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Scarce Resources, Real Business or Threat to Profitability?
Market. A "voluntary" ISO accepts both winning bids (as in method 1) and bilateral transactions (as in method 2), and schedules their delivery.
The United Kingdom's electricity system uses a mandatory ISO. Many American ISO proposals take their lead from the British. They will select generation units for operation by means of a Dutch auction, starting with the lowest bid, then move up the price ladder until they fill their requirements (see Table 2).
Under the auction system, the ISO pays all winning bidders the price required by the last (marginal) supplier. Presumably, as long as the bids relate to marginal costs, the difference between market clearing price and bid represents return on capital, which is necessary to attract new investment.
During the transition to competition, however, a bidding procedure presents problems. Power plants operating under rate-base regulation collect no more than cost. Thus, only non-utility generators benefit from the margin over cost (and the utilities miss out on still another opportunity to mitigate stranded costs).
Remember, though, that the purpose of a market is to make the most efficient use of resources (which power pools now do). The new market, too, should encourage efficient operation of facilities. If power auction bids reflect marginal costs of generators, then that market also approaches efficiency. In the bilateral option, in which buyers and sellers negotiate privately and do not provide price information, the ISO cannot take responsibility for the efficiency of the market. It simply implements transactions.
The ISOs would mix three types of transactions:
1. Bid to provide energy, submitted by the producer to the ISO.
2. Bilateral transaction that requires ISO implementation.
3. A supply bid, as in type one, above, except the marketer has hedged against the transaction and has failed to deliver.
Under present rules, utilityowned facilities participate in type 1 transactions, collecting operating costs only. Independent producers participate in all three types, collecting full market prices. The ISO has sufficient information to assure system operating efficiency only in the case of type 1. In type 3, the marketer will replace power committed at one location in the U.S. system with power injected in another area. In such an instance, the ISO must examine the implications on the available transmission capability. As of now, we have seen little study of how the "voluntary" ISO will work, how it affects market efficiency and whether it might function as a dominant market participant that acts as a price giver rather than taker. If market power is an issue, then that would argue for separation of the energy market from the transmission system support (ISO) function.
Then comes the matter of congestion. Transactions could produce line flows exceeding operating limits. The ISO would have to curtail some or all transactions to maintain system reliability. How does the system price its services? And what does equal access mean in such circumstances?
The simplest proposal, which the Federal Energy Regulatory Commission appears to favor, grants equal access to all. It would collect revenues from users based on megawatts of power injected into the system and