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Scarce Resources, Real Business or Threat to Profitability?

Fortnightly Magazine - October 1 1997

allows participants to trade rights (em subject, of course, to physical constraints on the system.

MIT Plan. The MIT plan envisions a multitiered structure that maximizes the use of market forces and minimizes the ISO's control over transaction profitability. First, participants in the energy market (bulk power) make their deals, without revealing the transaction price. Then, they ask the ISO to implement the transactions. Based on the information furnished, the ISO quotes a system support charge for the transaction. (Dealing with congestion is part of the system support services needed to allow the transaction to take place.)

The participants use the ISO's quote to decide whether to go through with the transaction as is. If the deal is modified, then the ISO modifies its quote, and the process continues until both parties are satisfied. The MIT plan gives participants the price of the transaction before the deal is complete. It also takes into account how the timing of the transaction affects its value, and lets system users make decisions without the need for ISO-determined controls.

This process may appear complex. However, it is similar to techniques used by securities traders, who somehow manage to execute seeming complex orders with blinding speed. In fact, the MIT plan informs participants of the price of the transaction ahead of the trade. It also takes into account the manner in which the timing of the deal affects its value. It would allow system users to make decisions without any need for controls determined by the ISO.

For price hedging, the MIT plan operates differently. In this case, the MIT plan conceives a two-tiered process that provides transmission system supports, approves use of market resources, and charges participants for their use of the system. Users receive technical and economic "feedback." %n4%n Thus, the plan does not require financial instruments to operate fairly. Nobody has a "right" to use the system. "Equal access," properly defined, provides the ticket to entry. Of course, market participants can hedge prices. But these participants, along with insurance firms, would be the ones to develop those financial instruments. That job would not fall to the ISO.

So, which plan should the ISO adopt? Admittedly, a process that informs participants of costs ahead of time appears more businesslike. On the other hand, the ISO's decision to select any one plan might not matter in an unconstrained market, or in one with perfect information flows. In our case, we have neither.

Pricing transmission based on historical costs may encourage transmission use and discourage investment in improving the grid. Curtailment procedures that give the impression the market participant is trading in a free market, but puts its profits at the mercy of the ISO, represent a new type of risk for electricity supply firms.

Operations: Maintenance, Upgrades, Incentives

One might readily dismiss real-time operating issues as not involving business outcomes. After all, market participants will receive transmission congestion rights and can use them to hedge price swings. Yet, this is a market in formation, not one with a long record of trading between seasoned participants. The