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New England Power Pool: A Bridge to Competition

Fortnightly Magazine - July 1 1995

model stresses. For these products, commodity-type arrangements are not always sufficient to account for situations where one participant has excess peaking load, others have unique financial needs, and so on. Those with efficient surplus energy automatically interchange bilaterally with those who have inefficient energy resources.

Clearly, an extensive forward market has developed around NEPOOL. First, the NEPOOL savings fund is, for all practical purposes, zero. NEPOOL members have arbitraged away any savings, as would be expected in an efficient market. Second, the number and frequency of bilateral transactions have increased dramatically over time, with power marketers and brokers conducting more business, another indication of a well-developing wholesale market. Literally thousands of active financial transactions occur at any given time. Figure 1 plots the number and duration of financial contracts that were active on January 26, 1995.

Bridging the Transition

Municipal systems were not originally members of NEPOOL when it was formed. Instead, municipals bought full-requirements power as customers of the local utilities, just as retail customers buy today from their host utility. The NEPOOL accountability structure, however, enabled municipals to change their status from full-requirements customers to entities that could use the New England regional wholesale market for supply (em not just the local utility company. Over 40 municipals are now members of NEPOOL. As the pool prepares itself for even more wholesale competition (em perhaps including load aggregation (em members recognize that the NEPOOL structure should be able to facilitate this change without adversely affecting the central dispatch, and as before, only the expanded bilateral financial transactions will have to be sorted out via the accountability dispatch.

Except for the two other major integrated power pools in the United States (New York Power Pool and Pennsylvania-New Jersey-Maryland [PJM] Interconnection), a large portion of the U.S. electricity system today is operated primarily as large electrical control areas without central economic dispatch. There are approximately 140 control areas, mostly dominated by one or several large companies. In a control area approximately the size of NEPOOL's, a few companies manage the central economic dispatch and provide power at times to others, such as municipalities, on a full-requirements basis. These control areas are similar to what NEPOOL was over 20 years ago, when NEPOOL consisted primarily of eight major investor-owned utilities serving municipals and other small entities on a full- requirements basis. By following in NEPOOL's footsteps, these areas could achieve the benefits of competitive markets and financial independence for all parties.

Over its 25-year history, the NEPOOL agreement has been amended and interpreted to meet the changing needs of its 100 members, some of whom are independent power producers. NEPOOL is committed to increasing its membership even further. Power marketers and brokers are participating in NEPOOL's reform efforts to broaden competition and member categories while maintaining the advantages of the dispatch system.

As its track record with municipals demonstrates, NEPOOL also provides the necessary foundation for increased choice, should this become the policy of the six New England states. Future independent load aggregators could combine retail and wholesale customer load as long as they