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Scarce Resources, Real Business or Threat to Profitability?

Fortnightly Magazine - October 1 1997

system, not yet in equilibrium, might not exhibit equality between prices and costs. The inevitable correction (em the one that brings prices and costs closer together (em could easily surprise traders, upsetting the rationale behind deals and undoing strategies founded on incorrect assumptions.

In practice, real systems operated by real people often depart from optimal solutions. For instance, as the transmission grid opens to generation outside its border, a utility will try to price for congestion in a way that keeps anyone from losing out. This "win-win" situation may be impossible to achieve, but people still will try. The fact is, opening the grid could affect the profitability of local generation. Transmission and generation under one roof could muddle congestion pricing, eliminating incentives to provide least-cost power to the consumer. To use generation effectively, enhancement of transmission must be preserved as an alternative to out-of-merit generation. In other words, if an upgrade to the grid offers the best way to cut costs for consumers, then somebody should have the incentive to make that investment.

Nevertheless, the design of incentives highlights the trade-off between simplicity and accuracy. In that regard, congestion-pricing methods should capture long-term rather than just short-term efficiencies. The network should not, for instance, build a new line the first time the system cannot meet a request. Analysis to identify inefficiencies and the most effective solutions should precede any such move.

As for the energy market itself, the ISO also must develop the means to provide incentives that encourage efficient maintenance scheduling. The British pool does not do this, but with a limited number of generators, often within view of each other, one control area and a surplus of capacity, it may not need to.

How, then, should the market choose between power plants and grid upgrades?

Perhaps, the network should base decisions on formal, computer-based methods approved by regulators. Use of such a method would eliminate the need for the ISO to make decisions that are likely to require conflict resolution specialists, as all of the "stakeholders" pitch for the solutions that benefit them the most.

All these ideas boil down to a simple maxim: The ISO should develop a method of congestion pricing that is most likely to induce long-term efficiency and meaningful enhancements of the grid. Regulators should require such programs, rather than settling for the lowest common denominator that keeps the lights on, or worse, vague promises of future efforts.

Making It Work: Efficiency, Feasibility, Fairness

In the past, power pools provided services and designated transactions to ensure the best system-wide operations, rather than enabling specific transactions. The ISO, under open access, will attempt to do the same, at least as far as reliability is concerned. Does the ISO have the responsibility to assure efficiency as well? Can it do so with the information available?

Everyone talks about equal access, but we have no technical definition for the term when it is not possible to implement transactions, that is, when the definition has value. The ISO could curtail all transactions equally, or only those that have a