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Fortnightly Magazine - October 1 1996

of balance, the system would still balance. The same would hold true if three (or 30) contracts were out of balance but offset each other (em financial balancing with no physical balancing.

* * *

The issue is not whether the ISO should operate a spot market. To perform load balancing, the ISO must have supply and load, with net imbalance between the two representing the amount needed to offset the net imbalance in the rest of the market. To perform load balancing at least cost, the ISO must be able to choose the cheapest resources to accomplish that function.

What's in question is whether we want to let others participate in that spot market. The ISO produces a market-clearing price through its basic load balancing function. Barring customers (generators or consumers) from participating in that ISO spot-market price is both unnecessary and inefficient. t

Mark Drazen is president of Drazen Consulting Group in St. Louis, MO. He was a member of the Alberta Department of Energy Technical Group that helped introduce a restructured electric utility industry in Alberta (with an independent power pool) on January 1, 1996.

1. In most current electric systems, customers do not face increased cost when the system gets tight. Because most rates are fixed, customers have neither the information nor the incentive to reduce load when incremental supply becomes more expensive. Time-of-use (TOU) pricing attempts to remedy this to some extent, but TOU prices are set ex ante and usually specified for fixed time periods. They do not reflect actual system conditions or costs at any given hour. RTP improves the timing of the signals. However, RTP energy rates are usually tied to system lambdas which, in turn, reflect incremental running costs,but not capacity costs. Capacity costs can be simulated by hourly adders, but these do not necessarily reflect the actual cost of incremental supply. Moreover, some independent generators might be willing to provide extra supply if they were paid the hourly kilowatt-hour rates reflected in the RTP rates, but this option is not available. Thus, although RTP rates are an improvement, they remain a crude approximation of a true market-clearing price.

2. The broader and deeper the market (on both supply and demand sides), the less the ISO actually has to do balance supply and demand; price signals will motivate generators and consumers.

3. To keep supply and demand in balance, the ISO chooses the cheapest generation resources and requests them to provide energy.

4. For example, the New England Power Exchange dispatches plants for load balancing without regard to ownership.

5. Under a "direct pay" contract, the customer pays the generator directly for the kilowatt-hours supplied. The ISO must determine how many (if any) kilowatt-hours used by the customer cam from ISO supply--and charge the customers (or its generator) accordingly. On the other hand, if a generator and customer trade everything "though the spot market" and settle price by a contract for differences, the ISO remains indifferent to that contract. Contractual imbalance becomes irrelevant since the ISO is paid by the consumer for all