange procedures based on the difference between how a member's system actually operated as part of the central dispatch and how it would have operated if each member dispatched its system on a stand-alone basis (em what might be called an "accountability dispatch."1 If members' resources in the central dispatch produce less physical energy relative to their stand-alone dispatch, it means that others have supplied them with energy at a lower production cost. Those who receive the energy pay their avoided replacement energy cost (short-run marginal cost) for power via NEPOOL. Whenever members are net providers of physical electricity relative to their own load dispatch, they are compensated at their replacement energy cost. The difference between the replacement costs of net users and net providers creates a NEPOOL savings fund, which is then allocated among interchanging members according to their respective contributions (see sidebar).

Members continuously enter into and modify bilateral contractual arrangements with other members and nonmembers to meet changing market conditions, and NEPOOL adjusts its members' own load dispatch to reflect these contractual arrangements. For example, if a NEPOOL member "sells" a slice of a unit to another member, the member's accountability dispatches are performed as if the buyer "owned" the slice, and that member is then held accountable for that decision. This potent combination of accountability and central dispatch gives NEPOOL members strong incentives to plan adequately for their individual energy needs by using their own resources or entering into bilateral contracts. Over the long term, new resource additions are incorporated into the central dispatch (em by definition improving efficiency in the region (em but only the owners of these resources are held responsible for their resource decisions. Members do not rely on NEPOOL for their energy needs because they prefer to transact in the bilateral market;