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New England Power Pool: A Bridge to Competition

Fortnightly Magazine - July 1 1995

the pool is only a place for trading surplus energy as a last resort.

Whether energy is transacted among the members via NEPOOL's interchange structure (about 5 percent of the time), via bilateral contractual arrangements, or within a participant's own system, the central physical dispatch does not change. Here lies the "magic" of the NEPOOL marketplace: Central dispatch ensures reliable energy production at the lowest cost, the forward bilateral market determines cost responsibilities, and the NEPOOL interchange method provides an accountable and disciplined market of last resort, thereby ensuring that all potential fuel-cost savings are captured.

Invoking Accountability Dispatch

At first glance, NEPOOL accountability dispatch and the sharing of savings may seem confusing and contrary to the spirit of competition: Low-cost producers do not share their margins with their high-cost competitors. In fact, though, accountability dispatch and its associated rules enhance New England's competitive wholesale electric market and provide a framework for future competition, permitting a wide range of large and small members to pursue strategies consistent with their individual mandates.

NEPOOL members are solely responsible for their own energy decisions, such as unit characteristics, operational restrictions, transmission limitations, self-nominated power, environmental restrictions, scheduling problems, contractual arrangements, and so on. Further, the fact that NEPOOL has 100 members but only 60 or so accountability dispatches suggests that members are engaging in portfolio management. All this is accomplished under the auspices of competition and customer choice, the driving forces behind the bilateral contract model.

The combination of central and stand-alone settlement dispatch frees market participants to engage in mutually beneficial, competitive, and confidential bilateral (or multilateral) paper transactions, leaving NEPOOL to worry about the physical operation of the system. Decoupling physical and financial transactions ensures system reliability, facilitates innovative bilateral paper contracts, and creates a forward market. NEPOOL members enter into a variety of financial contracts (em

including unit contracts, joint ownership arrangements, energy-exchange agreements, system power-sales agreements, and interruptible loads (em all to meet their own system needs, without having to address how such deals might affect the central dispatch.

The key advantage of NEPOOL is that it separates the physical supply from the financial products and services associated with electricity. Efficient markets can have different structures, ranging from commodity-based models to those that involve extensive tailoring of products and services. Markets for electricity are no different. On the physical side, electricity is much like a commodity; in the presence of a network, centralized economic dispatch achieves in the short run the same efficiency outcome as a marketplace that has successfully internalized any externalities. Essentially, this is what the PoolCo model does. Although PoolCo is bid-based and NEPOOL at present is based on marginal costs, there is no reason why NEPOOL could not also implement a bid-based approach. This option, in fact, is currently being explored in NEPOOL's ongoing review process, attended by members and nonmembers alike.2

Other products associated with electricity (em such as reliability, ancillary services, and risk management (em require a market in which participants can fashion contracts confidentially to meet their individual needs. This is what the bilateral